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By Laton McCartney
When Societe Generale first acknowledged that one of its junior traders, Jerome Kerviel, had made unauthorized trades leading to the biggest bank fraud in history, bank officials from SocGen and other French banks characterized him as some kind of black-hat wizard whose hacking virtuosity had allowed the trader to circumvent the bank's operational and fraud risk management controls over a period of several years.
Christian Noyer, governor of the Banque de France, the country's central bank, described Kerviel to reporters as a "computer genius." In a public statement, SocGen's chairman and CEO Daniel Bouton characterized Kerviel's fraudulent trading pattern as like "a mutating virus in which hundreds of thousands of trades were hidden behind offsetting faked hedge trades."
Actually, Kerviel's computer skills were hardly exceptional. His resume, which is available on the Internet, lists his processing skills as "Microsoft Office Package—Visual Basic." It also indicates that while he was working in the bank's middle office as a trader's assistant, Kerviel focused on process automation and managing tools development as well as strategies backtesting valuation (the process of optimizing a trading strategy using historical data and then seeing whether it has predictive validity on current data) and providing risk analysis explanations for various Delta One products, including basket trading (a single order to sell 15 or more securities), single stocks, index, Forex (foreign exchange trading) and rate futures. Delta One is SocGen's elite trading desk.
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"He had a very good understanding of all Societe Generale's processing and control procedures," the bank said in a January 27 explanatory note. But Kerviel was no rocket scientist.
Noyer of the Bank of France claimed that Kerviel somehow managed "to breach five levels of controls." Subsequently, however, it's become clear that that the controls were flawed (as CIOZone will detail in the next installment in this five-part series) and so ineffectively enforced that it is a wonder that Kerviel was apprehended at all.
After the fraud was revealed, Standard & Poor's cut its ratings on SocGen citing risk management deficiencies. "While SocGen's loss was caused by the fraudulent behavior of one of its traders, we consider that significant deficiencies in the bank's risk management framework made possible the magnitude of the loss," S&P said. "Risk control was too oriented toward market risk, at the expense of operational risk and fraud risk in trading activities."
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By January 27, even SocGen conceded that perhaps its controls left something to be desired. "I think our control systems work. But what we are dealing here with [is] a trader who developed a particular expertise to get around them," SocGen's investment banking head Jean Pierre Mustier told reporters in a telephone conference call. "The fact that he got around them shows they can be improved."
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