This sounds like the making of an exciting stock market movie (if there could be such a thing.)
By Friday, January 18, Jérôme Kerviel, a junior suit in the banking world, was on the hook for €50 billion – the equivalent of about half of all the gold and currency reserves held by France. The sum also exceeded the entire value of the bank at which he worked.
The 31-year-old trader at Société Générale, one of France’s most prestigious institutions, had secretly set up a series of deals that were going horribly wrong. So wrong that they threatened the survival of the bank and the health of global financial markets.
The directors faced a stark choice. They could let Kerviel’s trades – essentially bets that the market would rise – run in the hope of markets recovering. But that risked even greater losses if shares continued to fall. Or they could close the positions and take the hit.
It was no choice really. The potential losses if shares continued downwards could destroy the bank. “I did my duty and decided to unwind these positions,” said Daniel Bouton, the chairman. The bank later accepted a lifeline from two big American banks to escape the financial black hole.
The timing could not have been worse. Fears of recession and the debt crisis had sent shivers through the stock markets. On Monday morning the Asian markets were already falling by the time trading started in Paris. Soc Gen was a forced seller in plummeting markets – during that day leading shares in London collapsed 5.5% and in Paris 6.8%. This only compounded Soc Gen’s losses.
By the time it had managed to close out all Kerviel’s positions, the bank was down almost €5 billion. And Kerviel was being blamed for fuelling a stock market nosedive that spurred the American Federal Reserve into the biggest cut in interest rates for 25 years. He was described by the governor of the Bank of France as “a genius of fraud”.