Societe Generale Explains The Factors Leading To The EUR4.9B Fraud

The incriminated trader, Jerome Kerviel, was performing arbitrage in futures contracts, an activity seen as simple and with low risk, according to the website of French television station TF1.

 

Arbitrage activities consist of the acquisition of a financial asset portfolio and the simultaneous sale of a slightly different portfolio, in a bid to obtain profit through the difference in the values of the two.

 

Thus, all acquisitions are, normally, compensated through almost identical sales, the only difference being in the margin.

 

The fraud consisted in the assumption of fictitious positions for the second portfolio, to leave the impression that they compensate for the initial portfolio of financial assets.

 

In lack of compensation, the acquisition risk skyrocketed undetected by the bank’s control system.

 

The problem is that the automated control system of Societe Generale targeted, mainly, the pinpointing of excessive risk in a position. The system did not make a priority out of the size of the acquisition, which would have enabled the detection of an unusual amount of buy orders issued by the trader, cumulating EUR50 billion.

 

Another factor that facilitated the fraud was the fact that Kerviel worked for several years in an office that supervises trader activity, where he learned how to dodge the bank’s control system.

 

According to Societe Generale, knowledge about the security system enabled Kerviel to use the access codes of operators in the control office and cancel certain transactions before they are checked.

 

The third factor is the fact that the trader did not periodically o on vacation, in accordance with large financial institution regulations, a system that renders more difficult the trackdown of non-profitable positions on the stock market.

 

After the summer vacation, Kerviel was supposed to go on vacation again in winter, but he did not, stating personal reasons.

 

Several of his colleagues confirmed, under the protection of anonymity, that he no longer took vacations and he was working very hard.