To put an end to the Kerviel imposture

Once again, Jérôme Kerviel and his lawyer have achieved a masterstroke. When it comes to communication, you can hear it - their area of ​​excellence, if nothing else. On the eve of a review hearing, a clandestine recording comes out as if by magic of a magistrate sharing her feelings with a policewoman, who records the first one without her knowledge. Seeking to confirm the doubts that she herself had expressed before... While it does not change anything on the merits of the case, this unsavory process comes to the aid of the fable of a gigantic plot. Nothing better to galvanize the chorus of pro-Kerviel crying conspiracy and injustice.

How can such a sham prosper, despite a precise instruction, two trials and an implacable judgment (!) on the merits? What drives media and observers to give credence to such fanciful theses?

At least three factors combine to maintain this serial novel.

conspiracy theories

First of all, conspiracy theories seem to fascinate an unfortunately growing part of the population, whatever the subject. However, this one is daunting. A fantasy world, the financial markets; an astronomical loss, nearly 5 billion euros - sums we are talking about for a State, not for a litigant; a man, alone, facing one of the largest banks in the world. Instead of a technical defense and the contextualization of a course to lessen the sentences pronounced, Kerviel's lawyer since the appeal trial has chosen the path of permanent spectacle and the ideal angle to feed the conspiracy theory: what Kerviel was doing, the bank knew. Couldn't not know. Fantastic reversal of perspective where it is no longer really a question of describing actions and appreciating their harmfulness. Everything is reversed, since in this paradigm Kerviel is only a pawn. His acts and gestures are therefore secondary. The bank knew, orchestrated, decided: let it prove the contrary! As in any typical conspiratorial injunction, reality is challenged by a delusional hypothesis that should be able to be invalidated. The credibility of the thesis matters little: it is no longer a question of demonstrating what happened, but of having to prove what did not happen. Doubt can thus subsist almost ad infinitum. Prove to us that the CIA and Mossad did not orchestrate 9/11; prove to us that Société Générale was not aware... (In order to save time for the most meticulous plotters, I specify that the author of these lines worked in the trading room for Société Générale studies, then as a trader elsewhere. All this was very short and goes back to well before the activity of Jérôme Kerviel, but I am sure it will be enough to convince them a little more of the plot! Not to mention my years in the service of the "big employers" - and therefore indirectly from Société Générale - which should make them stop reading here...).

The bank, one of the most hated entities

Second major reason, there is a bank facing Kerviel. A bank ! Surely one of the most hated entities across the planet. And even more, if it were possible, since the financial crisis. “Bankster”: if you have to be convinced, type this word into a search engine or on a social network. On the bank-loathing scale, dealing room activity, trading in particular, is likely peaking. In a word, the environment in which Kerviel evolved is for many necessarily culpable. At a minimum, they consider it criminogenic. His position as a victim in these trials is therefore unbearable to the greatest number. In particular the far left, where, ironically, a large number of the most staunch defenders of poor Jérôme, a fallen trader, are found... Especially since Kerviel is portrayed as humble, even humiliated: he had been a trader since little - January 2005 -, after having been confined for several years in a more ungrateful “middle office”; he does not come from the most prestigious courses that banks love so much; barely if he is not portrayed as a victim condemned to an infernal zeal by an arrogant environment... There too, in its genre, the defense of Kerviel will have succeeded in a media tour de force: from the staging of from a papal pseudo-anointing to the vociferous support of far-left figures, passing through a surrender under the spotlight on the Italian border, the man who a few years ago was a trader ready to do anything to inflate his result and so its bonuses have turned into an icon of the wretched of the Earth crushed by greedy finance... This grotesque spectacle should cause consternation or make you laugh, but the hatred inspired by the opposing party leads some to join it, to others to find something touching in it. It must be said that opposite, the banks make little effort to appear more friendly, between profits and remuneration still staggering at the top, announced agency closures and account maintenance fees at the base. Not to mention the often icy defense and communication of Jérôme Kerviel's former bank...

