Kerviel’s bank-busting bets
I have discovered more about the extraordinary risks being run by Jerome Kerviel, the rogue trader at Societe Generale whose transactions cost the bank €4.9bn.
According to official investigators, in the last few weeks his bets on stock markets were so big that every 1 per cent swing in the value of European shares resulted in either a profit or a loss for the bank of €500m (£370m) depending on whether the swing was positive or negative.
In other words, his bet was big enough to bankrupt SocGen on the basis of any sustained fall in stock markets.
What’s more, bankers have confirmed that at the end of last year, Jerome Kerviel had generated a colossal hidden profit for the bank of €1.4bn.
Among the great mysteries of the Kerviel affair is how the French bank could have failed to notice a profit of that size.
That €1.4bn profit had become a loss of €4.9bn by January 23, when M. Kerviel’s position had been unwound.
Or to put it another way, the deficit on Kerviel’s bet in the opening weeks of this year was €6.3bn, or £4.6bn.
Bankers have also disclosed that in 2006 Kerviel’s open positions in stock-market index futures – largely bets on the direction of the DAX, FTSE and Eurostoxx indexes – reached a colossal nominal amount of €30bn.
This was closed out at the end of 2007. But Kerviel then went on a gambling spree and increased his position to a mind-boggling €50bn earlier in January.
According to a banker close to the investigation, Kerviel’s first fraudulent positions were taken out in January of last year – although he apparently took steps to conceal a small loss at the end of 2006.
What is also shocking is that as long ago as March and April of last year, Societe Generale’s back office, or administrative operation, queried phoney transactions being carried out by Kerviel to disguise his massive stock-market bets.
At the time he was covering up his massive speculative activity by pretending to enter into “pending” futures transactions, whose economic effect would have been to negate the real trades.
These pending futures deals were identified by SocGen’s back office 10 months ago, but Kerviel’s explanations of them were regarded at the time as plausible.
The use of the “pending” futures transactions was one of five different methods employed by Kerviel to hide the extent of his real trading.
The other techniques for creating phoney trades included entering transaction dates for deals that fell after the normal settlement cycle, doing forward deals with other parts of SocGen, and creating fictitious issues of warrants.
Bankers say that he must have been frenetically busy covering his tracks by concocting these illusory transactions.