Kerviel Today

The implication of all stories is that a BANK can take an unlimited position in billions of euros worth of derivatives. Doesn't that mean any trader can risk the bank's whole existence with a few keystrokes? How many other situations around the world exist like this?



http://www.bloomberg.com/apps/news?pid=20601087&sid=awKvzvsr.GmQ&refer=home

Jan. 30 (Bloomberg) -- Jerome Kerviel, the Societe Generale SA trader whose unauthorized bets led to the biggest trading loss in history, told prosecutors the bank cast a ``complacent look'' on his practices.

``As long as we were winning and it wasn't too visible, things worked out, no one said anything,'' Kerviel told police in a transcript cited by Le Monde, which was confirmed by the prosecutors' office. ``I am convinced my managers turned a blind eye to the means and amounts in question.''

Kerviel amassed 50 billion euros ($74 billion) in positions in European stock index futures, whose unwinding resulted in a 4.9 billion-euro loss at France's second-largest bank. Kerviel was charged on Jan. 28 with breach of trust, falsifying documents and hacking into computer systems. He was released from custody after turning in his passport, and was ordered not to leave France, associate with the bank or engage in trading.

In a transcript that draws from 48 hours of interrogation by the financial police, Kerviel provided details of his trades and the subterfuge he used to conceal his deals.

Societe Generale said a routine check exposed one of these bets on Jan. 18. That set in motion a three-day sell-off of his stakes and the bank's Jan. 24 announcement of the losses as a result of the actions of the ``rogue trader.''

Kerviel, 31, cooperated with the bank in explaining his trades, Chief Executive Officer Daniel Bouton said on Jan. 24. Kerviel handed himself over to police on Jan. 26.

`Not a Casino'

Kerviel ``did not have the right to gamble 50 billion euros,'' Societe Generale lawyer Jean Veil said yesterday in an interview on BFM television. ``A bank is not a casino.''

Kerviel joined Societe Generale in 2000, rising to ``trader'' status in 2005. He told investigators that he took his first bet that year, on Allianz SE, calling his 500,000-euro gain a ``jackpot.''

The initial Allianz success created ``a snowball effect,'' said Kerviel, who began creating phoney hedges for his positions. That wasn't hard to do, Kerviel told investigators.

In January 2007, Kerviel said he lost on a position on Germany's DAX Index when the market rose.

``The fake deal went unnoticed because there was no coherent control in January at Societe Generale,'' he said to prosecutors.

`Not Sophisticated'

His job was to arbitrage small price differences between contracts, not to take bets on market directions, Jean-Pierre Mustier, the head of investment banking at Societe Generale, said on a conference call on Jan. 27.

``By Dec. 31, 2007, my cushion was up to 1.4 billion euros, still unreported to the bank,'' Kerviel said.

Convinced the bank would start asking for proof of the fictitious accounts Kerviel said he began faking e-mails. Using skills he gained during his entry-level days at the bank's back office, Kerviel cut and pasted made-up client information into official-looking documents.

``The techniques I used were not at all sophisticated,'' he said during the interrogation.

There were other signs that should have tipped off the bank, he told investigators. On one day in November 2007, he had a gain of 600,000 euros that he refused to explain to his manager. ``Under normal activity-levels, a trader couldn't generate that much cash,'' Kerviel said.

``The simple fact that I didn't take vacation days in 2007 should have alerted my managers,'' he told prosecutors. ``That's one of the first rules of internal controls. A trader who doesn't take vacation is a trader who doesn't want to leave his book to someone else.''

To contact the reporter on this story: Heather Smith in Paris at hsmith26@bloomberg.net

Last Updated: January 30, 2008 00:53 EST