The supposed technicality of the file

Third element which allows to maintain the fantasies, the supposed technicality of the file. In France, particularly, where financial education is very poor, the Kerviel affair seems incomprehensible. A dream field to tell anything, to come out of the hat of knowing pseudonyms coming to defend the person concerned, and to confuse the most honest minds. Despite public judgments written very clearly (I invite you to consult the trial judgment and the appeal judgment), most of us are convinced that this is insider material. Which reinforces the two previous causes, Pavlovian conspiracy and hatred of banks: how could a society that will not fail to be the most ruthless with an overdraft of a few euros be able to let billions pass under its nose, when it is precisely his area of ​​expertise? How could the battalions of his anthills that are the market halls, paid for in gold, have been unaware of what a single one of theirs was doing in his corner? And for such long months? The jargon of financial products, control circuits and oversight bodies is debunked in such a way that the innocence of the bank is made implausible. The bank is hated, precisely because it is considered abstruse, deceitful, master in the use of the most technical and most vicious complexities... How could it then have been tricked on its own ground, technique, by a lonely man ?

An inherently absurd defense

Despite this environment conducive to the greatest unreason, let us try once again to highlight at least two fundamental reasons why the central thesis of the defense of Kerviel is intrinsically absurd.

First evidence: if Société Générale and in particular the direct management of Jérôme Kerviel had been aware of his actions, why did he do everything to hide them from them? It is necessary to recall in this regard the offenses committed by Jérôme Kerviel, convicted at first instance, then on appeal, and confirmed in cassation: fraudulent entry into an automated processing system; false: fraudulent alteration of the truth in a writing; use of forgery in writing; breach of trust.

Facts admitted at trial

This is what is obvious to all those who have studied this case a little bit: Jérôme Kerviel has never ceased to hide his fraudulent activity. Not to an imaginary or remote third party, no: to its direct management and to the bank's internal control entities, in all their components. Hundreds of fictitious, past, canceled and reintroduced operations; technical accounts used in a misleading manner; fake emails; false counterparties... Everything will have been done by the trader to hide from his professional environment his headlong rush in transactions that had nothing to do with his mandate. Facts that he also recognized in the investigation and during the trials. Just as he had to admit what the framework provided for his activity was, that he knew it and that he was bound to respect it. In particular, the famous residual exposure limit for the entire "desk" of eight traders of which he was a part, namely 125 million euros of net directional exposure from January 2007. It was necessary to act as if this limit was respected, directly with his office neighbours, his N+1 and the internal control departments. While he will take, alone, up to 400 times more risk...

His management had warned him

Kerviel was perfectly aware that his management could not tolerate risk-taking totally disconnected from what he was supposed to do. Moreover, he had been rudely warned in 2005, for a first position yet quite minor of this nature, which had shown a profit of 200,000 euros. Spotted unexpectedly, his management had warned him of the prohibition he had to engage in such activities, making him understand that there would be no second warning.

It is also not uninteresting to note that if Kerviel began to cheat in the first months of his activity as a "junior trader" in 2005, he did so in small doses. Then, he grew bolder in 2006, increasing risk-taking. But it was only at the beginning of 2007 that he began to exhibit himself in a delirious, industrial way. At the time when the position of his N+1 will be vacant for a few months, before a superior unaccustomed to this type of activity is appointed. This weakness of supervision - one of the many flaws of Societe Generale in its system - will have been exploited at the first opportunity by Kerviel.

From beginning to end, in a mixture of insane nerve and knowledge of the workings of internal controls that he had acquired in the years preceding his activity as a trader, Kerviel will therefore have cheated to hide what he was really doing from his employer. Therefore, how dare you maintain that he would in fact have encouraged him or that he could have known of these facts? What beginning of coherence between the schemes deployed by the person concerned, and therefore the risks he took to put them in place, if all that had in fact been known, accepted, tolerated and why not sponsored by his bank? This is obviously nonsense.

