Saturday, January 26, 2008

Kerviel's Knack for Kiting

By this time, Jerome Kerviel is running (pun Intended) neck and neck with Osama bin Laden as the world's Most Wanted Man. Unless apprehended, and if he can find his way into Afghanistan and join forces with Al Qaeda, his status will be in that position for a long time. There are similarities in the impact created by Osama and Kerviel; Osama terrorized the world with bombs, while Kerviel terrorized the global financial system (which affects citizens of the world) with fraud. He now ranks as the top most popular search request on Google, minus all the sex related ones.

The bank, Societe Generale stated that Jerome admitted guilt and he acted alone; and there was no personal gain for himself. All he did was make fraudulent bets using the banks money that European Stock Markets would rise. Well it did not. He then covered up the losses with more fraudulent accounts rather than leave the market and cut losses. His supervisors and department managers were given their walking papers. Jerome was playing the part of a big time spender, investing billions into stocks he perhaps believed would help his career, his fortunes and the bank's as well. Its quite similar to a degenerate gambler who would be at the brink of selling his soul and can't stop betting. When all hell broke loose, so did Jerome Kerviel.

He is now a hunted man, despised by his neighbors for bringing in the nosy media into their quiet lives, abandoned by his friends who have disappeared from his facebook list, and dumped by his girlfriend. His University professors say he was no genius. An ordinary student who worked hard and not a troublemaker. His office mates say that he was quiet, and worked his way up to become a trader from a nondescript job as a monitor of trades on the floor. Yet, the Chief Executive of the bank says the fraud was extraordinarily sophisticated. He certainly was a genius at kiting.

Doesn't this characterization sound like the terrorists of 9/11 as described by those who knew them? Did Jerome Kerviel intentionally defraud to create economic turbulence worldwide? We will know if and when Osama airs a video message to this effect. But how can this fraud be going on for a year without anyone noticing? How can one man run rings around a very sophisticated system and elude signals of the unauthorized amounts invested in unverified accounts? What sort of management controls exist in the second largest bank of France that would allow an employee who worked the backroom, knew the codes, mastered the control procedures, to become a trader? Is this because he was a "nice guy" quiet and honest? This is simply unforgivable stupidity. Jerome may be a fool, but he sure made a fool out of a lot of people worldwide.

Aside from a public apology, what is the culpability of Societe Generale? It seems that the bank was able to cut their losses by unloading unprecedented volumes of Jerome's futures contracts in the markets last Monday, exacerbating the already panic stricken markets to even higher levels. The banks losses are stated at $7.1 billion, but recent reports indicate that our anti-hero invested around $73.1 billion. How much of that the bank can recoup is not clear, but the losses could run up to $22 billion. For an institution that's capitalized at $52.6 billion the potential losses are enough to send the stockholders jumping from the Eiffel Tower.

Societe Generale is now forced to raise $8.2 billion in fresh capital. They would need more as the stock market continues its jittery plunge. This incident clearly illustrates how fragile the global economic and financial systems are, and how the interconnection of all countries, with its attendant benefits, can also bring about its collapse. While the decline in the financial markets was not due to the Kerviel caper, similar illegal activities executed in simultaneous fashion can bring the world to its knees.

It would be chilling to think of Al Qaeda expanding their efforts with activities such as these. Sabotage and economic terrorism could impact into panic, hunger, chaos, riots, civil strife and the decline of civilization as we know it. Coupled with their terrorist bombs at the weakened security situation, the combination would be deadly. Sophisticated systems of whatever kind are no match for human intentions and human frailties. It would be wise for those who hold power and influence to speed up the moral improvement of financial capitalism - if such an animal can be tamed.



Mad Economist said...

My friend, what he did was easy. I know of a this homo in a small company who was able to cover up a few $ millions worth of a single transaction loss. That he did in between sleeping with the company drivers that he housed in the company provided condo. Eventually, he got caught. That guy (gay) was no genius, either. He had nothng but bad intention. Imagine replicating that poor sap of a human being and letting them loose in the stock market... Whoa!

durano lawayan a.k.a. brad spit said...

Actually mad economist, Kerviel was only able to get away with what he did because he knew how to get around the systems alarms; and he knew the codes.

Otherwise, he had very poor judgment in portfolio selection and was not prepared with a getaway plan that would have given him a retirement fund.

But I agree with you, letting these types loose in the financial markets, specifically if they were organized ideologically or religiously, would be a disaster. --Durano, done!