Here is a view on the Societe General rogue trader debacle from our French correspondent Irene Frat.
Many questions – and a few answers
Why did he do it?
You would think it was for the money that Jérôme Kerviel took highly risky positions at Société Générale. Though he was eager to get a big bonus –he was hoping for 300 000 euros, not a paltry sum for a trader who made less than 100,000 euros a year in fixed salary, he did not siphon the money he could have made on the markets at one point.
Why ? The explanation lies in his personal psychology. Kerviel seems more addicted to the trading game than to making money. Explanations concerning his behavior also can be found in France’s general attitude towards social classes. “I was aware, starting from my first meeting in 2005, that I was less well-considered than the others [regarding] my university degree and my professional and personal background. I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that,” Kerviel reportedly told investigators.
Coming from a provincial, lower middle class background, Kerviel did manage to get a university degree. But not the “right” one.
It is like graduating from Harvard as opposed to an unknown state university in the United States. Only graduates from “grandes écoles,” ie. prestigious schools, where selection ends up being made on money and background as much as on intellectual abilities, can land top jobs in government, banks and big corporations. So Kerviel had a chip on his shoulder and wanted to prove that even if he came from the wrong background, had the wrong degree and worked first in the middle office at Société Générale, he could make it to the top. Could he have ever been accepted in the small circle of top traders? Not likely, as the French have a knack to find out who is who by spicing their conversation with questions like, “where is your family estate?” to detect people’s background. You might be making money, but if you do not belong, from birth, to the right background, you hardly ever get accepted. The French have a love and hate relationship with money and success, but above all, they like old money. Kerviel’s attempt was doomed from the start.
How many officials were in the loop?
When Société Générale found out on Saturday, Jan. 19, 2008, that unauthorized trades were putting the bank at great risk, SocGen’s CEO Daniel Bouton called Christian Noyer, the French central bank governor and France’s banks regulator, on Sunday to inform him. Noyer accepted SocGen’s strategy: the idea was to unwind the position immediately and in secret. As the markets were already down, waiting longer, in other words, hoping that they would go up again, could have easily backfired. The cost for the bank could have been even greater than the 4.82 billion euro loss SocGen had to take.
According to SocGen and the French central bank, preserving the secret of the unwinding operation was necessary to preserve market stability. Other financial institutions, already jealous of SocGen’s past success in the derivatives markets, could have taken the opportunity to pummel the bank. On Sunday, the French central banker called Michel Prada, the president of the French market regulator, the Autorité des Marchés Financiers (AMF). And he also called another Frenchman, Jean Claude Trichet, the European Central Bank governor, in case unwinding positions in European stock indices would unsettle the European financial markets. He called the Federal Reserve Bank of New York, which is the regulator for SocGen’s activities in the US.
But Noyer obviously can keep a secret : he did not call the French government until Wednesday, the day before the debacle was to be made public. Though French president Nicolas Sarkozy declined to make any comment on SocGen on Thursday, apart from emphasizing the fact that the financial market crisis proved that “reforms were necessary in France,” in private, according to French daily Le Monde, he was not happy that Noyer, whom he has known for a long time, as he worked with him in a previous government, did not see fit to tell him earlier. French Prime Minister François Fillon actually questioned Noyer’s attitude, saying: “It is an affair of such an importance for the French financial system, maybe the government should have been informed earlier.”
“Having called on the French president would have meant that his staff would have been in the loop, I mean at least 50 people, which goes against the idea of secrecy,” explained a source unwilling to go on the record at the French central bank. Could Sarkozy, who has criticized the ECB for not cutting rates, seek vengeance ? He could kill two birds with one stone : since Noyer sits at the ECB, he could think of appointing a better ally at the French central bank to exert more pressure on the ECB. Noyer’s term does not end before October 2009.
Should Noyer have called Ben Bernanke?