We are transported to the Fourth Dimension

I know, however, that such evidence cannot convince our high-flying conspirators, to whom it is not done. Good grief, but that's of course: if poor little soldier Kerviel was struggling to hide by all means what his bank-big-brother actually knew perfectly well, it was because she wanted him to believe that she didn't know... And that she had an interest in encouraging him to hide everything so as to be able to proclaim his ignorance if his brave and courageous trader fell on the battlefield... We are almost transported to an episode of the Fourth Dimension , with a Kerviel puppet who thinks he is doing something forbidden when in fact, the great satan sees everything he does and wants to let people see where it leads him - even if it means crushing him like a fly afterwards.

So let's expose the other fundamental consideration that makes the Kerviel defense thesis absurd and that those who hold forth on this case do not always seem to grasp. If the bank had known, at any given time, what Kerviel was getting into, it would obviously have stopped him immediately. At least out of interest. Because quite simply, the bank - this one like others - had no interest in tolerating such activities, even if they had been temporarily profitable. Not for a second. And the same goes for its management, right up to the top. There is even a total imbalance between risks and benefits that such "strategies" would have run, firstly for this management. This is why Kerviel's positions are prohibited in banks, even on a much smaller scale. This was obviously the case at Societe Generale as elsewhere, and Kerviel knew it perfectly. Hence his concealment of his positions. But he, precisely, could have a very clear, very direct, very financial interest. Under the pretext that he has not diverted funds from his trading activity to personal accounts, his lack of enrichment is often mentioned. He was hardly a philanthropic trader... Whereas, on the contrary, he was indeed pursuing a very direct goal of financial enrichment with his risk-taking.

Two types of arbitration

To shed light on this subject, it is necessary to quickly describe the licit and illicit activities of Kerviel. What he had to do was well known. Nothing rocket science, moreover, not at all the most complex products of contemporary finance. Kerviel was supposed to exercise two types of arbitration. Initially, exclusively the "market making" or animation of the market for Société Générale's turbo warrants. That is to say, ensure the purchase and sale of these products, and their coverage. Turbos are like options: a right to buy (call) or sell (put) an asset at a future date, for example a stock. Like options, turbos have exercise prices: that is to say that at the fixed expiry date, if they have a value, this corresponds to the absolute value of the difference between the price recorded and the exercise price. But unlike options, this exercise price is what is called a “knock-out barrier” (the call is then “down and out” and the put “up and out”). If, before the expiry of the turbo, this price is touched, then the turbo is “deactivated”: it is no longer worth anything.

Leverage

Let's take an example: I buy a turbo call at 100 when the stock is worth 120. The turbo will then be worth a price close to 20. If at maturity the stock is worth 150, my turbo is worth 50. money with high leverage (the stock gained 25%, but my turbo took 150%). But if at any time the action is 100 or less, the boost is zero and is disabled. It doesn't matter if the action goes up afterwards, I lost everything. Société Générale, like many banks, issues such products. Kerviel's job was to ensure the purchase and sale prices, with a sufficient difference between the two to remunerate the bank. And each time an order was placed, it was necessary to execute in the opposite direction an order to sell or buy the underlying (the stock in the previous example), which apparently an automaton took care of. Consequently, when the knock-out barrier is touched, the bank finds itself with an unhedged position on the underlying (which hitherto covered the position in turbos), and must therefore neutralize it. What had to be done, on the "desk" to which Kerviel belonged, as soon as possible. As we can see, this activity requires precision and rigor, but it is all in all quite simple. Because the “knock-out barrier” of turbos gives them a highly appreciated characteristic: unlike conventional options, for example, these products are not very sensitive to the volatility of their underlying or to the time that separates them from expiry. No complex volatility management to be expected, therefore. And a turbo evolves almost like its underlying: if the latter rises by 1, the turbo also (or falls by 1 for a put). Therefore, to cover the position of 1000 turbos with a parity of 1:1, it suffices to buy (turbo put) or sell (turbo call) 1000 underlyings (we say that the turbos have a "delta" of 1, hence the name of the Kerviel desk, "delta one"). In this kind of "market making", the profit is, to be honest, quite needy: you have to make volume, earn the difference between the buy and sell price that the trader offers to the market, and carefully execute the hedges, even to let them slide a little in the direction of the market if you are convinced of it (which begins to be risk-taking), especially when reaching the famous deactivating barriers. We reap a priori a progressive profit throughout the year, without great risk. Rather "boring" - and moreover, intoxicated by his hidden activities, Kerviel will ask shortly before his fall to be relieved of them. Believing that he did not see how to make enough profit with this kind of trading.

