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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18 Responses to Not buying the Jerome Kerviel – SocGen story

  1. leafar says:

    The funniest part is that you know have more than 10 jerome kerviel on facebook

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  3. Sylvia says:

    I’m so with you! Unfortunately today people do not think anymore with their brain. It’s all about eating what media put on their table: generation of idiot box. People are so alienated

  4. Nick from Oxford says:

    J. Kerviel was by no means a financial genius. He traded delta one products, which are the simplest on the market. He worked for a very large bank (120 000 employees) and he was very minor there. He had experience in back office and changed positions to front office. He kept the passwords from back office (the bank should have been more secure) and used these to make it look like he was taking positions on behalf of non-existent clients. Risk management would not have picked up that the bank was not neutral (his positions being non-covered) because of this. Because of losses due to margin calls he then increased his positions, hoping to recupe the money (this is terrible trading). He would not have gained anything from this. If anything he was a bad trader and also a rogue. This could have happened in many banks. They all work more or less in the exact same way. The bank and the trader both share blame.

  5. Nick from Oxford says:

    J. Kerviel was by no means a financial genius. He traded delta one products, which are the simplest on the market. He worked for a very large bank (120 000 employees) and he was very minor there. He had experience in back office and changed positions to front office. He kept the passwords from back office (the bank should have been more secure) and used these to make it look like he was taking positions on behalf of non-existent clients. Risk management would not have picked up that the bank was not neutral (his positions being non-covered) because of this. Because of losses due to margin calls he then increased his positions, hoping to recupe the money (this is terrible trading). He would not have gained anything from this. If anything he was a bad trader and also a rogue. This could have happened in many banks. They all work more or less in the exact same way. The bank and the trader both share blame.

  6. Dude, can you warn me before hunting down my sources? And note today’s NYT headline (so glib) “French Trader Remembered As Mr. Average”. Priceless.

  7. josemaria says:

    JK currently resides at the Opus Dei residence for men in Paris and may reached through Opus Dei. The funds from the opposite , winning sides of positions are now in various Opus Dei front companies. Opus Dei thanks you for your generousity.

  8. Sadboy says:

    I hadn’t thought about this angle but it makes somes sense. As an employee of SocGen I can tell you that the senior management are a bunch of bozos. They spend all of their time worrying about changing the company logo or preventing an employee from stealing $10 on his expense report, instead of doing the best thing for the shareholders. Seven months ago they could have sold out to an Italian bank for 170-189 Euros per share but they turned the deal down because Bouton would have lost his job. Now they will be forced to sell out on the cheap instead of choosing to sell at a huge premium. In the interim they should chnage the name of the bank to SogEnron and the logo to an “E” lying flat on its back.

  9. Gerald says:

    I find the SocGen story as hard to believe as you do. If Jerome Kerviel used passwords that he kept from his back office days to help him cover up his trades and those passwords were not changed over a period of several months that alone is a terrible indictment of upper management at SocGen.

    No, I expect that the realy juicy part of this story is yet to come.

  10. Zack says:

    Something is not right with this story. Now way that a junior trader could build over 1 year such mega loss.
    My theory is that SG has made a 7 B loss due to the american subprime mortages and they try to hide it for the stock market.

    Imagine what would happen with the european stock market if the banks would reveil their exact losses due to the US subprime mess? Indeed, a major panic. The asian markets will follow, than the latin markets … we will end in a world crisis.
    Thank you America for the subprime shit!!!!

  11. Guvna says:

    A little light relief, this link at least appears to be a humorous look at the whole affair. Or who knows maybe it really is him?

    http://jerometherogue.blogspot.com/

  12. PS says:

    I agree that there are a lot of unanswered questions.

    Let us assume that the position was down 10% when it was closed. More than that is almost impossible. The EURO STOXX and DAX is a bit more than 10% off their highs but its not probable that be bought in on the very top. Anyway let’s assume the position was down 10%. This gives us the number of futures he was long… 1,25 mln EURO STOXX futures or 250,000 DAX futures (or as SocGen revealed – a combination of both). This would be about 50% of the open interest in the EURO STOXX and greater than the open interest in the DAX.

    And the margin requirements….? I guess they are about 10%. That would imply €5 bln in margins!

    No matter if this guy was a “computer genius” or if he still had access to the back office, it would be totally impossible to have positions close to these, without any inside help. He also needed funding. The €5 bln to Eurex has to be transfered no matter how many fake trades he creates.

    Everyone trading the DAX remembers the HUGE buyer in the SEP 07 DAX future during the summer. During the call interaction on Sept 21 (close) the index was rigged from around 7250 to the closing price official closing of 7831.79. Was this done by Kerviel and SocGen? If it was raid ahould have raised question at that time. Eurex investigated this event but the official closing was left unchanged.

    http://www.eurexchange.com/production_newsboards/eurex/displayNewsboard.html?date=20070921&time=13360100

    It would be interesting to know if this was done by SocGen.

  13. justicia says:

    If he was just a junior trader where did he get the capital to open so many positions? Did he charge it to his credit card?

    The investigating magistrate will make a feast of young Jerome — and his co-conspirators. There’s no right to remain silent in France.

  14. Support and donate money to Jerome Kerviel

    Visit site: http://jerome.siguranglas.com/

  15. /popcorn, to be honest…

  16. As many I have also become very critical to this story and feel there is something behind it from the top management echelon of the bank. Well, this is hard to prove, but the impression I get of this bank is very poor. To say it simply, you don’t sell your assets when the price is at the worst when you don’t have to! I simply don’t believe it!

  17. J. Kerviel was by no means a financial genius. He traded delta one products, which are the simplest on the market. He worked for a very large bank (120 000 employees) and he was very minor there. He had experience in back office and changed positions to front office