When It Hits the Fan

On January 23rd, nobody had heard of Jérôme Kerviel. He was just another junior trader at France’s second largest bank, Société Générale. A day later, his name headlined nearly every major financial daily across the globe. Although his desk was limited to about $180 million in positions, Kerviel had forged passwords, faked control e-mails, and fabricated hedges in order to go well beyond the limit. He had learned all the necessary control tricks to pull off this feat during his time at the bank’s nondescript back office, where he had started working years ago before rising through the ranks to his more recent and prestigious office. In contrast to what the French public believes, however, his story is hardly one of personal growth and social mobility.

When his managers liquidated his positions, Kerviel held unhedged bets for over 60 billion dollars. Somehow, no one had noticed trades that exposed the bank for its entire market value. The managers silently sold Kerviel’s assets in a rapidly declining market amidst fears of global recession, and ended with over 7 billion dollars in red on their balance sheet.

Overnight, everyone knew his name: Google searches for Kerviel exploded, as did news stories, and columns in the Financial Times. Everyone was covering the most spectacular rogue trader in financial history. Yet there is something even more surprising than the lack of controls that allowed for Kerviel’s scheme to work under the radar for over a year: the public’s reaction to the debacle.

According to recent polls, 77 percent of French people believe Kerviel is a “victim” of the system. Bruno Jeanbart, a French pollster, told Bloomberg, “French opinion perceives [Kerviel] as a man in the street, overtaken by the system.” That was just the tip of the iceberg. The popular French daily Le Monde addressed Kerviel as a “hero of our time” on February 2nd, and that same day, Le Figaro revealed that only 13 percent of people believed the trader was responsible for the scandal. Thousands joined his fan group on Facebook and, to top it all, the National Observateur called him the “Che Guevara of Finance.”

An unnoticed trader thus became a romantic dragon-slayer. A few days ago, he told Agence France Presse, “I never had any personal ambition in this affair. The aim was to earn money for the bank…You lose your sense of the sums involved when you are in this kind of work.…You get a bit carried away.”

Needless to say, those numbers traders seem to play with on their many computer screens every day from dawn to dusk are hard to conceive of as tangible funds. In his overwhelming desire to achieve upward social mobility, Kerviel forgot that it was real money – and that the more zeros, the more they matter. Rather than a “victim” of the system, he represents the system’s worst nightmare: uncalculated risk.

That is precisely what risk managers are supposed to eradicate. But it makes for an unglamorous job–do you know anyone applying for a summer position in that division? Rather than making spectacular deals, risk managers keep track of all transactions, and make sure banks’ bets remain hedged and balanced. The possibility of loss is ever present, yet they minimize the odds of catastrophe. Clearly no romance there.

Even more crucially, despite the election of market-friendly President Nicolas Sarkozy, France’s relationship with financial markets is a troubled one–hence Kerviel’s heroic status. In 2006, a University of Maryland poll revealed that only 36 percent of French people believed that free-market capitalism was the best system of economic organization, compared to 74 percent in China. No wonder being called “Che Guevara” is a compliment in the Gallic press.

The French are quite in touch with their hatred of capitalism, but they hardly remember France’s original sin with financial markets. Back in 1719, in what became the first modern bubble (and bust), John Law single-handedly obliterated the incipient Parisian stock market. Once a penniless gambler, the rogue Law became part of the King’s court and eventually rose to Controller-General of Finances. He achieved control of the central bank, most money-issuing mints, the national debt, the collection of indirect taxes, and the largest player in the market, the Company of the Indies. Unchecked, monopolistic control of the market was part of his “Plan Sage;” but it eventually collapsed spectacularly, hindering French finances for generations.

Today, several voices have called for more regulation of investment banks like Société Générale. Speaking at the Harvard Kennedy School, French Socialist leader Segoléne Royal cited the Kerviel case as an example of why a sort of global regulatory central bank is needed. Royal may be right: Regulation, like good risk management, may help curb moral hazard. But this is just part of the solution.

It is far more crucial to remember that Kerviel is just like Law: Uncontrolled plans may prove profitable in the short run, but can and eventually do descend into chaos. It is those that get “carried away” who make for “le capitalisme sauvage.”



Pierpaolo Barbieri ’09, a Crimson Editorial Editor, is a History concentrator in Eliot House. His column appears regularly.