What Were the Real Risk and Control Issues at Societe Generale?
An article in yesterday's Financial Times covering the trial of trader Jerome Kerviel includes some interesting nuggets:
- The desk's trading limit of 125 million euros was "fairly frequently exceeded," according to Eric Cordelle, Kerviel's immediate supervisor. Up to 200 million euros was traded on some days.
- Cordelle denied knowledge of the 50 billion euros of unhedged positions Kerviel built up.
- Cordelle said he was overworked, and had neither the tools nor the resources to monitor individual traders' positions.
- According to Cordelle, Kerviel "was always able to come up with convincing explanations."
- Cordelle said "I was not a trader — I did not know the vocabulary of trading."
- The article reported Cordelle testifying that there was no risk-reporting system for traders, and implementing one "was not a priority."
A good auditor would identify the straightforward controls issues: no position reports, lack of supervisor review, etc.
A top-class auditor looks beyond and asks:
- Was the bank's risk culture appropriate? Was there appropriate training and emphasis on managing risk? Were the incentives for short-term performance appropriate?
- Why wasn't someone, somewhere in the organization, asking the questions even if Cordelle wasn't?
- Where was oversight by the risk office and by the financial department?
- Why was an inexperienced manager assigned to supervise traders, with so much money involved? Are there other, similar situations?
- Was Cordelle truly overworked and, if so, why? Are there other, similar situations?
- Are these issues that escaped the bank's auditors? Why?
Posted on Jun 22, 2010 by Norman Marks
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