The Curious Case of Jérôme Kerviel

Whose fault is it when your job is to make as much money as possible?

Back in 2008, it certainly looked as if rogue trader Jérôme Kerviel was acting alone.

He had built up derivative positions in the astronomic amount of €50 billion ($68.5 billion) – way beyond his trading limit – and had admittedly concealed them from his employer, Société Générale, by creating fake, offsetting trades in its computer systems.  

His massive exposures actually exceeded the market value of the bank which lost €4.9 billion unwinding the trades.  Kerviel was convicted of fraud in 2010 and sentenced to three years in a French prison.  His huge, hidden bets constituted the largest trading scam ever perpetrated on a bank at the time, and his sentence required him to personally repay SocGen for the full amount of its loss.   

Kerviel’s case

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For Kerviel, guilt and innocence may be hard to separate

Jérôme Kerviel joined SocGen’s middle office in 2000 where he assisted in administering its database and implementing its automated trading systems.  He was transferred to the trading floor in 2002 and trained in complex equity derivatives.1  Kerviel fared well as a trader and soon realized that he could do even better by exceeding his trading limit on an intra-day basis, since the trades wouldn’t show up as open positions on the bank’s daily reconciliations.  He also realized that he could even conceal his positions overnight by entering fictitious, offsetting trades into the bank’s trading logs which he could then cover up with fake confirmations.  

At trial, Kerviel did not deny his unauthorized trades and accounting deceptions, but claimed that his superiors at SocGen were aware of his excessive positions and condoned them as long as he was making money for the bank2.  He argued that it would be impossible for one person to have amassed an exposure of such magnitude without being detected by the bank’s internal risk controls.  He also claimed that other traders at the bank were permitted to regularly exceed their trading limits and that he was singled out because he came from a working-class background and went to the wrong schools.3 

He told the police “I was not as well regarded as the other [traders], owing to my education and personal and professional background.”

Moreover, Kerviel didn’t really benefit from his early successes as a trader.  SocGen paid him €48,000 a year when he moved to its trading floor and, after posting some impressive trading profits for his derivatives desk, he had asked for a €600,000 bonus but was reportedly awarded only half that amount.  At the time of his arrest, Kerviel was living in a sparsely furnished, one-bedroom flat and didn’t even own a car.  He told the police “I was not as well regarded as the other [traders], owing to my education and personal and professional background.”  He was the only derivatives trader at the bank who came through its middle office.

SocGen, of course, has insisted throughout that Kerviel acted entirely by himself and was a disgruntled employee with an undistinguished education4 who simmered with resentment over his comparatively small bonuses and failure to advance more rapidly.  

Appeals to higher authority

Since his conviction, Kerviel has appealed twice in the French courts.  In the second of those hearings, decided in March of this year, his three-year prison sentence was again upheld, but the Court of Cassation reversed his €4.9 billion restitution obligation to the bank.  It ruled that SocGen should bear some of the damages because of the failure of its risk controls5 and called for a new civil trial to determine how much of the loss should be allocated to Kerviel.

Faced with the inevitability of jail, Kerviel, who describes himself as a non-practicing Catholic, took his case to the Vatican and actually met with Pope Francis who, in his Evangelii Gaudium encyclical of last November, attacked the “tyranny” of financial markets and capitalism’s “idolatry of money.”  Surrounded by the press, Kerviel then began a crusade on foot from Rome to Paris in what he described as a personal journey highlighting “one individual’s struggle against high finance.”  Last week, he crossed the border into France to turn himself in to French authorities just in time to avoid being declared a fugitive from justice.

Before leaving Italy, however, Kerviel appealed to French president François Hollande to intervene in his case and grant immunity to any witnesses willing to testify on his behalf.  He apparently believes that his superiors, the bank’s compliance officers and SocGen’s other traders could demonstrate that his excessive trades were neither unnoticed nor uncommon.

Who can say that Kerviel was entirely at fault in light of what we’ve discovered about the ethical and operational infirmities of universal banks since the financial crisis — trading in complex and little-understood securities, lax risk controls and moral blindness in the face of greed.  Seen in that light, some might even suggest that Kerviel looks less like an isolated, rogue trader than the misfortunate product of a venal and elitist system.  The French public regards him as a folk hero. 

Just last week, Jérôme Kerviel told a Bloomberg interviewer that he was “ashamed to have been part of this system.”  He also said that, even while he’s in prison,“Société Générale and finance in general will continue to hear from me.”  His celebrity lawyer in France, David Koubbi, added that we will continue to fight to show that the so-called Kerviel case was in fact the Société Générale case.”

1 Primarily equity options, warrants and futures on single stocks and stock indices.

2 Kerviel published these claims in his May 2010 book, L’engrenage: Mémoires d’un Trader (Downward spiral: Memoirs of a Trader).

3 Kerviel grew up in a small village in Brittany and was educated at a local trade school, not a grande école like Sciences Po.

4 Note that prominent French banks are not exactly known for égalité in their personnel practices.

5 Separately, SocGen was fined €4 million by France’s bank regulator for risk control failures related to the loss.