Monday, 28 January 2008

Jerome Kerviel and SocGen: an uncreditworthy story

Interesting that M. Kerviel’s lawyers have come out swinging, which means SocGen will probably need to do more explaining that it would wish.

And there’s plenty to explain because the public-domain story just doesn’t wash. Robert Peston has had an honourable crack at it, correctly lighting upon the odd claim that Jerome ‘arbitrageur’ Kerviel avoided detection of his vast naked position by entering fictitious ‘special hedging’ deals which involved no margin calls. Peston’s inference is that this “doesn’t sound like a very liquid hedge … we are now at the nub of what worries me – that SocGen was allowing its traders far too much exposure to liquidity risk”.

But that’s a second-order point. (BTW, the liquidity in the underlying certainly held up: SocGen claim to have liquidated in next to no time - in a bear market !) Surely the bigger point is that the fictitious trades must have been burning up a humungous line of credit to the providers of the ‘special hedge’ – and this in the middle of a credit crunch ! And this went unnoticed too ? By a bank ?

We remain, Sir, yours utterly unconvinced …


Update (CU):
Not normally my forte to just spin rumours, but the temptation is too high given ND's story above
According to the MSN the whole story is elaborate fraud by Jerome Kerviel to which the Bank is an innocent victim. The story on the street is that there were quite a few executives who knew of the exposure by the end of December - at which point his positions were 1.6 billion euros in the black.
It was only the huge market falls in January that changed the attitude towards him, with reports being created and him effectively being dobbed in. At this point he had moved to a 1 billion euro loss. When Risk Management became involved they ordered all the positions to be unwound in a crashing market which led to a 5 billion euro loss overall. Ouch.
Many heads are to role and it is interesting to note the resignations before the inquest - often a giveaway of those who know they will get caught and choose an 'honourable' route. Just like the executive in the Kent superbug story of late last year.


Steven_L said...

Ouch, my eyes, what's happened the fonts?

Anonymous said...

I agree Mr. Drew.

I also can't believe the irresponsible reporting suggesting that this unwinding of futures caused the market meltdown. From what I've heard, the volumes simply don't support this theory.

Nick Drew said...

blogspot has run amok !

"This afternoon, many blogs showed the error bX-uxu3fu for about two to three hours. This was caused by a bug in our latest release that affected highly-customized Layouts templates. We noticed the problem as soon as the release finished deploying, and worked quickly to find and fix the bug.

We apologize to the bloggers and readers of the affected blogs.

Nick Drew said...

seem to have fixed it for now (by attacking the HTML directly)

*takes small bow*

Steven_L said...

What happens to 'rogue traders' who's bets win then? Do the get promoted? Get mega-bonuses to keep schtum?

Mark Wadsworth said...

Barings fell for the same crap.

Nick Leeson (who rocks!) also fobbed them off with the tale that all his positions were fully hedged. He asked his bosses for money for margin calls on one side, but they never asked him to cash in some of his winnings on the other side, or noticed that he had never asked for a deposit to be able to take the opposite position.

There's one born every minute.

CityUnslicker said...

Nice to see the typical French lack of resignations too!

Anonymous said...

So at one point this supposedly fraudulent trades were 1.6bn Euros in the black. Would have been a good time to call time on his little scheme surely?

Sounds to me that the top brass were in on this scheme and Kerviel is nothing more than the fall guy. Are those that resigned on their way out of the country I wonder?

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