No Défense

The humiliated French bank Société Générale has plenty more explaining to do before putting its rogue-trader scandal behind it.

Mr Kerviel’s credentials as a supervillain look less impressive in other ways too. His fictitious portfolio did not just comprise over-the-counter transactions with big banks, where agreed credit limits meant he could avoid margin calls. Embarrassingly, it also included trades with other parts of SocGen. Access to risk-control codes did not necessarily require the skills of a seasoned hacker; the bank says he may simply have offered to input details of trades on behalf of middle-office people when there was lots of activity on the trading floor. Some control procedures appear to have been predictable, being timed to take place shortly before the settlement date of futures contracts. Mr Kerviel’s limited holidays and late nights should also have raised red flags.

Despite the resounding support of the board, Mr Bouton has been severely weakened. Nicolas Sarkozy, the French president, has made pointed calls for SocGen executives to face “consequences.” The chairman may not survive the findings of an internal investigation into the loss. The future of the bank itself is also in doubt. Its shares have slumped since the start of the year and its credibility has been shredded, not just by the trading loss but also by write-downs of subprime-related investments. Analysts are trying to work out who might be in a position to buy the bank; one option is a joint approach by two other French institutions, BNP Paribas and Crédit Agricole, with BNP taking SocGen’s retail operations and Crédit Agricole the investment bank.

The question now is whether the flaws that seem to have torpedoed SocGen are endemic to other banks. There are some reasons to think not. SocGen’s management was being criticised for poor standards of disclosure well before news of the Kerviel affair broke: “They had not imposed the important discipline of transparency on themselves,” says John Raymond of CreditSights, a research firm. In common with other French banks, SocGen was also thought by many to take an overly mathematical approach to risk. ” ‘It may work in practice but does it work in theory?’ is the stereotype of a French bank,” says one industry consultant. More obvious visual cues—beads of sweat running down Mr Kerviel’s face, say—may get overlooked in this type of environment. And the sheer size of the loss partly reflects the bank’s pre-eminent position in the equity-derivatives field.

But there is no cause for complacency. Most observers, regulators included, concede that banks can do little to stop determined individuals from sidling around controls, at least for a while.

And in the midst of the subprime crisis, the SocGen saga resonates for other reasons too. One concerns the status of risk managers within banks. Mr Kerviel is alleged to have outfoxed rather than pulled rank on risk managers, but swaggering traders can find it all too easy to ignore the concerns of meek back-office types. Many Wall Street banks have responded to the meltdown in structured credit by strengthening their risk teams. The SocGen loss will accelerate that trend.

Events at SocGen will also fuel an old debate about bankers’ pay—Mr Kerviel was reportedly motivated by his desire to win a higher bonus—and a newer one about the ability of banks to keep pace with the dizzying growth of derivatives markets. It will also reinforce concerns about how “fat-tail,” or extreme, risks correlate: might SocGen’s risk managers have been too distracted by its subprime woes to keep watch on the futures desk?


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