Regulator Wanted! No Experience Required
By Adrian Ash
January 30, 2008
The only real upshot of the banking scandal at
SocGen will be more work for those poor drubs, the financial regulators...
JEROME KERVIEL now famed the world over as France's
worst-ever financial mishap after John Law apparently claimed on his most
recent resumι to enjoy judo and sailing.
Did he mention running up $7.1 billion in losses for his employers,
too?
Something of a loner according to the world's media (only 11
friends on Facebook!), he's also been called a "computer genius" by
his colleagues at Sociιtι Gιnιrale in Paris.
But that genius earned him a mere 100,000 last year
"peanuts in the banking world" as the British press put it this
weekend. So what gives?
Kerviel certainly seems bright enough to bring down a bank. He
studied economics at Nantes and then Lyons, one of France's top 10 universities,
before joining SocGen in 2000. But he only worked as a back-office drone, filing
and checking other people's trades for two years (otherwise known as
"risk-control and security systems" in the media reports), before
graduating to Trading Assistant (a.k.a. middle-office drone) on the European
equities desk, plugging numbers into SocGen's stock-market derivative positions.
"He spoke very little, answering questions with nothing more
than a yes or a no," winks a colleague who clearly spotted Kerviel was a
wrong 'un but failed, mysteriously, to alert anyone. And behind the weirdo
stare, this low-grade bean-counter was in fact a criminal mastermind or so
everyone says bent on gambling three times SocGen's entire stock-market cap
by "hacking through four separate fire-walls" said French finance
minister Christine Lagarde to CNBC today.
Monsieur Kerviel then chose "very specific operations which
didn't involve any cash movements...placing transactions which did not require
immediate confirmation" from senior management, says Jean-Pierre Mustier,
head of corporate & investment banking at SocGen.
In short, and to judge by the public statements of SocGen's
management, Kerviel also kept a white fluffy cat on his lap and a fish-tank full
of piranhas just below the trap-door in his hallway. "The nature of his
fictitious and fraudulent operations were constantly evolving," pleads
Daniel Bouton, SocGen's CEO, in an interview with Le Figaro.
"And when the control systems detected an anomaly, he managed
to convince control officers that it was nothing more than a minor error."
Zut alors! This sad loner was able to fool all of the people pretty
much all of the time, including the time that SocGen's risk-management team
actually got round to scrutinizing his book after an urgent tip-off from Eurex
the European derivatives exchange itself.
Why didn't the 2,600 people apparently working in "risk
management" at France's second largest bank bother to dig deeper? Ah well,
Kerviel was a criminal genius, remember. Everybody says so. Albeit a criminal
genius stuck in bean-counting roles for six years who managed to scrape barely
half the average stock-trader's salary when he finally got a trading position.
It could have happened anywhere, or so everyone would have you
believe and they might just be right even if Kerviel did lack the brains
and balls to really get ahead in the competitive, cocky world of financial
trading.
On the other side of the trade, meantime, and protecting the
world's investors and savers from the skew-eyed evil geniuses working Excel
spread-sheets at French investment banks today, sit the regulators. You might
think they're busy enough right now, simply trying to keep up with the world's
evil financial geniuses.
But if they're busy now, just wait until the politicians are
finished trying to cover their own posterity.
"We have to put a stop to this financial system which is out
of its mind and which has lost sight of its purpose," spat French president
Nicholas Sarkozy on a trip to India last weekend.
"The point of a financial system is to lend money for economic
activities, which, in turn, generate profits. It is not to go and speculate on
different activities which create enormous flows and profits in a few
hours."
Oh really? Just what does Monsieur Le President think derivatives
are used for today creating economic value through prudent lending? Jerome
Kerviel struggled to make $150,000 a year in a job that regularly pays nearer
$300,000 plus year-end bonus. Even when the authorities at Eurex queried his
trading, the "risk management professionals" at SocGen fell for his
schtick (it seems) and missed the sheer size of the positions he'd built up.
Either that, or they did know what was happening...and the rumors
of a 300,000 bonus ($447,000) if Kerviel's high-risk model paid off are more
than just chatter.
It's not just the high-octane world of derivatives tom-foolery
that's bamboozling government regulators and their elected bosses, however.
"The failure of Northern Rock, while primarily a failure of its directors,
was also a failure of its regulator," reckons John McFall, the UK member of
parliament who's just led an official inquiry into Britain's first banking run
in 130 years.
His report expressly recommends that any new powers of banking
regulation and like all good reports, it demands there be plenty go to
the UK's central bank, rather than the current UK regulator, the Financial
Services Authority.
"We propose the creation of a new post of Deputy Governor of
the Bank of England and Head of Financial Stability," the Treasury
Committee's report concludes seemingly unaware that the BoE already has a
deputy governor responsible for financial stability. Sir John Gieve was
appointed Deputy Governor in Jan. 2006, with specific responsibility for the
Bank's Financial Stability work.
But don't you see? "The deputy governor should be someone with
senior banking experience," counters Michael Fallon, another member of the
Northern Rock inquiry. "You can't have someone like Gieve, a civil servant
without any banking experience."
