The biggest scam in banking history , it could have reached 50 billion Euros

By Zafar Masud

MANY readers will probably remember a Wall Street bond trader and his constantly yelling into what Tom Wolf had disparagingly called a ‘doughnut’ in his 1987 best-seller, The Bonfire of the Vanities. In these 20 years both have come a long way. Yesterday’s ‘doughnut’ is today’s highly sophisticated ‘cell’ that can dart a whisper, or a video-clip, across the seven seas in a fraction of a second.

The golden boy has changed too. High on testosterone (less than five per cent of the traders are women!) he is alone at his desk, earplugs on, a determined fist gripping the mouse, eyes, like an eagle’s, scanning the horizon on the multiple screens that offer him a permanent view of all the world’s stock markets. On an average day, he makes, or loses, for his company 100,000 euros. On a turbulent day, his wins or losses could hit the 15-million euro mark. No questions asked! Since futures are on sale somewhere in the world all the time, he doesn’t sleep much, never goes on vacation and is washed out by age 30. Then, with all his well-earned bonuses, he is promptly transferred to less straining tasks and an upper niche in the financial hierarchy.

Jerome Kerviel was such a trader who worked for one of the biggest banks in France, la Société Générale, or SocGen. An unremarkable and unremarked young man, Kerviel got hooked on venturing far beyond the beaten trail early on. In one of the deals that he struck last December he made a gain of 1.4 billion euros for his bank. Given the staggering amount, he panicked; he was not authorised to make that bid. He hid the transaction under a sea of purely invented statistics, making it appear as if the bank had made a ‘mere’ 55 million euros.

Emboldened by successes in not only carrying on his phenomenal operations undetected but also in his ability to conceal them behind a statistical smokescreen, Kerviel galloped ahead with his virtual adventures until it was too late.

On January 24, this year SocGen woke up to the fact that it was five billion euros poorer and that Jerome Kerviel had the unrivalled, and not much envied, distinction of being the cause of the biggest scam in banking history.

Two days later, Kerviel turned himself in to the French financial police, admitting all but also wondering why his bosses were denying they were in the know all the time of what he was up to!Kerviel is convinced that his transactions would not have harmed the bank in such a dramatic fashion had his bosses given him time to wait out the current financial turbulence instead of impatiently unwinding his strategy in a volatile market. The young trader remains under police custody. Once the judicial investigation comes to its term, he will face charges of forgery, breach of trust and unauthorised access to computerised data. Proven guilty, he might face a seven-year prison sentence and up to 750,000 euros fine.

Kerviel’s redemption might come from the fact that despite the enormity of his misdeed, or probably because of it, he doesn’t fit into the pattern of a small-time crook. Like any other trader, he aspired for juicy bonuses and, most of all, respect from his colleagues and a speedy climb up the gilded corporate staircase. Apparently, even his prosecutors understand this point though one of his bosses went so far as to call him a ‘terrorist’.

The only time he has been allowed to speak publicly since his detention, Kerviel told news reporters on Feb 5: “I am taking my share of responsibility but I will not be a scapegoat for the bank.” A point of view almost shared by Christian Noyer, the governor of the Bank of France and the chairman of the French Banking Commission: “I find it completely incomprehensible that the vast position accumulated by Kerviel could not be detected sooner by the SocGen management.”

Everyone agreed though that laying the suspicion of conspiracy thickly on the young trader would have amounted to asserting that a whole gang was working secretly on a plot and that he was only a part of it. Convinced that this was not true, investigators went through the phenomenal bill of Kerviel’s cellphone that ran up to 1,000 euros some months. Why the cellphone when a trader has two fixed lines permanently connected to his ear-plugs? The sleuths discovered most of the cell calls were made to another youthful trader by the name of Moussa Bakir who worked for Newedge, a SocGen subsidiary.

The conversations that were recently released to the press only show a highly stressed Jerome Kerviel seeking advice from his buddy on what to do next. Moussa Bakir’s counsel invariably boiled down to the same few essential points: “Remember, you are not a criminal. Keep your eyes on the screens. Concentrate on the futures. Pounce when the time is right. Your bosses will be thanking you instead of sending you to prison.”

Speaking of the magical vortex of trading that can suck a young man into its infernal bowels, one of Kerviel’s prosecutors, Jean-Claude Marin, says: “This works a bit like a drug. There is an addiction. There is a dependency on this complicated system of betting on the markets and there is a sort of a spiral from which it is not so easy to exit.”

In a way, despite the five billion euros loss, stopping Kerviel in the tracks when they did was a relief to the SocGen bosses because, as they were to find out to their ultimate horror, during a maximum risk phase, the young trader had exposed the bank to a far greater possible loss of 50 billion euros!

At the same time, the French government has another headache to cope with. A number of banking predators, including French establishments like the BNP and Crédit Agricole, but also foreign banks such as HSBC and Barclays, are already rolling up their sleeves to make a fatal takeover bid for SocGen.

As boys will be boys, banks will be banks. John Steinbeck had said it all in his 1939 masterpiece The Grapes of Wrath: “A bank is a monster. When the monster stops growing, it dies. It can’t stay one size.”

The writer is a journalist based in Paris. -courtesy Dawn