Arbitrate the turbos of the competition

The team in which Kerviel evolved had set up a more sophisticated activity: trying to arbitrate the turbos of the competition. In particular by playing on the possibilities of a knock-out barrier for them the next day when they observed the previous evening movements after the close of the markets going in the expected direction. Operations that can thus lead to higher risk taking than simple “market making”. And therefore able to generate more spectacular profits. It is of course on the development of this activity that Kerviel will moreover play to pass the fact that its official result was in strong growth, except masked positions, passing from 5 million in 2005 to 10 million in 2006 and especially 55 million in 2007. Unimaginable on turbo market making alone, and even considerable with this new arbitrage activity.

But these 55 million were in fact only the externalization of the proceeds of his illicit activities that Kerviel had allowed himself, to maximize his bonus and his chances of seeing his responsibilities increase without going too far, which would inevitably have led discovering the pot-aux-roses. While he was carefully hiding around 1.4 billion in profit on his hidden positions at the end of 2007...

No martingale in there

For what was he doing, exactly, apart from the activities assigned to him and which have been described? Well, the most basic, not to say childish thing about the financial markets. What everyone can experience as a temptation: buy the stock market when you think it will go up, sell it otherwise. As simple as that. Kerviel bet big, and even huge, on products that could not be simpler, up or down. As one might do in a bistro conversation. No martingale in there, no extraordinary strategy that a bank could have wanted to appropriate. No fundamental analysis, no quantitative expertise, no miraculous arbitrage: the most basic risk-taking there is. Purely directional risk, as we say in the markets. Something that relies on nothing more than an operator's 'feeling', and therefore has no reason to be more valid than the opposite 'feeling'.

Banks and their managers have everything to lose from such stupid and wicked risk-taking. There is indeed about as much chance of winning as of losing in such positions, whereas for example the banks certainly win in many of their activities, and typically the market making of the products described above, or else when they can benefit from real technical arbitrage opportunities, which their size, the expertise of their teams and their central position on the markets allow them. It would therefore be totally irrational for a leader to set off on such a haphazard path: in the event of a large-scale loss, as inevitable as going out of red at roulette, it's the door without warning. The end of bonuses and big salaries. The opprobrium on a CV and on a name, considered unfit to work again one day on the markets. Conversely, and all the more so when one goes up in the hierarchy, an additional gain achieved in this way would not change much to already astronomical remuneration. Not replicable over time, such a performance would inevitably have its pendulum swing back if it were then necessary to accept falling results. Without counting the controls to come from the regulator, who would have necessarily blamed the bank - especially if it had acted in a masked way without, in particular, having the gigantic equity capital required by such risk-taking. A control likely on its own to bring down the entire management of a bank for this reason, including if it had generated profits in this way. Not to mention also the absence of a framework for such an exercise, which would have necessarily been spotted and could have generated real anarchy in the bank. And let us recall the scale of Kerviel's risk-taking: with 50 billion exposure, in even more disastrous market conditions, this could have resulted in a loss not of 5 but of 10 billion for Société Générale. Then surely leading to the disappearance of the bank.

Contrary to all rationality

Even imagining them as the most greedy beings in the world, nothing could lead a group of officials from a large bank to adopt or cover up the drift of a Kerviel. It is simply contrary to all rationality, including the most cynical, the most individualized there is. Both very sophisticated risk-taking, the ramifications of which are difficult to measure, or herding in a direction that will prove to be systemic, can unfortunately lead financial institutions down a dangerous slope. As much as it would take an entire staff made up of stupid, suicidal individuals to engage in such primal directional risk-taking on a large scale. This does not correspond to any case of bank failure in the recent crisis, while the Kerviel syndrome has struck other traders in the past, as was the case for example with Nick Leeson at Barings.

