Thursday, October 7, 2010

Throwing Jerome Kerviel Under the Bus

I feel sorry for Jerome Kerviel. His face was a picture of devastation. His life is in tatters, and the next three years will be spent in prison. I realize that Kerviel is not an innocent man. He lied and hid his losses using his knowledge of risk management systems gained in previous jobs. What he did was stupid and financially damaging to SocGen - he came close to ruining the bank. There is no excuse for what he did.
There is also no excuse for SocGen to have let it happen.The most cursory of glances into trading accounts would have flagged up issues. The most elementary of audits would have caught Kerviel before his mistakes were monumental. The bank repeatedly ignored warnings and red flags concerning Kerviel's positions, preferring instead to focus on the profits he appeared to be making. SocGen is guilty of extreme moral hazard, and should also be punished.
If there is a lesson to be learned from the trial of Jerome Kerviel, it is that the big banks almost always win. A big bank can gamble its clients' money, let traders take on huge positions with no risk or leverage controls, and cut corners on technology and common sense and still win the day. Government, and that includes judges, will continue to support them because they are 'systemically' important. The only answer is to force banks to take steps to prevent a Jerome Kerviel from happening again. Regulation in the form of forcing banks to employ real-time risk management, trade monitoring and surveillance might ward off another $4bn loss. And prevent what actually appears to be abject stupidity in the name of profits. 

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