At Societe Generale, was “rogue trading” standard operating procedure?

by Patrice Sarath, May 27th, 2008, 7:00 am

Can Jerome Kerviel be a rogue trader if he had accomplices, no actual oversight by his superiors, and a pervasive environment at the bank that, according to Kerviel, encouraged reckless trades?

To quote Inigo Montoya from The Princess Bride, “I don’t think that word means what you think it means.”

According to an internal report, supervisors at Societe Generale ignored 75 alerts that should have warned them that Kerviel was making unauthorized trades. As one source put it, “They had a 9 in 10 chance of discovering what was going on.”

Kerviel still faces criminal charges for trades that caused nearly $8 billion in losses at the French banking giant. These new allegations of lack of oversight by the bank mean more than just embarrassment for the company. Other employees could lose their jobs and the bank could face lawsuits by investors.

Although it’s fun to chant “rogue trader, rogue trader,” the reasons for the SocGen losses do not vary that much from the UBS debacle (nearly $40 billion lost) or the downfall of Bear Stearns. Lack of oversight on the part of SocGen, hubris at Bear Stearns, and an adolescent desire to play with the cool kids at UBS led to each bank’s embarrassing failures. In each case, everyone involved thought that the rules didn’t apply to them, that risk didn’t apply to them, that they could game the market. In each case, they found out otherwise.

It’s a funny thing about risk. Risk actually doesn’t change — only our interpretation of it does. When you get away with something for so long, it doesn’t seem that risky after a while. That’s not rocket science, that’s just human nature.

Well, maybe it’s rocket science too. Just ask NASA engineers in 1986 and again in 2003. Every successful launch leading up to the Challenger and Columbia disasters made officials and engineers accept more and more risk until the next tragedy happened (and will happen again, no doubt).

Maybe bankers should take a look at these disastrous failures and the culture that allowed them to happen and apply some of those lessons to their business. And maybe they should stop crying “rogue trader!” when it wasn’t just one trader and he wasn’t a rogue.