Sunday, January 27, 2008

Kervielology 2

versac has some lucid thoughts on why Société Générale's explanation isn't playing well in Poitiers. Back in the Nixon days, the type of explanation that SG has put out would have been called a "modified limited hangout." It raises more questions than it answers. Pierre Moscovici thinks so too. And Bakchich.

ADDED LATER: On the blog of Alain Lambert, UMP senator and former budget minister, A. B. Galiani explains the controls on options trading and offers his opinion that these controls could not have been circumvented by one person acting alone.

HERE is SG's explanation.

And here are more doubts.

And more technical information.


Francisco suggests:

I think you should devote some attention to the growth industry in Kervielogy...a fascinating phenomenon that is.

And he gives this link. Indeed, Francisco has an excellent point. The speculation about Jérôme Kerviel, the alleged perpetrator of the Société Générale fraud, is fascinating from many points of view. In the article Francisco cites, the Communist Party is said to have compared Kerviel to Alfred Dreyfus. That certainly races ahead of the evidence, though it does reflect the widespread belief that Kerviel has been made a scapegoat for the crimes or misdemeanors of others.

The aspect of Kervielology that has most interested me has to do with the frequency of comment on his relatively humble status at SG. He may have been making more than 100,000 euros a year, but he was "not a Golden Boy." Why? Because he hadn't attended a Grande École. He was not part of the old boy network of X or Normale Sup' or even HEC, but merely a graduate of a modest program in Financial Engineering in Lyon. How, then, could he have been admitted to the inner sanctum of the bank? The implication is that he wasn't admitted but hacked his way in, owing to his skills as a "computer genius." As is well known, hackers, unlike Golden Boys, can be self-taught. The necessary skills are often linked to a socially awkward personality, and Kerviel has been described variously as "reserved," "isolated," "given to working on his own." Although the bank's safeguards, designed by Golden Boys, should have rendered the treasure safe, there is no telling what a malevolent "genius" can accomplish in secret and by stealth.

Yet there is also a counter-narrative. Kerviel was "bright," some say, but "no genius." If he circumvented the bank's safeguards, it was indeed because of his antisocial nature and humble stature, which forced him to work late at night, when no one was around, and presumably thus to gain access to the secrets that reveal themselves only to surreptitious creatures of the night.

Of course we have no idea yet what actually happened, or what kind of person Kerviel is. There have been indications, however, that the bank's vaunted risk managers never indicated a problem and that the first sign of trouble came from counterparties to some of his option deals, who called for cash to be put up to cover margins when the market began to fall. It has begun to dawn on the financial press just how frightening this scenario is: who knows how many other Kerviels there are on the planet, trading desperately on behalf of their employers in the hope of getting ahead and attracting no attention at all until things go disastrously awry.