Wednesday, January 30, 2008

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...


At 11:09 PM , Anonymous Poornima said...

reads like a Jeffrey Archer+Sidney Sheldon plot.......u have 2 hand it 2 him i say......


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