The Societe Generale scandal

Font Size

Print

Feedback

Email

Discuss

The recently discovered fraud at Société Générale gives a feeling of déjà vu. Will the investigations and conclusions also follow the same old pattern till memories fade and the episode repeats itself? The failure of Barings has been a case study of poor internal controls, laid-back supervision, tolerance of transgressions that yield profits, and overall laxity with risk management. In the case of Société Générale, too, Jérôme Kerviel has revealed how easy it is to play risky games out in front and wire up the back-end suitably. The estimated loss of over $7.1 billion is the biggest so far in banking history, and is over five times that caused by Nick Leeson of Barings—of course, Kerviel’s lawyers have claimed that the charges have been put forth only to mask or divert attention from other losses incurred by the bank.

The lessons being drawn may soon include that a person who worked long years in the back office should not be posted in the front office—as the 31-year-old Kerviel had learnt the ropes of back office controls before moving to the trading desk, even though some analysts point out the ineffectiveness of such a separation in markets for derivatives. Another conclusion possibly is that greater the returns in a segment, the lighter tends to be the supervision. The derivatives and forward contracts markets had reportedly yielded returns of over 40% more than that by the bank’s retail business. A Wild West culture seems to prevail in such high-strung trading zones that encourages adventurism, cosmetic management of problems and even outright fraud.

There are three other notable lessons. The first is for companies that house risky behaviour. Employees hired for sensitive jobs are not tested to check patterns of behaviour under extreme conditions that inspire gambles that verge on fraud. This is what transforms a Jérôme Kerviel into a stunt motorcyclist, an “Evel Kneivel”, who risks his life amid loud applause. It is amazing how even otherwise intelligent people demonstrate such poor judgment in pursuits of extreme risk.

Recruiters must now use advanced assessment centres and intensive tests that can detect worrisome behaviour patterns, and not be satisfied with box-ticking exercises that let candidates show what they want to show. In addition, better research is needed to track behavioural patterns and their outcomes, combining technology and psychology.