How could a junior trader at France's second largest bank manage to lose €4.9 billion in a series of unauthorised trades on European equity markets?
That question has yet to be properly answered by his employer, Société Générale. It claims that Jérome Kerviel operated alone and unaided within the bank and created false transactions to conceal his huge losses over many months, which Société Générale only discovered last weekend. Once again a rogue trader has outwitted the risk control procedures of a major international bank, this time to carry out the world's biggest banking fraud.
Société Générale has invoked "exceptional fraud" as an excuse for the detection failure by the bank's risk management system. Governor of the Bank of France Christian Noyer clearly concurs. He has described Mr Kerviel as "a genius of fraud". But this attempt to minimise the bank's own managerial failure in not spotting the "elaborate fictitious transactions" of its junior employee much sooner, lacks credibility. It is seen as an attempt to excuse, if not exonerate, the bank for what was a remarkable absence of oversight and control.
The parallel with past great bank losses, at the hands of other rogue traders, is obvious. But the difference this time is one of financial scale. In 1995, when Nick Leeson brought down Barings bank, the losses were one fifth those incurred at Société Générale. In 2002, Allied Irish Bank's losses at Allfirst, its American subsidiary, were one tenth of those at the French bank. There, Allfirst's trader, John Rusnak, had covered up his fraudulent activity by entering fictitious transactions in the bank's computer system.
Had the financial markets been aware of Société Générale's trading losses before it managed this week, secretly, to orchestrate the raising of some €5.5 billion to boost its capital, then the bank itself could have failed. That fate was narrowly avoided. But the bank's reputation has been seriously damaged by this great humiliation. And yet, despite this debacle, the bank's own top management still remains in place.
If the challenge facing banks in general is to try and ensure more effective risk management of their operations, that facing national governments is how to regulate the activities of banks without stifling their initiative through excessive supervision. Up to now the onus has been on banks to manage their own risks with light external regulation. Société Générale's €4.9 billion trading loss, however, is one measure of the latest failure of that method and of the need for stronger international banking controls.