After SocGen went public with its losses, some ventured to say that if the Federal Reserve had known, it would not have cut its rates by 75 basis points [Ed note: many might argue that if the New York Fed knew, Bernanke knew]. This implies that unwinding SocGen’s positions did weigh on the markets. Though it could have contributed to the nose dive, SocGen’s activity, according to the authorities, never went over the 10% limit in overall trading in one day for the three days it unwound its positions. “Thinking that the Fed would act to save a French bank is ludicrous,” said the same source at the French central bank.
Who will push the Bouton?
In countries like the United States, other banks’ CEOs, like Chuck Prince at Citgroup and Stan O’Neal at Merrill Lynch, have lost their job less than fraud. Why did Bouton stay ? He did offer to resign. But in France, responsibilities are preferably laid with the middle ranks rather than the top management. After all, every body who is somebody in the French government (apart from President Sarkozy) graduated from the same school and feels a sense of solidarity.
However, after his initial mute reaction, President Sarkozy did ask for Bouton’s scalp by saying: “When someone is very highly paid, even when it is probably justified, you can’t avoid responsibility when there is a major problem.” He would have been able to triumphantly show Bouton’s head to French crowds, always happy to see a financier fall. Bouton fought back, for various reasons. Firstly, because as a staunch free market supporter, he believes that the government has no right telling him what to do. Secondly, because he is deeply attached to “his” bank. Though he worked, like many graduates from the “grandes écoles,” in the French government at the start of his career, he crossed over to join Société Générale in 1991 and became CEO in 1997. Totally devoted to his job, he feels “married” to Société Générale.
Bouton secured his board’s backing. “The board is asking me to stay at the helm of the ship during the storm. I am a man of duty. I am not going to jump overboard,” Bouton said in his first television interview. Indeed Bouton has a duty to re-capitalize the bank. He is now busy trying to raise 5.5 billion euros. Will investors trust him after what happened? This remains to be seen. According to French philosophy, the least Bouton can do now is to help clean up the mess. This does not mean that he won’t be pushed out when the job is done.
Will state intervention and protectionism win the day?
“Société Générale must stay French,” Prime Minister François Fillon said. The French like to be among themselves when it comes to their much praised national champions. They distrust globalisation and prefer to see it as a one way street: French corporations have the right to expand overseas and buy foreign companies, but foreign companies should have the decency to refrain from buying French ones. Why ? Because many things, from Danone’s yoghurts to banking institutions, are considered in France’s strategic interest. The French government won’t leave Société Générale “at the mercy of predators,” cautioned an aide to President Sarkozy. “The state will intervene if necessary”, he added.
France’s worse nightmare would be that a sovereign fund comes and bails out Société Générale. “Société Générale’s recapitalization is at the top of the agenda for the moment,” French Finance Minister Christine Lagarde said in an interview. “Once that is done, SocGen won’t have to link up with anyone at all,” she added. This protectionist attitude angers the European Commission.
“Each potential buyer has to be treated in a non discriminatory manner,” cautioned the spokesman for Charlie McCreevy, the European commissioner for internal market and services. Other European officials, like Jean Claude Juncker, president of the Eurogroup, which brings together the ministers of finance of the Eurozone member states, .joined in, saying that banning an institution because it is not a French one was “an attitude of the past.”
Takeover rumors, by another French bank, at least, already are going around. Indeed, BNP Paribas, France’s largest bank, confirmed that it is “thinking about a bid, simply because the whole European banking community is thinking about it”. In 1999, BNP already tried to buy Société Générale. Bouton fended off the attempt. BNP eventually took over Paribas, a French investment bank.
As Société Générale is active in both retail and investment banking, some analysts speculate that the institution might eventually be broken up, each unit going to different French banks, one possibly being BNP-Paribas, the other, Crédit Agricole. “Societé Générale is in good health and has enough funds to remain independent,” said Bouton in a television interview. Whether it will remain independent is another story. But Bouton can count on another backing. SocGen employees demonstrated at the end of the fatal week in the cold to support their bank’s independence.
Irène FRAT in Paris
Tags: French bank, Jerome Kerviel, rogue trader
