Thursday, 7 October 2010

Do they know what's going on ?

Remember Jerome Kerviel - the trader who almost brought down Societe Generale ? The French banking giant ? He was convicted by a French court this week, sentenced to jail and ordered to pay back the € 4.9 bn loss the bank suffered as a fine - largely symbolic as he would just become bankrupt.

No doubt at all that he was guilty. He had built an open position of some € 50 bn. He violated trading policies of the bank. His actions almost brought the bank to its knees. He was guilty; and he's been found so in court.

But what is amazing about the judgment is that it completely exonerated Societe Generale. They have been found to be not guilty at all. That completely gobsmacks me.

The bank admits lax controls, but said it did not know. You want to believe that the bank did not know that the guy was taking an open position of € 50bn ? Really ?? Of course they must have known. They just turned a blind eye as long as he was raking in the money. When the retreating tide revealed who was naked, they suddenly have lost the power of eyesight.

Correction. Maybe they did not know. And that's the frightening bit about it all. Financial products are created of mind boggling complexity. Competitive advantage of traders are counted in the nano seconds by which one computer is faster than another. The field is dominated by twenty something whiz kids with the brains of a rocket scientist. Even they may not fully understand what they are creating. And who sits on top of such geeks. Forty something, or even older, dinosaurs (like me ! although I am not sitting on top of anybody) who are too proud to admit that they don't have a clue of what's going on.

So maybe Societe Generale was being very truthful in saying that it did not know. This is probably true of every bank or financial house that's doing such stuff. And that's the really scary bit about this whole case.

7 comments:

  1. It is nice to see the justice is so swift in France.
    As you have mentioned, both scenarios are possible.
    Most of the time, as long as results are delivered, many don't mind how it was delivered!

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  2. Ramesh I share your disbelief. In general, when someone builds up a position of this magnitude - which is an aggregation of a set of such positions - the counterparties usually ask to speak to the trader's superior. There is no way Societe Generale did not know what was happening. A stupid judgement in my opinion.

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  3. @zeno - yes it is swift. Madoff has been convicted. So has Kerviel. The case against Ramalinga Raju is yet to come up for trail, even though he also admitted his guilt.

    @Ravi - Yes unbelievable. What must have happened is that Soc Gen must have hid under legalese.

    ReplyDelete
  4. Anonymous8/10/10

    terinju thaan thappu pannaanu sonna kootu kalavaani solli ulla thaliruvangalla...teriama thappu pannitaanna..avan matum thaana sikkuvaan. Kedi paya pullainga. Koodia seekram SGla sila pala thalais urulum :)

    ReplyDelete
  5. I think it is ridiculous that the bank gets away scot-free. Especially at this point in time when we are all trying to figure out how to deter risk taking behavior by banks going forward, the verdict codoning the bank is wrong on so many levels. How can top management be forgiven for not knowing what was happening when they admit that the controls were poor. After all this is not the first instance of a trader going beserk.... As for your scenario of dinosaurs versus geeks - scary but true.

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  6. well... not so very pleasant to be a dinosaur in these banking companies. But then, dinosaur needs to ensure the geeks are not playing around controls and policies. True, these are the geeks who are doing something wrong. But the people who are sitting on top of them are equally responsible... sad that only wrong-doer was held guilty in this case.

    ReplyDelete
  7. @gils - Yes indeed some thalais will urulify, if they haven't already, but that's internal bloodletting - it still amazes me that the company got away without any punishment.

    @J - Yes indeed, its very strange, but then France is more forgiving of those in power

    @Vishal - Its a bit like giving a flower garland to a monkry .....

    ReplyDelete

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