Rogues and risks

Written by The Financial Express | Updated: Jan 28 2008, 04:17am hrs
There are frauds and then there are frauds. However, for sheer audacity, Jrme Kerviel deserves the mantle of the worlds most notorious rogue trader, edging out Nick Leeson. Aged just 31, Kerviel is a junior trader who has left Socit Gnrale holding a can of $7.1 billion in losses. Thats five times the sum blown up by young Leeson at Barings. That Socit Gnrale is a French bank thought to be much too conservative to have anybody of his disposition stalking the corridors, let alone the trading terminals, adds to the consternation that is greeting the news across the financial world. It is important to start asking the hard questions. How did such an astounding case of unauthorised trading escape the banks internal detectors of corporate governance and systems of audit oversight It appears that the trader consistently placed absurd bets on the derivative markets, some of them almost as if he was ideologically opposed to profit. Of course, human recklessness and fallibility cannot be overestimated among market players in these days of extreme complexity. Still, what is especially mysterious in this whole affair is the amount of money that was hedged. Do junior traders really have access to such sums of money to play with That too, at multinational banks This does no good to the image of banking as a seriously safe institutional set-up, the reason that granite pillars and impressively engraved architectural facades are deemed to be a must-have, especially as a point of contrast to Internet banks that could vanish into cyberspatial oblivion overnight.

The Indian financial sector would do well to draw some lessons from this episode. At the centre of the fraud are derivatives that shift risk from one owner to another. In times of dynamism, investment firms place a premium on risk-taking, and smarter players of the pass-on-the-parcel game rake in the biggest bucks. While there is a clear economic advantage in such risk diversification, a good sense of balance must always be maintained, and transactions must not duck either audit scrutiny or external regulations. In India, the derivatives market is in its infancy. For its orderly development, no one should be let slip. Any big blowout could hurt the hard-won support for derivatives. A scam mustnt become a pretext for financial luddites to chase out genuine value.