Trying to turn Jérôme Kerviel into the Lee Harvey Oswald of the banking world won’t fly. There is much more to be suspicious about when it comes to the role of his superiors at Société Générale and the governance failings of global financial institutions.
The disclosure that a lone trader’s unauthorized transactions had caused Société Générale to lose more than $7 billion prompted us to respond with a loud “Incroyable!” But when it was said that the bank’s efforts to minimize its losses may have led to the market meltdown that saw $1 trillion obliterated from stock markets worldwide, one could only think “C’est impossible.”
But of course, both situations were eminently plausible. On January 21, while Wall Street was closed for the Martin Luther King holiday, SG worked frantically to repair the damage caused by Jérôme Kerviel’s transactions. That day in Europe and Asia, and the next in North America, markets tumbled. Top central bankers and capital market regulators have not denied that the selloff was prompted by events at SG. In fact, they appear rather indifferent to that proposition.
For his part, Kerviel has told French authorities that it would have been impossible for his employers not to have known he was betting such large stakes in order for his trades to have contributed more than one-third of the bank’s profits in 2006.
As The Wall Street Journal reported, Mr. Kerviel told French authorities:
I cannot believe that my superiors did not realize the amount I was risking. It is impossible to generate such profit with small positions. That’s what leads me to say that while I was [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading.
We have previously drawn the comparison between this incident and red flags at Barings which no one heeded. Similar signals are emerging at SG. There will be more to come.
If the lessons of the subprime meltdown teach anything, it is that these well-educated, highly paid masters of Wall Street and its European counterparts are not quite as skilled and all-knowing as advertised. The same applies to the regulators and central bankers, whose imperial (and imperious) manner, even in their North American incarnations, on some days seems rather French itself.
The world’s investment bankers, who, more and more are taking on the appearance of financial contortionists, seem not to have known what they were pushing or what the potential consequences of these tainted subprime vehicles might be. And because they were spitting out such high fees and profits for the likes of Société Générale, Citigroup, Merrill Lynch and UBS, a picture is emerging that management and boards were disinclined to ask the questions that should have been asked. This occurred in an era of Sarbanes-Oxley governance, when directors boast about being so engaged and so cognizant of the risk issues they face that most have demanded pay hikes that have let them pocket three or four times what they were making in the pre-Enron period.
Governments talk incessantly about the threat of global terrorism and its desire to wreak havoc upon free market capitalism. Heavily armed forces continue to guard the world’s leading stock exchanges and extensive precautions are in place to protect against cyber terrorism. Or so we are told. Yet it appears that all these formidable safeguards on the part of institutions which are collectively entrusted with trillions of dollars are little match against a lone trader who has been described as “average” and whom it is said didn’t really fit into the exalted culture of Société Générale. We doubt that trying to turn Mr. Kerviel into the Lee Harvey Oswald of the banking world will fly. There seems, so far, to be little of the malevolent in this youthful product of the French middle class and a lot to be suspicious about when it comes to the role of his superiors and the governance failings of global financial institutions.
One shudders to think what a really bright fellow bent on destruction could have accomplished. How about three or four really bright fellows driven by evil intention? Or how about a few CEOs going about their normal business in, say, investment banking and mortgage lending? Record multi-billion dollar losses and write-downs –some estimates now place that figure at $100 billion- have swept across the financial sector in recent weeks, apparently caused by senior bankers who were acting totally on the level. Somehow that’s not much more reassuring than the miscreation of a low level trader who ran amok. How they were morally or legally permitted to place their institutions in the path of such Titanic risk, under the supposedly watchful eyes of auditors, directors and regulators, is something that remains unexplained. When the world’s financial system begins to look like something out of Ripley’s Believe It or Not, it is time to bury your spare change in the backyard.
The fact that Wall Street and much of the world’s investment banking industry have profited so well from the subprime scandal, with record employee bonuses being dispensed this year, shows that there is much more than the likes of Jérôme Kerviel that the world needs be worried about when it comes to integrity and ethics. Nor does it instill confidence that central bankers and governments were so long deaf to the ticking time bomb that was the subprime credit calamity, let alone that they failed to protect against the threat from Mr. Average.
The world is entitled to its sense of bewilderment about the actions of Mr. Kerviel. He seems more than a little bewildered about the whole thing himself. But it should be alarmed by the failures of the guardians and gatekeepers, the governments and the central bankers, who permitted the rise of a risk-oblivious culture to permeate the heart of modern capitalism and inflict the greatest losses in investment banking history.
Their failures, the extent of which seems to mount with each passing day, is our choice for the Outrage of the Week.