Jerome Kerviel and SocGen: an uncreditworthy story
Interesting that M. Kerviel’s lawyers have come out swinging, which means SocGen will probably need to do more explaining that it would wish.
And there’s plenty to explain because the public-domain story just doesn’t wash. Robert Peston has had an honourable crack at it, correctly lighting upon the odd claim that Jerome ‘arbitrageur’ Kerviel avoided detection of his vast naked position by entering fictitious ‘special hedging’ deals which involved no margin calls. Peston’s inference is that this “doesn’t sound like a very liquid hedge … we are now at the nub of what worries me – that SocGen was allowing its traders far too much exposure to liquidity risk”.
But that’s a second-order point. (BTW, the liquidity in the underlying certainly held up: SocGen claim to have liquidated in next to no time - in a bear market !) Surely the bigger point is that the fictitious trades must have been burning up a humungous line of credit to the providers of the ‘special hedge’ – and this in the middle of a credit crunch ! And this went unnoticed too ? By a bank ?
We remain, Sir, yours utterly unconvinced …
Not normally my forte to just spin rumours, but the temptation is too high given ND's story above According to the MSN the whole story is elaborate fraud by Jerome Kerviel to which the Bank is an innocent victim. The story on the street is that there were quite a few executives who knew of the exposure by the end of December - at which point his positions were 1.6 billion euros in the black.
It was only the huge market falls in January that changed the attitude towards him, with reports being created and him effectively being dobbed in. At this point he had moved to a 1 billion euro loss. When Risk Management became involved they ordered all the positions to be unwound in a crashing market which led to a 5 billion euro loss overall. Ouch.
Many heads are to role and it is interesting to note the resignations before the inquest - often a giveaway of those who know they will get caught and choose an 'honourable' route. Just like the executive in the Kent superbug story of late last year.