Editorial – Lessons from Kerviel: the real ones, and the rubbish

Editorial – Lessons from Kerviel: the real ones, and the rubbish

Why is there so much public sympathy for Jérôme Kerviel, the rogue equity index futures trader who nearly felled Société Générale?

Part of the reason surely lies in Kerviel himself. Leaving aside his eccentric good looks, the inexplicability of his crime lends it an air of glamour. Rather than being obviously motivated by tawdry greed or desperate haste to cover up a trading loss, he seems to have been following some inner project of his own.

Kerviel claims this was to make money for the bank in a way tacitly sanctioned by his bosses. It seems more likely that his motivation was egotistical – like a computer hacker (which in effect he was), he set out to circumvent the system, either to damage it deliberately, or to prove his own superiority, or just for the thrill of gambling with much bigger stakes.

The frequent comparisons with Nick Leeson seem completely wide of the mark. There was nothing mysterious about Leeson’s behaviour – he was a greedy trader who got into trouble and tried to cheat his way out of it. Having served time he is completely contrite and clearly a perfectly normal and likeable human being.

As Kerviel repeatedly outwitted controls, using a fiendish combination of tricks, his pure skill attracts admiration. Even Société Générale called him a “computer genius”.

And the blank space of his motivation can be filled with whatever artistic, vandalistic or hedonistic inspiration suits the taste of the onlooker.

Villain with a fan club

Many commentators and members of the public outside the financial world, therefore, have exonerated Kerviel and even praised him.

Yesterday Pierre Haski, a French journalist, sympathised in The Guardian with what he believes is the French public’s “outrage” at the “ludicrous” verdict. “How can a €50bn risk and a €5bn loss be blamed on just one man?” Haski asked, lamenting that no one at SG had been sued.

If Haski is right about public opinion, another reason why people are siding with Kerviel is that trust in banks is at an all-time low. With good reason: the deliberate actions of many of them have led to financial ruin around the world.

But in this case, the anti-bank sentiment is wrong.

Kerviel is nothing like as bad as Bernie Madoff, a highly intelligent, successful man who shamefully and needlessly stole from almost everyone he came in contact with.

But Kerviel is a selfish, immature vandal who has caused financial harm to thousands and great personal distress to many SG employees, including those who have lost their jobs, right up to the chairman, Daniel Bouton.

The accusation that Kerviel’s bosses knew what he was doing was always wildly implausible, not least because of his tortuous efforts to cover his tracks.

Any line manager would have known that tolerating a trader exceeding his limits was a crime that he or she would inevitably be sacked for, or worse. No wonder Kerviel’s lawyers failed to prove any complicity by other SG staff.

It is an excellent thing that he has been fined €4.9bn – it might just scare off a few more conventional rogues from trying their hands at mischief.

Technical minefield

It’s certainly true that SG’s risk controls failed. They may also have been lax or careless. But before anyone gets on their high horse, they should ask themselves if they could design and run a watertight system capable of keeping out a determined fraudster.

SG failed, but SG paid the price. In a similar way, governments and taxpayers failed to stop the bank-induced credit crisis, and have paid for it dearly. But the main blame for these events lies with those that made them happen, not with those who failed to stop them.

Less comfortingly for the derivatives industry, both the Kerviel and Madoff episodes show that despite all the millions spent on high technology, enormous holes can still be found in the system – non-existent trades, for goodness’ sake.

Every effort should be put into creating systems that make that kind of mismatch between different institutions’ books as close to impossible as one can get.

The other lesson is the same that so many banks learnt in the credit crisis: the trap of the false hedge. One of Kerviel’s dodges was to cover large positions with hedges. Risk managers saw them as neutral. The only problem was, the hedges were fake.

In the same way, the likes of UBS and Merrill Lynch hoarded triple-A rated CDOs, sometimes insured by monoline insurers or AIG. These assets were riskless, so why not stuff away $20bn of them?

Whether you’re hedged or not, size matters. The bigger your position, the more you need to check your hedge.