Who the hell is Jérôme Kerviel?

For starters, definitely not one of France's better known products until just a few days back. All that has since changed and old Jerome is now almost a global celebrity, albeit not a very popular one. Amazing, isn't it? And the best part is that you can be the next Jerome Kerviel!! All you need to do is figure out a way to bring a bank down all by yourself... Well, technically Jerome has not brought down a bank down yet, but I wouldn't quite bet on that not happening just yet.

The financial world has been in a pretty bad way for a while now, and every day seems to bring new bad news. More panic reaction by the Fed, more subprime losses and more banks going hat in hand to moneybags in the Middle East and Singapore. Seasoned industry watchers, such as yours truly, believed they had seen it all in the world of high finance until the Jerome Kerviel saga broke out. Well, without any further ado, let's get down to the interesting part...

Société Générale or SocGen, as it is more commonly referred to in the business press, is a leading player in the Equities Derivatives business and one of France's more recognized names in the financial world. A few days ago SocGen made the headlines when it came out with the news that it had been a victim of fraud by one of its traders. It would not have been a big deal, except for the fact that the fraud was to the tune of $7 Billion!! In contrast, the original rouge trader Nick Leeson, who brought down the Barings Bank in 1995 lost less than a fourth that amount. Jerome has well and truly set a new benchmark for rouge traders the world over!!

The story is that Jerome used his knowledge of SocGen's controls and processes from his years of work in the back offices to effectively bypass and circumvent the regular system of checks and balances when making his trades. Apparently, Jerome would back up his open positions with fictitious hedges made by SocGen's clients that offset the bets. Every time any of Jerome's trades got flagged, he would magically produce a fictitious offsetting hedge for the trade and slip by. Well, all good things come to an end and so they did with Jerome too. Jerome placed some heavy bets in early Jan, after which the markets turned suddenly and unfavorably for Jerome. By this time some of the folks higher up in the SocGen food chain got to know that Jerome was up to something and an investigation revealed that Jermoe had open positions to the tune of over €50 Billion. To put things in perspective, that's more than the entire market cap of SocGen. The top dogs at SocGen spent the next couple of days furiously unwinding the positions that Jerome had built up, and having done so broke the news to the market creating a new superstar in the rouge traders' gallery.

This brings us to some very interesting questions: What the hell kind of checks and balances did SocGen have in place? And how was one man, a junior trader at that, able to build up positions of up to €50 Billion? Hedged or not, the fact that a small fry could bet the farm and much more just boggles the mind. Jerome says that there is no way his bosses could not have known about his trades, since the profits of the magnitude he generated in 2007 would not have been possible with small trades. I'm no finance guru, but I must say I am inclined to agree with Jerome on that one. The man was an arbitrageur, exploiting the inefficiencies in the markets to make money off them. Unlike probably even a decade ago when markets were less efficient and arbitraging was an attractive proposition, today's markets are quite efficient which means you need significantly larger bets to make the same profits. This lends a bit of credence to Jerome's story that his bosses turned a blind eye to his actions as long as he made profits and only took notice when the tide turned.

Well, SocGen and Jerome will likely be the news for some time to come now, and I'm sure there are more twists and turns in the SocGen saga before the dust settles. But one thing is for certain... Jerome has set a record that is not going to be broken in a hurry. Until later... cheers...

Whose world is it anyways?

Just imagine for a minute that after a good night of partying hard, you returned to your house and passed out smoking a cigarette on your bed, dreaming happy dreams and woke up to find your house spectacularly on fire. What would your first concern be?

a) Getting the hell out of the house.
b) Salvaging your precious collection of baseball cards.
c) Thinking of ways in which you could con your insurance company into footing the bill, and calculating how much you stood to gain from the accident

I suppose most level headed individuals would pick option (a), given the circumstances. You could also be forgiven for picking (b) if you are either ten years old or spent your whole life collecting those stupid cards and are unwilling to see your life's work go up in a puff of smoke. But only a cold and calculating mercenary who had probably spent most of his adult life in solitary confinement would pick (c).

Yet, that is pretty much exactly how the delegates behaved at the recent climate conference in Bali. Barring the EU, whose sheer determination to the cause kept the conference alive, everyone else seemed to be trying to talk their way out of doing their bit for the planet. At the heart of the conference was the issue of mandatory emission caps on greenhouse gases, something that most environmentalists believe is urgently required if we are to avoid permanent and irreversible damage to the environment.

The US, as could be expected, was the undisputed star of the show for all the wrong reasons and almost singlehandedly derailed the entire conference. The Bush administration's reluctance to set binding emission caps on the American industry is well documented, but what is not widely appreciated outside the "environmentally conscious" circles is how the US has systematically tried to undermine global initiatives for stricter emission controls at various levels. The US first pulled out the Kyoto agreement, after having signed the initial draft rendering the whole exercise pointless. The US also got its pals, Australia, Japan and Canada, to bail out of the Kyoto Protocol and tried to make it look like it was staying out of the ambit of the agreement on account of its unfair treatment of the developed nations. Without the participation of some of the world's biggest polluters, the Kyoto initiative was really an effort only on paper.

The Bush administration didn't just stop there. In an effort undermine any future global efforts, it started a parallel initiative grandiosely called the "Asia Pacific partnership on clean development and climate", which advocated voluntary and non-binding emission control by participants. And we all know how these voluntary schemes pan out...

The final straw was at the Bali summit where the US stubbornly refused to agree to any deal that didn't place similarly tight constraints on the developing nations, primarily China and India. China and India, who are by no stretch of imagination minor players on the pollution front these days, kept pointing to history, the notion of "per capita pollution" and their current state of development as reasons they should be allowed to keep polluting while the developed world took corrective action. While the reasons put forth are all very valid, fighting for the right to pollute while the world is dying around you is truly lamentable. Furthermore, it gave the US position a hint of legitimacy.

The US finally gave in and got on board the Bali summit when faced with the prospect of collective global wrath on its position, but not before substantially diluting the wording of the draft to suit its ends. Only time will tell us whether the world's biggest polluter has finally decided that it was time to do its bit for the planet or played the last Judas in mankind's history... The world might remember the US president Bush as the man who shaped the course of world history by invading Iraq, but to me he will be the man who tried his hardest to end the world through his position on climate change. Until later... cheers...