Jerome Kerviel, the Poorest Man in the World Who Owes the French Bank Société Générale $6.7 billion

To many Parisians, Jerome Kerviel is a Robin Hood of sorts, a crusader who warns them of the financial tyranny of the capitalist world they live in. The €4.9 billion fine the unemployed trader incurred, which would probably take him 49,000 years to clear if he paid his top salary of €100,000 at Société Générale every year, had him dubbed as the “poorest man in the world” and moved quite a few people. Rising quickly through the ranks at such an eminent bank without attending any of France’s elite schools has given him a cult status among people of certain sections. They saw him as someone who succeeded in doing something the privileged were doing despite coming from a modest background. Here is more about the French rogue trader Jerome Kerviel and the scandal.

After graduating from University Lumière Lyon 2 with a Master of Finance in 2000, 23-year-old Jerome Kerviel joined Société Générale’s middle office. Within five years, he was promoted to a junior trader at the bank’s Paris branch.

Jerome Kerviel in 2015
Jerome Kerviel in 2015. Image Source: Max Malafosse

According to one of Kerviel’s former lecturers, he was in no way exceptional and “didn’t distinguish himself from others.” Kerviel’s graduation specialization was in organization and control of financial markets. When he joined Société Générale he was working in its compliance department. He began working 18 hours per day at the middle office and finally earned his promotion. The Paris branch he was promoted to was the bank’s Delta One which included functions like program trading, exchange-traded funds, swaps, index futures, and quantitative trading. The bank’s governor called him a “computer genius.” In 2006 he earned a bonus of €60,000 in addition to a €74,000 salary and hoped to earn a €600,000 bonus for 2007.

Kerviel was assigned to arbitrage small price differences between equity derivatives and cash equity prices. He soon began taking bets on market decisions and bringing in huge profits to the bank.

Belgrade Branch of Société Générale
Belgrade Branch of Société Générale. Image Source: wikimedia

In the late 2006 and early 2007, Kerviel began creating fictitious trades which, though initially small and occasional, increased in size and frequency. Following the terrorist attacks in London, he gambled against German insurer Allianz and raked in an unexpected €500,000, receiving a pat on the back from his supervisors.

Kerviel’s experience in working at the bank’s middle desk gave him enough knowledge to cover his tracks and disarm the bank’s safeguards. He soon began taking large, open positions to bet against the market and filled hundreds of thousands of small, fictitious hedge trades to offset his unauthorized positions. According to the bank’s chairman, Kerviel’s method was a “mutating virus” which let the trade exist for just a few hours before automatically closing and moving to a new position. This resulted in a huge inflow of money and he brought in €4 million in 2005 and €11 million by the end of 2006 for the bank.

In 2007, the financial crisis began to upset the market, and in early 2008, feeling confident that things would turn around, Kerviel built up a position of €50 billion, more than Société Générale’s entire market capitalization. But this time, he was wrong.

TED Spread, Financial Crisis of 2007-2008
TED Spread, Financial Crisis of 2007-2008. Image Source: Lawrence Khoo

While most banks were trading while keeping in mind that things could get worse because of the financial crisis, Kerviel decided to bet on a rebound. In 2007, he built up a €28 billion exposure in just a few months and surprisingly ended up bringing an astounding profit of €1.4 billion to the bank. By January 2008, markets were doing worse than ever and most traders were making large sell-offs with equity indices dropping and banks treading carefully. Kerviel, however, was confident that stocks would bounce back and so built up a position of €50 billion. But, the things he predicted never happened. By the time his bosses realized what happened, Société Générale lost €4.9 billion in just three days. The CEO had to immediately resign due to bank’s emergency rights issues.

Kerviel was sentenced to prison for three years in September 2014 at Fleury-Merogis prison, south of Paris. After 110 days in jail, he was granted conditional release by the appeals court. 

Jerome Kerviel Meets Pope Francis
Jerome Kerviel Meets Pope Francis. Image Source: David Koubbi

As the court proceedings went on, Société Générale maintained that Kerviel was an “evil genius” and acted alone despite their alleged warnings not to take bets. Kerviel said that the bank turned a blind eye to his practices when he was bringing in profits and made him a scapegoat when things went bad. In 2010, Kerviel was convicted of breach of trust and forgery and was sentenced to five years in prison, two of which were suspended. Before his prison term started, Kerviel made news when he went on a walk from France to Rome and back to see Pope Francis in an attempt to fight the bank and as a warning against the financial “tyranny of the markets.” He was released after a few months to serve the rest of his sentence wearing an electronic tag, and the fine of €4.9 billion was later decreased to a more reasonable sum. The spokesman of Société Générale, however, criticized all the media attention on Kerviel saying that he was meticulously investigated, “judged three times and found guilty each time.”
[sources: wikipedia, WorldFinance]

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