Who benefited from the Soc Gen rogue trader?
That’s the next big questions for regulators - and they seem set on looking beyond the obvious candidate, Nick Leeson, who flogged his insights to the highest media bidder (the BBC.)
The Times reports that regulators in Paris and London have launched an investigation into whether anyone improperly profited from knowledge of SocGen’s predicament as the French bank early this week sought to unwind the huge positions built in equity derivatives by Jerome Kerviel. The AMF, the French counterpart to the FSA, will also look at trading in SocGen shares.
The potential for serious market abuse was high because SocGen took five and a half days after it learnt of rogue trader Jérôme Kerviel’s activities to go public on the disaster…
…There were unconfirmed suggestions today that Mr Kerviel may have confided in a friend who worked at a rival investment bank last Sunday.
Many other people inside and outside SocGen knew of the problem by Monday morning, including the Banque de France and the AMF.
The pool of professionals “in the know” is thought to have mushroomed during the early days of the week as SocGen drafted in JPMorgan and Morgan Stanley to orchestrate the €5.5 billion emergency capital-raising, which was also formally unveiled on Thursday.
Rumours swirled on Wednesday that SocGen was poised to announce vast write-downs of about €40bn - a figure in excess of the bank’s market cap. The €40bn figure then came back inexplicably quoted in French francs, equating to about €6bn. The rumour-mongers had struck upon the right bank, but had yet to unearth the true reason behind its losses.
By Friday, focus had turned to the explanation given for Jerome Kerviel’s success in concealing his huge positions - namely that his previous position in the middle office of SocGen had left him with detailed knowledge of risk controls and procedures which enabled him to mask his outsize bets.
There are noises already from some banks about a ban on moves from the back and mid offices to the front line of the business. The Times adds that the FSA is to stress the importance of segregating the activities of the various areas - with a note added to the file of those who move from one to the other alerting managers to the risk.
This sounds like classic knee-jerk stuff to us. Regulation tends to be counter-cyclical, and the authorities, as the latest news from Davos on efforts for transparency in OTC derivatives trading indicates, often like to focus on regulating the latest balls-up rather than looking for the next one.
The middle office operates to some extent at the behest of the trading desks - not least because those working in the former may wish not to cause undue trouble in the hope that the next spot on the floor goes their way. But a formalisation of the first class/second class citizens divide between the middle and front offices could create as many problems as it cures. The reason that bright, ambitious types take middle office jobs is to stand a chance of gaining promotion to the purportedly more glamorous front office. An outright ban on moves would, as it currently stands, only serve to limit the pool of talent headed for the middle and back office’s risk management and clearing and settlement functions to the mediocre.
Avoiding sub-standard staff in critical areas would require a beefing up of these positions perhaps in pay, but more importantly in terms of internal prestige. In that case, the need for a ban on frontward moves should evaporate. In any case, the idea that three years spent filling out forms in the middle office qualifies one to circumvent the supposedly multi-layered and nuanced risk controls in a large investment bank is either fanciful or highly worrying.
But tarring Jerome Kerviel with the middle office brush may suit on other fronts. The upper echelons, mused one Francophile recently returned from working in France, may find it easier to dismiss their rogue trader as exceptional - a lone, troubled agent - because he appeared to be an outsider. His meagre CV and education - a masters in finance from the University of Lyons - marked him out as not belonging to the French elite, let alone his passage up through the ranks of the middle office.
Another reason to put the squeeze on upward mobility in the French workplace then? Or will President Sarkozy - himself deemed an outsider and who might yet seize the opportunity to crash together a national champion as a result of France’s banking embarrassment - see matters differently?
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