FRANCE

Société Générale: ”This fraud was born out of a faulty system”

Commentary on the fraud that has cost French bank Société Générale five billion euros from our Observer Pierre Hessler, a former member of the board of directors for Capgemini. Hessler, author of ‘', worries about the incapacity of big banks to adapt their risk management systems to increasingly more complex markets.

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Commentary on the fraud that has cost French bank Société Générale five billion euros from our Observer Pierre Hessler, a former member of the board of directors for Capgemini. Hessler, author of ‘Company scandals and the media', worries about the incapacity of big banks to adapt their risk management systems to increasingly more complex markets.

The investment bank of Société Générale enjoyed an excellent reputation until the Kerviel affair, and rebuilding this will undoubtedly be the general directors' foremost priority. For observers of company scandals, this event has confirmed three important lessons.

Banks and other financial institutions are forced by the markets to operate to a level of complexity that they are too often unable to manage. Risk management is always lagging behind when faced with financial engineering geniuses; a little like the development of defensive rather than offensive weapons. In the case of Kerviel, his IT ‘genius' was what fooled the inspectors. In the case of the sub-primes, this was sadly not the case; it was collective stupidity and an incapability of seeing past success to the bad consequences ahead.

Such a business always tests your ability to analyse, understand and communicate quite harshly. It seems that some were too hasty to confirm that the control system was working well! The media uses technical terms without explaining them- maybe because they don't understand them themselves. Without doubt surrounded by self-certified experts in ‘crisis communication', Société Générale executives might have believed that they would be able to manage the flow of information concerning this news- maybe because they didn't know or maybe because they were trying to lessen the blow of embarrassment. There remains a lot to be explained, and even more if the bank already knew about this last year.

Most scandals are seen as aberrations, and therefore don't worry capitalist financial institutions. After the Kerviel case, experts assured that it was a one-off before they even knew the details. At this stage however, everyone believes the opposite; that this kind of thing is all too easy, and a result of the old-age physics of trading - immediate gains and losses. In one transaction a trader can make what it takes a normal worker to gain in 20 years. Being under so much pressure and surrounded by so much temptation, who could resist taking a risk and bending the rules? At the bottom of the profession's ladder, Kerviel no doubt dreamt of climbing it. He wanted to do it by himself in his own way, and a little mischief here and there soon became something quite bigger.

To be continued..."