“Limits” for each type of risk

Naturally, even the most sophisticated activities have directional leeway. There is risk taking on the direction of the market which is tolerated, because otherwise traders would be forced to hedge permanently and urgently, in sometimes unfavorable market conditions. They could lose there, while leaving this valve can maximize gains when a trend is clear enough. It would be a shame to prohibit them from taking advantage of it, and that is why trading teams have "limits" for each type of risk, including that of the direction of the stock market. Let's also say it, these limits serve as valves for market operators, like a little playground allowing them to get out of their routine when they want to make a small bet on the direction of the market: we call that the "spiel". But a very relative flexibility, often "intraday" (that is to say that everything must be closed during the day) and always, of course, in compliance with the famous limits. When these are exceeded, traders are called to order and must return below, as Kerviel knew very well with regard to the 125 million euros of the “desk” to which he belonged.

Like a casino player

Kerviel could therefore carry out this mad dog activity only without the knowledge of his bank. Alone, intoxicated by the incredible amounts he happened to have the means to commit, he threw himself into his casino. Like a casino player, he sometimes won (a very favorable position as of December 31, 2007), and inevitably lost (2 billion losses as of June 30, 2007, and of course the fatal fall of January 2008). Surely considering that playing bigger had no limit and would be beneficial, hence the rise in risk-taking with an open position of 50 billion at the start of 2008, after several exposures of 30 billion in 2007.

But unlike his management, he clearly stood to gain from such uncontrolled risks, at least from his point of view at the time. Certainly convinced, like any casino player drawn into his spiral, that he could always "recover", and probably unaware of the risk of his fall, and even more of its consequences, put forward a small part of his winnings at the end 2007 was of very direct interest to him. The sometimes considerable bonuses of traders are in fact directly indexed to the result of their activity (all the more so in this period before the financial crisis). To report a profit of tens of millions of euros was perhaps a bonus in millions of euros for the person concerned, especially as his seniority progressed. Perhaps also a sharp increase in salary, new responsibilities. And therefore a career as a multimillionaire in finance, far removed from the prospects that were his when he was still in the "middle office". Hence a certain rationality in his cheating if on the one hand he glimpsed these marvelous prospects, while he probably only saw in the worst case a big loss for his bank, which would then surely be content to get away with it. discretely separate. All this perhaps leading him simply to have to seek better fortune in another establishment, why not by trying the same thing there. Unaware of the magnitude of the coming disaster and its consequences for himself, the game could be worth the candle.

This is where we have come to. Not only is it absurd to imagine that the bank knew of Kerviel's true activities, when he used all possible means to hide them from him. But it would also be crazy to think that a bank and its management could have found some interest in it, so knowing this without reacting within the hour and putting an immediate end to it.

Do not exonerate Société Générale at the time

This is not to exonerate Société Générale at the time. After all, while it's ludicrous to think she knew what Kerviel was up to, it's damning that she didn't find out for so long. The flaws in its management and its control at the time are very serious, no doubt about it. The Banking Commission had also been very severe on this subject, and imposed a rare fine for France on the establishment of La Défense. A good part of Kerviel's management chain was dismissed, and its CEO ultimately did not recover, having to abandon his chair a few months later. Finally, it is this major failure in more ways than one - the weakness of the control of raw positions, for example, which should have stuck Kerviel from the start, the shortcomings in the detection and control of fictitious transactions or even passivity and credulity in the face of the questions of a market theater of these positions - which led the Court of Cassation to annul the civil part of the appeal judgment, while confirming its criminal dimension.

Let reason prevail over fantasies

It will be up to the Court of Appeal of Versailles to say what the injured party, Société Générale, must consider to be its fault, that of the failure of its processes and its chains of control which allowed the fraudster to act as it pleases for such long months. This is the meaning of the cassation of the 4.9 billion in damages and interest claimed from Kerviel at first instance and on appeal: when it is such a large institution, the defrauded has the responsibility to prevent the action of the fraudster in her bosom. Which in no way clears the latter. But let's hope, surely unreasonable, that after this next and a priori final judgment, reason can prevail over fantasies.

24 mins

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