Future shocks
Published: January 25 2008 02:00 | Last updated: January 25 2008 02:00
Modern banking is peppered with tales of rogue traders blowing holes in their employers' balance sheets. The case of Jérôme Kerviel, the rogue trader at France's Société Générale, is, however, in a class of its own.
When Nick Leeson brought down Barings in 1995 risk management became a more serious business. Banks installed sophisticated blackbox technology to prevent a repeat disaster. While lacking Mr Leeson's star status, the backroom boy turned "vanilla" futures trader who lost €4.9bn for SocGen shows just how easy it is to dupe these sophisticated systems.
Still, it beggars belief that such a large trading loss could be concealed for any length of time. It goes without saying that executives should have known what was happening under their noses. But what protection are compliance controls and watchful management against a geek with intimate knowledge of back-office computer systems and reportedly secret passwords?
At one level the abuse at SocGen is another example of a European bank trying to emulate Wall Street's finest, but coming unstuck because of a failure in risk control.
But it is also true that as long as human nature remains what it is - and dealers are rewarded for making profits and fired for failure - then deception will always be a risk. That risk is usually contained by computer software codes and the deterrent of prosecution. In this case, the SocGen trader, like Mr Leeson, probably knew from his earlier backroom role how to hide his positions.
For the bank, which was founded in Napoleonic times and survived two world wars to become a pillar of France's business establishment, this is a humiliating episode that could yet prove terminal. A take-over attempt by one or more of its rivals must be a possibility.
For investors, it is an ominous reminder during a dramatic week for the world's battered financial markets that the banking system is wide open to a catastrophic failure. Just as the volatility in asset prices since the start of the year added to SocGen's problems, other banks may well be nursing similarly large trading losses from poor judgment.
The big question is what else is out there. Few guessed the far-reaching effects of the credit squeeze. Nobody believed monoline insurers, the ultimate guarantors of security, could be at risk. Compliance systems were foolproof. Now human failure has proved their undoing. As Richard Fuld, Lehman Brothers chairman and chief executive, put it: "Nothing stuns me, nothing surprises me these days."
Copyright The Financial Times Limited 2008
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