6 COMPLEXITY FROM GROWTH IN LINES OF BUSINESS…
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system also missed at least 115 times when this trader recorded a purchase and a sale for the same asset at different prices. Two managers noticed the trader’s reluctance to go on holiday, but did nothing about it. Auditors questioned 39 separate discrepancies on his trades, with no investigation. The various controllers changed frequently and did not coordinate adequately enough to cause an investigation. Nonetheless, at 13 different times, someone called the trader for an explanation. On the two occasions when his explanations was incoherent, and his manager was notified of this, the manager took no action. The trader showed very significant profits—€43 million in 2007, more than six times the €7 million he had made in 2006. Of this €27 million was made from trades on the bank’s own account. No one questioned how such profits were possible, given the strict limits in place for the section in which the trader worked. When an employee of SocGen’s Accounting and Financial Affairs Department investigated in January 2008, the trader gave answers the employee could not understand. This was not unusual as these employees often lacked market knowledge comparable to traders. This lack of understanding was one reason why matters might not have been taken further. Another might be that traders making a great deal of money should not be unduly bothered. The earlier example of Barings in 1995 and their star trader Nick Leeson was similar. In the case of SocGen the investigating employee persisted and was instrumental in exposing the fraudulent trades. On 20 January 2008, it was discovered that the trader, Jérôme Kerviel, had built up an un-hedged, unprotected position of €49 billion. This was close to double SocGen group’s total capital of €27 billion. If the position had not been discovered at this time, and the positions had had to be sold down while markets kept falling, SocGen would most likely have ceased to exist. SocGen was allowed three days to manage the situation by the French regulator. This primarily required selling down the massive position accumulated incurring significant losses. At the same time, SocGen suffered losses related to United States subprime lending of €2 billion. SocGen had been a leading innovator of the financial structuring that enabled subprime lenders to package and resell the loans to investors. Including the losses from selling the rogue traders’ position, SocGen’s total loss for 2008 was €5 billion. J.P.Morgan and Morgan Stanley organised a share issue of €6 billion in new capital. and SocGen was able to continue operating. The Group chief executive officer stepped down, although he remained chairman of the
