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:

  1. Was the bank's risk culture appropriate? Was there appropriate training and emphasis on managing risk? Were the incentives for short-term performance appropriate?
  2. Why wasn't someone, somewhere in the organization, asking the questions even if Cordelle wasn't?
  3. Where was oversight by the risk office and by the financial department?
  4. Why was an inexperienced manager assigned to supervise traders, with so much money involved? Are there other, similar situations?
  5. Was Cordelle truly overworked and, if so, why? Are there other, similar situations?
  6. Are these issues that escaped the bank's auditors? Why?

Posted on Jun 22, 2010 by Norman Marks

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  1. In the end, doesn't it almost always come down to misaligned incentives? There was surely incompetence involved, but Kerviel's argument that he was left alone because he was making money (until he wasn't) rings very true... 

  1. Sounds exactly like the previous trader desk control failings: from Kreiger at Bankers Trust in the '80s to Nick Leeson and the Barings Bank. As long as the dollars are rolling in, no one wants to know the gritty details. Reminds me of the politics and sausage parable.

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