When ethics don’t matter: Kerviel and Société Générale

Go Jérôme, search your next target, I support you! Facebook posting by ‘Manu’ for Jérôme Kerviel, 25 Jan 2008.

On January 21, another “Black Monday” in the catalogue of financial woe, global markets tumbled. The US Federal Reserve had an emergency meeting and cut the official rate by three quarters of a per cent. The White House pressed for a stimulus package to relieve an ailing American economy.

The culprits were familiar: the sub-prime bugbear and a fall in the housing market. To that was added another: a junior trader working for France’s second largest bank, Société Générale. But Jérôme Kerviel, who faces at most a mere three years in prison for losses in the order of 4.9 billion Euros, is merely the symptom of a pervasive disease.

Kerviel’s costly hedging on plain vanilla futures, though spectacular, is far from unusual. The banking landscape is littered by “roguish” precedent, conduct that often determines the profits of the very banks who eschew them when they fail. The 1990s was memorable for several practitioners of “off-the-book” activity, from Barings Bank, which gave us Nick Leeson, and Japan’s Daiwa Bank, which provided the wily executive Toshihide Iguchi.

The list goes on, and continued into the new millennium. Australia’s own National Australia Bank announced various “rogue currency trades” in January 2004 which cost the bank something in the order of A$180 to A$360 million. The culprits then were four currency options traders.

The bank reacted coolly: it still expected to pay a full-year dividend; and it opened its books to an audit. Besides, faulty “procedures” in its foreign exchange department had been corrected, and its chief sacked. No one mentioned it again, and the traders were quietly sentenced in the County Court of Victoria.

In a sense, the sub-prime market is the apotheosis of a grand rogue scheme, a large gamble that went terribly wrong. It also happened under the watchful eyes of now discredited market sages such as former Federal Reserve chairman Alan Greenspan. For Greenspan, controlling a bullish market was a crime against nature. In such a milieu, there is little moral difference between the speculators at the NAB, Northern Rock’s Adam Applegarth, and the junior Kerviel. A worried British Prime Minister Gordon Brown could only tell the World Economic Forum in Davos the obvious: there had “been too much off-balance sheet activity”.

SocGen has, much as the NAB did in 2004, been engaging in frenetic off-sheet activity. Like other banks, it got knee deep in the sub-prime market, writing off considerable losses. But in also allowing a single trader such unaccountable access over complex mechanisms it barely knew how to control, it committed the same sins the NAB and Barings did. Such omissions made it constructively guilty. The bank has done its best to limit Kerviel’s prominence in the corporation. This degrading does little for the French banking giant, and says much about the culture prevalent in banking circles.

Kerviel, for one, could hardly have been a sole operator. He dabbled in totals approaching 50 billion Euros, figures that could have hardly gone unnoticed within his bank. He acted more like a hired mercenary, doing it for the working cultures of La Defense, Canary Wharf and Wall Street. Kerviel, after all, did not profit from his own schemes. He did not even behave, as French investigating judges have found, fraudulently.

Despite such errant behaviour at both the individual and corporate level, some economic commentators remain in an amoral daydream. Scanning through the apologias for his behaviour, one finds such financial spokesmen as Terence Corcoran of the Canadian Financial Comment (January 24), who pours scorn on “the gurus of corporate ethics”. He targets the British Broadcasting Service and ethicists such as Roger Steare of London’s Cass Business School. He marvels at “the resilience of the market and the effectiveness of the market system”. SocGen survived, just as the NAB did. Money raised from investors replenished stocks depleted by Kerviel’s speculation.

Astonishingly, one leaves Corcoran’s moral-free meditation wondering if Kerviel and his bank should be sanctioned or blessed. His fan clubs on the networking site Facebook think the latter, expressing envy and admiration. The market, rather than being a composite of people and resources, is an abstraction best left alone. Greenspan would have approved.

SocGen’s chairman and chief executive Daniel Bouton, along with deputy Philippe Citerne have paid lip-service to corporate accountability by foregoing their salary till June 30. But such individuals are also cult followers of the “genius” that is the market. “These losses,” claimed Bouton at a press conference, “could have been gains if the market had climbed on Monday, Tuesday and Wednesday.” The 1930s may have been, as W.H.Auden called it, a dishonest decade. To this can be added the first decade of 2000, with its corporate malfeasance from a moribund Enron to the incompetent oversight of SocGen.