It was put out in jest and probably not always adhered to but the underlying theme made a lot of sense. Trading is an emotional exercise—especially for those in the heat of the action inside the now antiquated trading pits—where judgment is extremely important. It is easy to let those emotions overcome you in the heat of the action as it is, let alone if your judgment is impaired by alcohol or drugs.

I thought of this when hearing the story of a rogue London energy trader who may have been over served—on something—when he entered a series of large positions in overnight trading in Brent Crude oil on the ICE Futures Europe electronic platform.

It brings to mind a danger in our new world of trading and work. In the old days it was simple, you went at it hard for a relatively short work day and then the bell rang. And then you went at  partying, by the way, with just ask much gusto. This was particularly true of traders who tended to be young and have quite a bit of discretionary money.

One of things that that I liked most about working on the trading floor was that no matter how hard or stressful of a day I had, when the bell rung, it was over. Now trading is a 24-hour activity and it is oh so easy to flip open your laptop sign in on start trading. Lose some money—well I will just make that up. And so on. Like the gambler who tries to make it all back on Monday Night football. But every day and every hour the game goes on.

There was a reason that markets where only open for so long—it was too intense of an environment to be at it non-stop for a full work day. With 24-hour markets traders need to make their own limits and adhere to them.

Written in the sort of short hand used to quickly convey a message (over the Reuters instant messaging system), Jérôme Kerviel seemed to have an on going dialogue with a broker at Fimat, recently renamed Newedge, called Moussa Bakir. Here are some excerpts, translated and put in understandable English :

On Oct. 11, 2007 :
Kerviel asked his broker Bakir : « you did not tell him (apparently his boss) what we are doing, did you ? Tell me
Bakir replied : He comes back tonight.
K : you did not tell him about our trades, did you ? I’ll kill you
B : you’re crazy, it’s between you and me.

On Nov 28. 2007 :
B : they need to be asked how they can see that. Or tell them that the net position is wrong.
K : yeah, but I don’t want them to get me out of my position at 250000.

On Dec. 13. 2007 :

B : you will really need some serious time off
K : in jail
B : nuts. What did you do wrong. You did not rape anybody. You didn’t do anything illegal in the sense of the law.
K : I make a lot of money, that’s all.
B : I’d go to jail anytime when I make money legally
K : shut up
B : fucker
K : this will show the Kerviel power
B : or craziness.
B again : a simple and discreet guy. No special attraction. Makes a lot of money. And not recognized for his true talent

On Jan 17, 2008, when the audit system has started focusing on Kerviel :
K : well, I’m finished
B : what d’you mean
K : forget it

On Jan 18, 2008, when everything is uncovered starting at 9 : 14 am
K : my last day here
B : stop it ! there is a rebound at around 4180
K : super
K again : I’m dead. No sleep. And you dined with Pedro and Manu yesterday.
B : yeah. As soon as I got out of work. He came on the Champs (Elysées) I needed to do something before going to sleep. You should have come to take a bite.
K : I can’t eat.
B : I haven’t eaten at night for the last three days.. I was supposed to go to Milano with Tayed and his brothers today.
K : frankly, you should go
B : not serious, my dream, you know what it is
K : No. I think I jump from the tower tonight, no problem.
B : the market is going back up at 4300
K : I’m going to go outside Paris.
B : let’s cut this position
K : Shit, I am dreaming of it everyday.
B : and then we go away to a sunny place for two weeks. No cell phones.

At 11 : 15 am
K : they are killing me here
B : go and smoke a cigarette

At 1 : 56 pm
B : doing ok, my friend
K : no. I’m fired tonight I think. There was a meeting (with) Luc, François, Pym, on my case.
B : stop seeing everything in black
K : and the Martial ( apparently it is also the name or nickmame of a person) is talking to Eric. I think I’m kicked out.
B : concentrate on the market

At 3 : 10 pm
K : I’m in deep shit
B : so what

At 4 : 01 pm :
K : I’m fired in 30 minutes
B : you have a meeting. With who
K : Martial & Baboulin (again, names or nicknames of people)
B : call me after
K : frankly I don’t feel like talking
B : courage, buddy
K : buddy is dead

At 4 : 54 pm
B : I send you the conf (confirmation of a trade – this is apparently a false confirmation by a fictitious counterpart)
K : OK

At 6 : 56 pm
B : what are you going to do. After we go out to dine
K : no, I’m not out yet
B : at around what time
K : dunno. Let me go. Let’s talk on the phone
(by 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

Huh???

SocGen is a leading provider of retail-oriented forward products, such as certificates and contracts for difference, and the implication is that Kerviel balanced his myriad long futures positions with hundreds of small fake forward positions — possibly listed as belonging to retail clients. But such forwards ARE subject to margin, albeit from the customer, who should have put it on deposit at SocGen itself.

That means that even before the positions turned against Kerviel, the bank would have had a mismatch between margin paid out to hold the futures positions and margin taken in to cover the forward positions — or at least margin on deposit to cover futures and margin on deposit to cover short forwards.

Someone higher up the SocGen ladder — perhaps someone sharing in the bonuses generated by the department — must have seen the mismatch and wondered why the bank was paying out billions in margin calls on futures positions for a trader whose margin was limited to €500,000!?!

And his answer — that they were balanced by forwards — prompted no one to peek behind the curtain of the little man in the corner?

Surely the fact that this one low-ranking trader would even have such a massive forward position on his books sent up red flags — whether the offsetting futures position was making money or not. The given answer: that Kerviel knew when he was being audited, and would dissolve his fake positions before an audit and then recreate them afterward — is hardly comforting.

Jean-Pierre Mustier, who heads SocGen’s investment banking division, says the scheme worked because Kerviel kept his individual trades small, and that supervisors had questioned Kerviel’s positions on several occasions, when individual trades got too large, but that he usually “corrected” the problem by either cancelling the orders or trimming the positions.

Well, yeah, the bank does have an automated risk management system that won’t let traders place orders higher than their limits — and that may be what he’s referring to — and perhaps his pathetic explanation that “Société Générale got caught just like someone who would have installed a highly sophisticated alarm … and gets robbed because he forgot to shut the window” will turn out to be true…

But experience has shown that sins of omission contribute more to events of this kind than sins of comission. If you see something fishy that may be putting money in your pocket, it could pay to look the other way, and brings little to go digging…

Mustier may not have known what was going on, but his dismissal of any conspiracy talk is disheartening. “If one trader can unwind this transaction, one person can make such a transaction,” he said in a weekend conference call, where he equated the simple act of unwinding the position to the complex task of building it up.

That statement is surely comforting to any passive or active conspirators who may be losing sleep over the prospects of an investigation — but it certainly doesn’t bode well for SocGen shareholders.