SocGen: The trader vanishes (Caused global market meltdowns)

Financial Times ^ | 1/24/08 | John O’Doherty and Peggy Hollinger in Paris

[BurbankKarl]

“I don’t know where he is,” said Daniel Bouton, the long-standing chief executive and chairman of Société Générale, when he was asked on Thursday about the whereabouts of Jérôme Kerviel, the trader at the centre of one of the biggest frauds in banking history.

But while Mr Kerviel’s movements remained unknown, the sequence of events that led to the extraordinary writedown at SocGen was becoming clearer.

The trader joined the bank in 2000 and worked in Paris. The first three years of his career were spent in the bank’s so-called “back office” and “middle office”, where trades are settled and risk is managed. SocGen said he had never worked directly in its risk control section, but remained in contact with people in those areas so he could be updated with the bank’s risk controls.

“The reasons he could succeed was because the trader knew intimately the bank’s risk controls and swiftly shifted positions to evade detection at each level of control,” Bouton said.

The fraud was discovered after the trader made an error with a fictitious counterparty. Its extent became clear over the weekend, when the bank‘s management interviewed Mr Kerviel.

Jean-Pierre Mustier, head of investment banking who was among those present at an interview with the trader over the weekend, said: “I am convinced he worked alone.”

SocGen said that Mr Kerviel was responsible for trading futures on European equity market indices, and had taken “massive fraudulent directional positions” in 2007 and 2008, many of which had made a profit in 2007. It was positions he had taken since the start of the year that caused the losses.

[Justa]

Because they’re French?

[VegasCowboy]

OK, I’m with you now. They might have done it just to piss us off. :)

[Blue_Ridge_Mtn_Geek]

“Perhaps he was a scapegoat for the bank’s actions. The loss was too much for the bank to accept responsibility for so they made a patsy agreement with the suspect and he went away.”

A possibility, though a remote one I think. Also possible is that his activity involved others who benefited from it while his profits were running but wanted to duck out when their bad bet blew up in their face. This doesn’t mean that top management was aware of what was going on, but it does suggest that (no matter how careful the risk management is) misbehavior of underlings can happen. It IS a bit mysterious why he was doing this, given that no one has figured out how he might personally benefit from it. Also suspicious is his “sudden disappearance” afterwards.