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What Motiviated Kerviel?
Kerviel was hooked, but unlike previous rogue traders, he seemingly had no intentions of pocketing the money himself. The money would go to the bank. His motive then, aside from the thrill of high stakes gambling? According to the committee report, each trader maintained an individual P&L, recording their profits and losses. At the end of the year, the bank would pass out bonuses in accordance with the profits indicated by the individual trader's P&L. In fiscal year 2006. Kerviel had earned a bonus of 60,000 euros. For 2007, he had asked for 700,000 euros, according to bank records, but had obtained only 300,000.
Emboldened by this success, Kerviel began to make larger and larger investments, betting on the direction of the market. In November 2007, he explained to interrogators, "I went back on the DAX (the German sock market index) and seeing it was juicy, took positions from co-workers' automated [trading machines, which apparently his colleagues let him use to facilitate the frenzied pace of his trading] at the same time [he was trading on his own terminal]. On one day alone, I made 600,000 euros [about $900.000]."
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During this period, Kerviel's trading volume was enormous—on average 1,700 futures contracts per day, meaning he was buying stocks at a certain price with the understanding he'd be able to sell them at the same price in 90 days (if the stocks went down during that period, he would make money and vice versa). Between March 15 and August 30, 2007, he traded about 150,000 contracts in total, with a value of about 30 billion euros. Remarkably, between September 11 and late November, his trading volume doubled, reaching approximately 350,000 contracts. For the year, he had generated a positive gain of 1.4 billion euros (about $2.2 billion today). The bad news: he'd hidden these gains from the bank. "At this point the situation is beyond me," he confessed. "I don't know how to tell the bank about it....so I decided not to declare this to the bank and so to cover up this amount, I created an offsetting fictitious operation."
Still, in January of 2008 Kerviel continued to trade, but, for the first time in his tenure on the Delta desk, he spiraled into an extended losing streak. A former Deutsche Bank, official who worked in Paris and only agreed to talk to CIOZone if his name wasn't used, states that during the first two weeks of January Kerviel was making larger and larger bets that the market would turn around. Later, according to the Financial Times, Kerviel admitted he was "doubling down," what in roulette is known as a "martingale"—a betting strategy based on doubling a bet after every loss. Casinos have limits on how much you can bet this way. Not so at SocGen. Every time he'd lose, Kerviel would double his wager, meaning that if Kerviel was down 2 billion euros, he'd bet 4 billion the next time, then 8 billion if he lost again. Every one of his long contracts failed to pan out with the result that by January 16, he had about 50 billion euros—more than the bank's total market capitalization—riding on a market turn around. "It was one of those one-in-a-hundred situations in which the penny comes up tails time after time," says Dr. Albert "Pete" Kyle, Smith Chair Professor of Finance at the University of Maryland's Robert H. Smith School of Business.
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