Tuesday, January 29, 2008

Rogue trader or a Rogue Bank ?

Société Générale, the French Bank is quick to blame Jérôme Kerviel, the trader allegedly responsible for a €4.9 billion ($7.2 billion) loss it declared earlier this month.

Remember Nick Leeson and the Bearings bank episode? This comes pretty close. Jérôme Kerviel's unauthorized trades may have cost Société Générale €4.9 billion, but they also helped to turn the French bank's $3 billion of subprime losses into something of a sideshow.

Attempt to mask inherent inefficiencies in internal risk management by pinning it on individual traders show bank managements in poor light. May be, they expect to get less sullied by raising this smokescreen to deflect public attention away from subprime induced losses for which they own more direct responsibility. Daniel Bouton, the bank’s chairman, and Jean-Pierre Mustier, Head of SocGen’s investment-banking arm may have hoped to escape with just a smear instead of a much maligning, indefensible subprime bruised image by bringing it up now. Coming at this worst hour for bank CEOs, trading losses emerge as preferred excuses for their plight than subprime losses that nail them straightaway.
We will never know. But it is hard to digest how Mr Kerviel got away with building up such a big position unnoticed. Do banks only look at net exposure and not a trader’s outsized gross positions? Why didn’t the margin calls on Mr Kerviel’s real trades (likely to have been in the order of €2.5 billion on a €50 billion position) trigger alarms?

I am tempted to call them rogue banks. The trader just played fast and loose – when allowed.

Labels: ,


Post a Comment

<< Home