A man in France described as a 31-year-old computer genius single-handedly cost Societe Generale, the second largest bank in France, over $7 billion in only one day. The Frenchman’s actions powerful influenced everything from the worldwide stock market free-fall to the U.S. Federal Reserve’s emergency decision this week to cut interest rates.
Now this lone trader is being portrayed by the governor of the Banque de France as a “genius of fraud”. But his crimes, which might otherwise have gone unnoticed, were made much worse by a case of terrible timing—coming as they did on the worst trading day in France and most other world stock markets since September 11, 2001.
According to bank officials in France, Jérôme Kerviel worked at Societe Generale in Paris for five years, learning all the secrets of the security system that the bank used for fraud protection. Then Kerviel was promoted to trader. Now he was one of the employees the security systems had been created to police—a veritable fox in the henhouse.
Over the next several months Kerviel used his inside information of the bank’s six-layer security system to pull off one of the largest banking frauds in the history of France and worldwide banking, creating devastating losses of more than $7 billion for Societe Generale.
Both Daniel Bouton, executive chairman of Societe Generale bank, and Jean-Pierre Mustier, head of the investment bank, had their resignations rejected by the board of directors, officially absolving them from guilt. Still both men’s jobs are in jeopardy after the investment debacle.
While Kerviel has not been seen lately, his lawyer said on French television that he is not fleeing and is “available for judicial authorities.” However, she wouldn’t say where he was, perhaps to shield him from aggressive reporting, or worse.
Banking specialists in France and elsewhere said Societe Generale’s big mistake was moving an employee armed with the back-office secrets of the bank’s monitoring system into the role of a futures trader.
Kerviel’s job was trading in European equities futures, a speculative market that involves betting on the future performance of stocks.
The trader maintained two sets of books, one in which he kept accounts of his successful investments, and a secret parallel book where he was voiding his losing positions, Bouton said.
He knew when the security checks were going to take place, Bouton said, because over the years Kerviel had become and expert in the security schedule. Bouton said Kerviel outmaneuvered six levels of security checks and firewalls designed to detect and prevent fraud.
Societe Generale bank officials spent last weekend and the early part of this week secretly selling many of Kerviel’s investments to try to stop the bleeding. But in a perfect storm of bad timing, the worst collapse in world stock markets, including in France, since the Sept. 11, 2001, terrorist attacks drove Kerviel’s losses higher and higher, eventually topping $7 billion.
The man who caused this massive house of cards to fall was not a high-flyer, said one former colleague. In his best year at Societe Generale bank, Kerviel earned only $146,500 a year in salary and bonuses. Yet his motive did not appear to be personal gain, said bank officials, who even after interrogating the man for six hours still remained baffled as to why he committed the fraud.
