Société Générale: A Quest for Glory and a Bonus Ends in Disgrace

DOREEN CARVAJAL and JAMES KANTER
NYT, January 29, 2008

PARIS — When Daniel Bouton, the chief executive of Société Générale, announced that the venerable bank had lost more than $7 billion in unwinding the positions of a rogue trader, he called the culprit “a terrorist.”

But Jérôme Kerviel, nicknamed “the mad trader” by the French press, told investigators that all he wanted was to be respected, and to earn a big bonus.

Mr. Kerviel, the son of a hairdresser and a metal shop teacher from the provinces — a contrast to his pedigreed superiors — reported to work early, stayed late, and took only four days off in 2007, in a nation where six weeks of vacation is de rigueur. Starting in early 2005, he made small unauthorized trades, a strategy that ultimately wound out of control.

At a news conference, Jean-Claude Marin, Paris’s chief prosecutor, said, “When you have been performing these operations for months without being discovered, there is a kind of spiral, where you ultimately think yourself much stronger than the rest of the world.”

In 48 hours of intense questioning, Mr. Kerviel described growing increasingly daring after no one at the bank detected a series of small, unauthorized trades that he had placed. And Monday, pressure mounted on Société Générale and Mr. Bouton to explain how the bank had missed the illicit trades, and the red flags Mr. Kerviel set off, for so long. French authorities began to snap at one another Monday, even as they closed ranks, promising to repel any hostile takeover bid by a foreign company.

Mr. Kerviel told prosecutors that other traders at Société Générale had used similar tactics but with smaller bets.

He said that he eventually built up a lucrative position that would have earned the bank 1.4 billion euros, or a little more than $2 billion, if it had been cashed out by the end of last year. And he told prosecutors that he thought he deserved a bonus last year of 300,000 euros. Instead, he received 1,500 euros.

Initially, his bets did pay off. The bank’s head of asset management, Philippe Collas, told Bloomberg News last week that Mr. Kerviel was “massively in the money” by the end of December. But then the European market turned down and his losses mounted.

Over time, Mr. Kerviel had increased the size of his bets — he hedged his positions on paper with falsified documents and e-mail messages — but he remained convinced that success was just around the corner.

“He bet on the return of the markets that were extremely low and he imagined that there would be a return of the markets just as large as the losses,” Mr. Marin, the prosecutor, said. “There is an addiction. There is a dependency on this complicated game of betting on the markets, and there is a sort of spiral into which it’s difficult to exit.”

If he is found guilty of abuse of confidence, the charge carrying the most severe penalty, Mr. Kerviel faces a seven-year jail term and a 750,000 euro fine. Mr. Kerviel is also accused of forgery and unauthorized use of someone else’s password to access a computer system.

He said he did not seek to keep any of the bank’s money.

The prosecutor recommended keeping Mr. Kerviel in protective custody, in part because of the danger of suicide once Mr. Kerviel realizes what penalties he is facing.

“One of our concerns is that he needs protection,” Mr. Marin said, adding that Mr. Kerviel had not received any threats. “He’s not depressed at the moment. But once the full measure of behavior hits home you know that the way that human nature operates means that he could take some kind of action.”

Later Monday, Mr. Kerviel surrendered his passport and was released by a judge, who decides such matters separately from the prosecutor. Prosecutors immediately appealed the decision.

Over the course of his interrogation by prosecutors, Mr. Kerviel admitted making deceptive trades. The trades were part of his ambition to succeed in the business and impress his bosses, and to lead them to recognize his “financial genius,” Mr. Marin said.

Mr. Kerviel was striving to break free from his lowly beginnings in the bank hierarchy. He graduated with a degree in finance from a university in Lyon that specialized in training bank employees, and in 2000 he began work in the unglamorous back office and middle office, where trades are monitored.

And once he became a junior trader, his salary of 100,000 euros was paltry in comparison with the bank’s stars.

“He wanted to prove his competence,” Mr. Marin said, “and his capacity to act on the market. He was also seeking a bonus from his results.”

Indeed, when Jean-Pierre Mustier, chief executive of Société Générale’s corporate and investment banking division, called in Mr. Kerviel for questioning on Jan. 19, the day after the trader’s faulty positions were discovered, Mr. Kerviel insisted for several hours that rather than engaging in wrongdoing, he had instead invented a new kind of trade that would make the bank money.

The pressure to perform apparently took its toll on Mr. Kerviel. His family said they had detected signs that he was suffering under pressure from his job and that they had grown increasingly worried.

During an interview with the French radio network Europe 1, Sylviane Le Goff, one of Mr. Kerviel’s two aunts, said he had suffered health problems because of his job. The family, she said, had urged him to quit, but Mr. Kerviel told them he did not know what else he could do.

“He is a boy who is serious, honest and hardworking and is incapable of doing anything wrong,” Ms. Le Goff said, declaring that her nephew had been manipulated and that authorities should examine the actions of his managers.

Mr. Kerviel still remains convinced that the positions he took would not necessarily have harmed the bank in such a drastic fashion if the company had not moved to unwind his actions into a volatile market that was already falling.

“In waiting a little while,” he told the prosecutors, “there could have been fewer losses.”