Not buying the Jerome Kerviel – SocGen story



The greatest ever trading fraud emerged this week with the €5bn loss at SocGen, attributed to a junior equity derivatives trader called Jerome Kerviel and possibly driving pamicky Bernanke to cut rates.  The press has lapped up the "people" angle with glee without stopping to think about the details of the alleged fraud too much.  It is one of these cases where facts defy the imagination.

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Here’s the FT’s summary:
"According to the official version of events, a single, undistinguished
trader ran rings round SocGen’s risk management system to take massive
– and as it turns out, unhedged – positions in European equity futures."

I just find this whole story had to believe.  So I asked an [unnamed] friend of mine for his advice on this larger than life story, and here are his insights:

  • Everybody who is anybody in trading or banking is mentioned in Bloomberg.  But as late as Wednesday, this was not the case for Jérôme Kerviel.  Not one mention anywhere in the system. Even people who left the industry 10 years ago still have their profiles in tact. But not Jérôme Kerviel.
  • Bloomberg did, however, create a profile for him overnight with his photo, education and a link to their news articles which now do mention his name –but only after Le Figaro did so. Oh, and Le Figaro is citing Bloomberg News as the source of Jérôme Kerviel’s name and yet he is not mentioned in any article published in Bloomberg News.
  • In order to loose €4.9 billion in the futures market one would have to trade at least 10 million futures contracts.  The problem is that the daily volume of Eurostoxx futures are only about 1/4 or 1/3 that amount –and that includes all the players, not just one bank. Moreover, if one’s positions become more than 10% of the open interest, it sets off alarm bells in the futures exchanges. But apparently not if you are Jerome Kerviel.
  • SG has extremely sophisticated risk management systems. How did he get around it?  SG has no
    response to this but let it be known via the Banque de France that Jerome Kerviel was a "computer genius" but according to the web he went to business school in Lyon. Could he be a computer genius?  Yeah why not.  But with all the other facts that don’t add up, it almost defies credulity.
  • The margin requirements necessary on the number of futures contracts necessary to produce such a loss would come to about €400 million.  Where did he get the money?
  • SG has decided to prosecute him but on only very limited terms: document fraud and attacks on their internal control systems while not pursuing any monetary damages and saying that he did not
    attempt to profit from the trades. This will allow them to pursue him in the courts on a very focused case which reduces the risk that  they will have to reveal any of their internal accounting.

So the obvious question is: are the trading losses ascribed  to Jerome Kerviel, the rogue trader, vastly exaggerated and did the bank use this occasion to attribute more losses to his account that he was really guilty of…  That’s today’s contribution to the great body of work surrounding conspiracy theories :-)

Paul Kedrosky (reliably) comes up with a fun angle on this story: Jerome is left with one friend on Facebook since this story broke out.

kerviel-friend

One thing is for sure, this is a great way to make it onto wikipedia with a full article.  I hope this guy can take some serious pressure…

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