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By Laton McCartney
Today, Part 4 of the CIOZone's five-part investigation into the subprime credit crisis and the Societe Generale trading scandal. The fall-out of these incidents has laid bare glaring failures in risk management technology, controls, procedures and processes. But the question for CIOs: If the technology had been better, or better managed, could the mess have been avoided? In our attempt to answer that question, we published Part 1: Behind the Subprime Collapse, Part 2: Inside the Societe Generale Trading Scandal, and Part 3: How SocGen Managed Risk. In this installment in the series, we look at what SocGen has said about its risk management operation.
Within a week after rogue trader Jerome Kerviel's activities came to light, SocGen commissioned a special-three person committee made up of prominent French business heads. They included Jean- Martin Folz, the former chief executive officer of PSA Peugeot Citroen; Jean Azema, CEO of insurer Groupama—and a member of the SocGen board—and Antoine Jeancourt-Galignani, chairman of real estate company, Gecina SA. Their mission, "Misson Green" the bank called it, was to prepare a report on how the incident happened and how to prevent similar losses in the future. In this effort the committee was assisted by PricewaterhouseCoopers, the global accounting firm.
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On February 20, three weeks after it was formed, the committee noted in a preliminary report that the bank had failed to follow up on some 75 warnings about Kerviel's trading activities between June 2006 and the beginning of 2008. These red flags included excessive commissions paid to brokers proportionate to the amounts Kerviel claimed to be trading; differences of more than 1 billion euros during reconciliations of Kerviel's trading books with the online derivatives broker the bank owned, ClockOptions; trades in excess of Kerviel's authorized limit (23 million euros); trades with unidentified brokers and a trade with a maturity date on a Saturday.
The committee also charged that the bank's operational staff rarely went beyond routine checks and failed to follow up on questionable transactions. Even when bank officers questioned Kerviel, and his responses seemed implausible, no initiative was taken to probe the trader's responses more deeply. In rare instances, when questions about the trader were presented by compliance agents to senior management, nothing was done, the report stated. "When the hierarchy was alerted, it didn't react."
In some instances, the committee noted, the bank simply lacked control measures which would have been likely to identify the fraud, essentially within operations. "No controls exist over cancelled or modified transactions, or over transactions with technical counterparties, or over positions with high nominal [euro amounts], or over non-transaction flows during a given period, all analyses which would probably have allowed the fraud to be identified," the committee concluded.
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Then, too, Kerviel had been cagey in covering his tracks in amassing 50 billion euros in unauthorized positions in stock index futures. The committee uncovered forged documents and a total of seven bogus e-mails Kerviel had sent to various compliance agents regarding trades. These supposedly came from counterparties (banks with which Kerviel was trading) verifying fictitious trades or transactions made under conditions other than those indicated in the e-mails.
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