Can there be a more satisfying spectacle than that of pompous French bankers writhing in embarrassment, squirming with shame and trying with increasing desperation to distance their own reputation from the corporate catastrophe of a £3.7bn gamble that back-fired?
The story of the £3.7bn loss at Societe Generale has a serious side, which I will come to in a moment. But first let us just sit back and enjoy it. The miscreant, Jerome Kerviel took a massive bet with the bank’s money that European markets would rise. No doubt he would have landed himself a massive bonus had we been right. Unfortunately, for him, he wasn’t. So instead of being feted by his employer, showered with money and awarded a promotion he finds himself branded a criminal.
The fault though, is clearly not his alone. I don’t know what it must feel like to have run up a loss, on paper, of £1bn – or even of £1m for that matter – but I dare say that at that point you reach a signpost. In one direction it reads ’Certain Redundancy, May Never Get A Job Again.’ And in the other it reads ‘Double Up, Cross Your Fingers And If It All Comes Right, You Are In Clover.’
So you might as well go for broke. But you would think that the activities of le petit garçon would be monitored by some grand blanc chief. Apparently not. The control system failed through the same reason that Nick Leeson got away with it. Before being let loose with the bank’s cash Kerviel had worked in the back office and knew how to circumvent the system.
However you look at it, though, the senior bods of Societe Generale are in the dock too, because they have simply failed to implement a watertight monitoring system. It is probably this very guilt that is causing senior board members, who cravenly refuse to be named, that Serviel was ‘a fragile individual with personal problems.’ ‘He was,’ says another ‘not one of our stars.’ Well he certainly isn’t now, that’s for sure.
How good are banks’ monitoring procedures?
So why, then, was this despised thirty-one year old allowed to punt around the bank’s money while being paid £74,000 per year, a salary that might not rank highly by the standards of the banking sector but would seem pretty good to most of us? This is one element of the answer to one of the issues debated on Radio 4’s Any Questions, ‘Can we trust the banking sector?’
One Sunday afternoon in 1995 I was standing in the kitchen of my flat in Hong Kong watching illegal immigrants being chased up the hill by the police (they do something about it over there) when I flicked on the radio just in time to hear the words ‘British merchant bank in crisis after unauthorised trading losses.’ Since I was working for Schroders at the time there was a moment of alarm followed by one of relief mingled with gloating as the identity of Barings was revealed. A few weeks later the head of Schroders visited Hong Kong and described how on that Sunday he and other senior bankers had been called into the Bank of England to try to save Barings. ‘We all looked at each other’ he said, ‘with the same thought. It could so easily have happened to us.’
Since then banks are supposed to have tightened up their monitoring procedures. But in another breathtaking claim Soc Gen has said that ‘all our models of stress-testing are working perfectly well.’ But not apparently quite well enough to cope with a stressed trader who knows his way around the system. The fact is that fast though bankers may be running to set up monitoring systems traders are running even faster to devise new trading strategies. When Barings collapsed proprietary trading in derivative instruments was in its infancy. The scale and complexity of it was nothing compared to today.
But rather than be wary of these trading strategies banks are increasingly reliant upon them. In their desperation to report growing profits they have departed from their proper function, which is to take deposits and lend money, and are all trading frantically. Losses are bound to occur and the danger is that they cannot be spotted or controlled either by internal managers or by bank regulators who struggle to keep up. The Northern Rock affair has exposed the utter inadequacy of the UK’s banking regulatory system, the central purpose of which is the prevent banks from getting into difficulties. And Northern Rock, a simple building society, was a relatively easy case.
So can we trust the banks? The answer is that it depends whether you are a shareholder or a depositor. Given their crazy strategies, the impossibility of knowing exactly what is going on, and the general view that shareholders do not deserve any protection, I would not buy a single share in any bank. But Northern Rock has shown that depositors must be protected at all costs. Governments will throw any amount of tax-payers money at the problem to ensure that depositors cannot lose. Is this right and fair? Not entirely. But that seems to be the way of the world just now.
This article is taken from Tom Bulford’s free daily email ‘Penny Sleuth’.