So just who should the government look to hire instead? A senior
banker wanting to lose all his Facebook friends by stamping on their business
models in between rounds of golf? Gieve is the perfect man for the job of
monitoring financial stability, in our opinion here at BullionVault,
because the task is next-to-hopeless and he's a career bureaucratic with
experience of lost causes in spades.
A Whitehall policy-wonk from the age of 24, Gieve really showed his
talents as Permanent Secretary to what used to be called the Home Office. The
Justice Ministry as it's now known underwent something of a re-branding after
three political chiefs had to resign inside five years. Gieve worked for them
all, but the department he ran was entirely "unfit for purpose"
claimed one of the hot seat's brief incumbents and running the department
day-to-day was Gieve's responsibility.
Indeed, the man now charged with over-seeing the UK's financial
stability seemed to have real trouble using Excel spread-sheets back at the Home
Office.
"Accounts contained numerous errors and internal inconsistencies,"
said the official auditor's report in Jan. 2006. He refused to sign off the Home
Office's internal accounts for the last year of Gieve's tenure.
"In particular, amounts relating to cash, Exchequer funding
and non-retainable income...were contradictory and did not reconcile between the
different places in which they appeared in the accounts," the auditor
stated.
"There were also material omissions and misstatements, for
example the value of the private prison estate was incorrectly recorded in the
accounts."
Sir John is no accountant, of course. That's why he nabbed a deputy
guv'nor-ship at the Bank of England three weeks before the auditor's report on
his Home Office accounts was released. The perfect man for the job!
"It is clear that the distinctions between different types of
financial institution banks, securities firms and insurance companies
are becoming increasingly blurred," announced Gordon Brown on taking office
as UK finance minister in May 1997. Now enjoying the slings and arrows that go
with being prime minister, "there is a strong case for bringing the
regulation of banking, securities and insurance under one roof," he
concluded back then, axing the Bank of England's supervisory role and giving it
to a new 'super regulator' that would become the Financial Services Authority
three years later.
Yes, the very same Financial Services Authority that failed in its
duty to monitor and regulate Northern Rock.
"Is the creation of a such a regulator feasible," asked The
Banker magazine in June 1997. "Will it necessarily be more effective,
and should it be attached to the central bank? In a business dependent on trust
and confidence why abandon a well respected institution in the hope that a less
prestigious one will do better?"
Even the head of the Bank of England, "Steady" Eddie
George himself (BA Cambs; career central banker; no private-sector banking
experience whatsoever), found it hard to bite his tongue, despite winning
independence on setting interest rates within one week of Gordon Brown (PhD Edin;
career politician, plus a brief stint as lecturer & journalist; no banking
or business experience whatsoever) becoming Chancellor of the Exchequer.
"Former BoE supervisors have expressed concern over whether
credibility could be maintained in a single institution which is responsible for
both the mis-selling of pensions and systemic risk," The Banker
magazine went on.
"And BoE governor, Eddie George, has warned that the new and expanded
[regulator] risks becoming over-bureaucratic and too inflexible in taking a
one-size-fits-all approach to financial regulation.
"Other have worried over how the BoE staff, and the culture
they bring with them, will blend into the new 'super-SIB' structure. Some fear
the different purposes of regulation will themselves become blurred within a
single organisation."
British readers might find all this...written almost 11 years
ago...wearisomely familiar. The looming collapse of Northern Rock's aggressive
short-term borrowing model was utterly missed by the Financial Services
Authority last summer, even as the global credit crunch bit. It was left to the
current BoE governor, Mervyn King (PhD Cambs; career academic; no private-sector
banking experience whatsoever) to warn vaguely of the risks to stability
posed by the UK's record credit binge.
But as Helen Liddell, then economic secretary to the Treasury, put
it in May 1997, re-arranging the UK's regulatory structures was just a
"management issue" which would be solved.
And government can resolve anything it chooses, right? Most
especially the multi-trillion international financial markets...where the
world's brightest brains sweat bullets trying to turn a quick buck even quicker.
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The FSA, in contrast, has just got round to bringing its first ever criminal
case for insider dealing despite being the statutory prosecutor for insider
dealing since 2000.
"Thats a long while," as Sara George of Allen & Overy noted to
the Financial Times. Not least because the regulator itself says
insider dealing is "rife" in the City of London, affecting almost 24%
of takeover and merger announcements in 2005 utterly unchanged from the
proportion subject to insider dealing in 2000, the year the FSA became
responsible for preventing it.
As for fines, the FSA's preferred slap on the wrist, the largest single censure
of a retail finance firm to date was this month's £1 million fine (less than
$2m) of HFC Bank for giving "unsuitable insurance advice". HFC is part
of the HSBC group. The parent's latest interim report showed that it earned that
much pre-tax every 36 minutes.
The FSA's largest fine all told was £17 million ($33m) charged to Royal Dutch
Shell for lying about its crude oil reserves in July 2004. The oil giant's net
income at the time was £24m per day.