HE WAS a trader whose modest position afforded him the anonymity necessary to execute the world's largest banking fraud.
Over the past five years, Jerome Kerviel had made gradual, if unspectacular, progress in one of Europe's premier financial groups, moving from its back-room administrative operations to a dealing desk.
At the age of 31, and the most junior of a s
ix-strong team of traders, he was responsible for "plain vanilla" futures hedging on European share indices, such as the Frankfurt Dax index, similar to Britain's FTSE 100
It was a job that was designed to minimise risks. Essentially employed to take out insurance policies, the Frenchman was supposed to look at his bank's portfolio, and bet in the opposite direction, thereby offsetting any surprises in the trading book.
No-one would have suspected such a modest trader would be capable of, let alone intent on, untoward activity. But Kerviel was using his experience in the company's administrative department to make mental notes of its Byzantine security procedures in preparation for the biggest gamble of them all.
Yesterday's admission by Société Générale, France's second biggest bank, that its rogue trader had apparently carried out a £3.7 billion fraud sent the institution into near meltdown.
It is not clear how long Kerviel's ruse had been going on, but he was able to conceal his losses in complex fictional transactions, echoing the actions of Nick Leeson, the trader who brought down Barings.
Already beleaguered by the subprime crisis, Société Générale is now being forced to seek £4 billion-plus in new capital. Trading in the bank's shares, was suspended for a while yesterday and, when trading resumed, they dropped 5.5 per cent.
In a statement announcing the discovery, the bank described the fraud as "exceptional in its size and nature".
It was uncovered after the crisis on world markets late last week, as Kerviel, who earned about £75,000 a year, rushed to close fraudulent deals. When confronted, he confessed to the fraud, equivalent to the bank's profits in a single year. He was dismissed, along with four or five of his supervisors.
"I'm convinced he acted alone," said Jean-Pierre Mustier, the chief executive of the bank's corporate and investment banking, who interviewed Kerviel when the fraud was uncovered.
Daniel Bouton, the bank's overall chief executive, offered his resignation, but it was rejected by the board. He now faces an uphill struggle to restore finances, and credibility, to the bank, although the losses will still leave the company with a net profit of between £450 million and £520 million for 2007.
A preliminary criminal investigation has begun.
HOW LEESON'S GREAT GAMBLE LED TO DISASTER THE original rogue trader, Nick Leeson was a senior trader in the Singapore office of Barings, earning £50,000 a year and annual bonuses worth three times that figure.
Able to make deals and settle them himself – jobs usually shared by two people – he soon began to run amok. He hid early losses in a secret account, number 88888, then made further bets to make up for the debts.
At one point, he bet on the market staying still, only to wake up and find the Kobe earthquake had sent shares plummeting.
He kept on digging, and was left with losses of £750m. He fled, leaving a note on his desk saying "I'm sorry."
He was sentenced to six-and-a-half years in prison but was let out after less than four. After beating cancer, he wrote a book about his experiences which became a film starring Ewan McGregor.
He is now chief executive of Galway United Football Club in Ireland.
'It is amazing a young trader, on his own, could have got away with it' ANALYSIS: LESLEY CAMPBELL IT SHOULD be impossible to make bogus trades in the City, where changing prices constantly ripple down the screens on the dealers' desks.
Clerks hang over the shoulders of the traders; compliance officers watch as each number ticks over, looking for any anomalies.
The biggest problem for an aspiring rogue trader is that for every buyer there has to be a seller, and vice versa. But the Société Générale fiasco makes it clear that in spite of the most sophisticated computers, rogue traders still find ways to fabricate that missing part of the deal.
The process can be relatively easy if an accomplice can be bribed to collude. The rogue trader sells shares at a price lower than the market, the client buys them, then sells them again. Part of the profit is kicked back to the rogue trader.
Another two-sided con necessitates the co-operation of someone from the bank's back office who can slip an unwanted trade into a dormant account, or into the frequently abused error account, where mistakes sit until they can be reversed the following day. Most cons in the City involve two parties colluding. These are the most profitable, the quickest and cleanest, but they're hard to get away with more than once.
If there is no accomplice available, the rogue trader simply manufactures one. Nick Leeson of Barings cut and pasted old letterheads to create bogus confirmation faxes and used them to reassure his London head office that there was money on its way to balance out the losses he had made. The new generation of rogue traders would find it hard to get away with anything so primitive.
It is amazing that a trader, a young trader, on his own, could have got away with such a massive loss without anyone noticing. SocGen's management seems to believe that his behaviour was irrational, but if he stood to earn a bonus of 30 per cent of everything he made on the markets, perhaps he wasn't so irrational after all. After all, the 4.9 billion isn't going to come out of his pocket.
• Lesley Campbell was a commodity futures trader in the City for more than 20 years. She is now a consultant on risk management to clients including the World Bank.
The full article contains 1023 words and appears in The Scotsman newspaper.
