The ordinary public is once more aghast with horror and amazement at the revelation of yet one more rogue trader action that threatens prime financial institutions and market panic.
The case of the French rogue trader, involving 31-year-old Jerome Kerviel has gripped the world’s headlines and there is even talk of a Hollywood film being contemplated, and an online fan club has sprung up to depict Jerome as a latter day “Robin Hood.”
The $7 billion man (euro 4.9 billion) who lost this amount by running an exposure of 50 billion euros, has indeed caused an international stir, not only for Societe Generale who were the alleged victims, but also for central banks and regulators who were caught on the hop, especially when the financial markets were already in a nervous state from prime mortgage losses.
What went so horribly wrong, that there is some conspiratorial whispering that the Federal Reserve Chairman Ben Bernarke was panicked into cutting the Fed rate by a staggering 0.75 percent after being appraised of the scale of Societe Generale’s losses and the unwinding of Jerome’s positions?
That might or might not be the case, but the facts, as revealed to-date, are as follows: According to Soceite Generale, Kerviel was a “genius” rogue trader, who, allegedly using his previous backroom operations experience, managed to fool his employer by using ingeniously fraudulent methods, including hackling into colleagues Internet codes, to hide his gambling on the equity derivative markets.
Apparently this “genius” had committed some 50 billion euros to purchase futures portfolios - effectively betting on the future direction of the stock market, which went wrong. If this is genius, then Kerviel seems to have joined the millions of other geniuses in the Middle East markets who carry on the same activity but for their own portfolios every day. The losses for Societe Generale were no laughing matter — more than the banks value of 35 billion euros — and about the size of France’s entire annual budget deficit.
Kerviel has come out fighting since giving himself up voluntarily to the police for questioning, and Societe Generale has been in some disarray since judges threw out fraud charges against the trader, and released him under judicial supervision. The young trader told investigators that his irregular deals had taken place since the end of 2005, a dagger at the heart of Societe Generale’s defense that he was a one-off fraudster of genius.
Kerviel has now accused his superiors at Socgen of deliberately turning a “blind eye” to his gigantic operations in equity derivative trading and of being part of a culture of fear. He basically accused his bank that he was allowed to proceed as long as he made money.
According to the rogue genius, he could not believe that his superiors were unaware of the amounts he was committing, and that it was impossible to generate such profits with small amounts. Kerviel insisted his techniques of concealment were not at all sophisticated and could have been picked up by correct controls.
This seemed to sum up SocGen’s bank culture, according to Kerviel, as being “not seen, not taken. If taken, you’re hanged.” Kerviel has also accused his colleagues of having similarly traded beyond their limits, as prosecutors said the bank had been alerted by the Eurex derivatives market to the scale of his positions as long ago as November 2007, but SocGen did nothing. Eurex said that its controls “functioned correctly at all levels; also in the case of Kerviel,” and SocGen admitted that it had also been warned by the Deutsche Boerse subsidiary more than once, but that once these false trades were picked up, “Kerviel explained then away, justified them, or fabricated a cover.”
This explanation by Societe Generale beggars belief. Are we to swallow the fact that a young junior trader was allowed to trade over his limit and then blandly explain away, whether he was a genius or not, massive trading positions to his more experienced seniors? This assumes that the financial system is basically sound and only rogue genius-afflicted traders are causing so much mayhem.
What seems to be the unfortunate case is that the most gregarious example of a form of wild gambling has been going on unchecked, whether in the ongoing subprime mortgage market or earlier episodes of rogue trading. They all pointed to one thing: as long as the rogues were seemingly doing well, and pulling in the profits, they were stars to hard pressed executives, with one eye on personal bonuses and the other on placating shareholders.
And, so, Kerviel, whether he is to be played by Olivier Martinez or Ewan McGregor in a Hollywood blockbuster, has joined an illustrious rogue trader’s gallery. Nick Lesson who bankrupted the British bank Barings in 1995, after losing nearly $1.4 billion on the Asian futures market, wiped out Baring’s cash reserves. Leeson wrote a bestseller called “Rogue Trader” after four years of jail in Singapore, and was depicted in a movie starring Ewan McGregor.
Liu Qibing, the famous Chinese metals trader, disappeared in 2005 after betting wrongly that copper prices were going to fall. What made it more intriguing is that the London Metal Exchange thought he was a copper dealer for the Chinese State Reserve Bureau, but the Chinese denied Liu’s existence, maybe to avoid public blushes. Another rogue trader was John Rusnak of Allied Irish Bank in the US who was charged with covering up around $700 million of trading losses.
A bigger rogue trader was Yasuo Hamanaka of Summitomo who blew away around $2.5 billion on the world copper market. Known as “Mr. Five Percent,” on account of his trading share of the world copper market, Yasuo was jailed for eight years in 1996 after admitting to a 10-year career of unauthorized dealing.
The strangest case was for Peter Young, a fund manager with Morgan Grenfall who lost around $500 million from funds he run in a series of unauthorized investments. Young was deemed unfit to stand trial when he turned up at London Magistrates Court wearing a women’s jumper and dress, probably due to a latent genius trading affliction.
In all these cases, the rogue traders did not seem to personally benefit, but were driven on by their corporate cultures of ever increasing trading profits and balance sheet growth. Elementary risk management controls were either ignored or circumvented, despite red flag warnings along the way.
In the Gulf, we seem to be blessed with a more stringent and conservative financial supervisory system, that often takes its time to approve any new exotic financial product until regulators are satisfied that risk management controls are in place. It might be a while before a Gulf trader joins the genius rogue gallery, and long may it remain that way ...
(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran).