Kerviel a folk hero? Ouch

As proven more than a few times over the past 20 years--anytime where a trader has any type of access to the back office creates a massive exposure to risk. In the old days (and still today)traders that make a bad bet have been able to "hide the ticket in the drawer" and otherwise exploit the time it takes for the back office to balance its books i.e counter party confirmations and trade settlement cycles. The fact that SocGen didn't appear to have strong enough controls (checks/balances)in place that allowed a single individual to mask $50 billion of capital exposure on its balance sheet is mindbending. Couple that with the fact that they otherwise panicked and annointed a single individual to close out all of the positions in a few keystrokes merely confirms that SocGen senior management should be sent to the guillotine.

Let us not forget the episode at another French institution, Calyon in September. It seems clear that management in that case made a fatal error in judgement as well. By all accounts the trader at Calyon was up large amounts of money but had exceeded his risk limits. Mangement, who is still in place, directed an immediate unwind of incredibly large credit derivatives positions in one of the most illiquid credit markets ever seen. They then admit that it was the unwind of these positions that caused any losses. Should they be surprised? Obviously it is folly to unwind large positions in illiquid markets. Clearly that was a terrible decision, not to mention there were never any allegations of fraud. At SocGen, the situation is somewhat similar. Had there not been such a drastic unwind of Kerviel's positioins, it is doubtful the loss would have been as sever. I can't see this happening in the U.S. Take Goldman's recent stellar quarter for instance. Apparently there were a handfull of ABS traders who had placed massive short bets on the ABS indices that far exceeded their risk limits. Instead of forcing the traders to unwind their positions in an illiquid market, management at Goldman backed their traders, and unwound in a reasonable fashion when the trade was clearly in the money. It was this particular trade that accounted for much of Goldman's stellar performance in 2007 Q4. This highlights the difference between management at U.S. and French firms, and explains why the U.S. banks have dominated this industry.