The Wall Street Journal-20080131-Kerviel Felt Out of His League
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Kerviel Felt Out of His League
Full Text (953 words)In 2005, Jerome Kerviel got the biggest break of his career: a promotion out of Societe Generale SA's lowly back office -- a place so uncool it was dubbed "the mine" -- and into a coveted job as a trader at the powerful bank.
But if clawing your way up from the mailroom wins you a badge of honor in the U.S., not so within in the rigid class system that defines the upper ranks of French finance. Mr. Kerviel's effort to impress his colleagues now appears to be a motivating factor behind his disastrous trading spree, which burned a 4.9 billion euros ($7.3 billion) hole in Societe Generale's books.
"I was held in lower regard than the others because of my educational and professional background." Mr. Kerviel told prosecutors over the weekend. His comments were from a transcript and confirmed by prosecutors and his lawyer.
Trading might not be rocket science, but Societe Generale has a tradition of drawing its star traders from France's most elite schools. Many have doctorates in disciplines such as astrophysics or nuclear science. They are known as "quants" for the complex "quantitative" mathematical trading formulas they develop. They pull down the biggest paychecks.
The bank's top brass, including investment-banking head Jean-Pierre Mustier, is from the engineering school Polytechnique, the M.I.T. of France. Chief Executive Daniel Bouton graduated from the prestigious Ecole Nationale d'Administration, a school known for churning out high-level government functionaries that run the country.
"If you graduated from ENA or Polytechnique, you have an absolute tenure; if not, you miss out on all the good job opportunities," according to a former Societe Generale executive. "This rift exists all over the bank."
French authorities placed Mr. Kerviel under formal investigation Monday on charges of forgery, breach of trust and breaking into computer systems. He was released but barred from leaving the country. Societe Generale has accused him of fraudulent trading that at one point left the bank exposed by 50 billion euros.
"His career path made him sort of an exception," says Mr. Mustier.
It hasn't always been this way. Societe Generale's current corporate culture is a byproduct of the bank's transformation in the late 1980s from a conventional retail bank to a major player on the global financial stage, according to Michel Marchet, a representative of one of the bank's labor unions and 40-year employee. When he started, Mr. Marchet recalls, even employees without college degrees could build successful careers.
Suddenly, they found themselves overshadowed by new recruits plucked from France's top-notch schools. The rise of a new "elite" class, Mr. Marchet says, also meant "fewer working-class people were joining the bank."
The high-pressure atmosphere has taken its share of victims. In June, a trader in his 30s who worked on the same floor as Mr. Kerviel jumped to his death from a footbridge near Societe Generale's towering headquarters in the La Defense suburb of Paris. Moments before his death, Mr. Marchet says, a supervisor had interrogated the trader for losing about 9 million euros in unauthorized trades. "He took his bag, left Societe Generale and jumped off a bridge," Mr. Marchet says.
A spokeswoman at Societe Generale declined to comment on social tensions at the bank. She confirmed that an employee committed suicide last year.
That death came in the wake of two other suicides in recent years. In 2005, a trader jumped to his death from a ninth-floor window at the bank's headquarters, Mr. Marchet said. A year later, a back-office employee jumped in front of a train commuting between La Defense and the center of Paris.
The trading desk where Mr. Kerviel landed, the "Delta One" unit, deals with trades aimed at making small profits with stock-market fluctuations. Mr. Kerviel, who hails from a small town in Brittany and graduated from a little-known university, suggested in his statement to prosecutors that he hoped to curry favor with people who counted.
Mr. Kerviel's job was to invest by simultaneously taking opposite bets on the direction of the markets. The bets were supposed to mostly offset each other in what is typically a low-risk way to make a small profit. But starting in November 2005, Mr. Kerviel started placing bets only in one direction, hoping for far bigger gains.
To hide his strategy, he created a set of parallel fake bets in the other direction to give his supervisors the illusion that his books were correctly balanced.
When his supervisors asked him about unusual transactions, Mr. Kerviel would rely on simple tricks to evade their inquiries. "I fabricated a fake mail using a feature in our in-house messaging system, a function which allows you to reuse the electronic letterhead I had received and change the body of the text," he said.
At first, Mr. Kerviel's strategy paid off -- too well, in fact. His gains snowballed so quickly that, at some point, he had locked in a gain of 1.6 billion, about a third of the bank's overall net profit in 2006.
At that moment, "I don't know what to do," Mr. Kerviel told investigators. "I am happy, proud, but I don't know how to justify my gains."
What seemed to disappoint Mr. Kerviel was that his trading prowess wasn't being acknowledged. He told prosecutors that he believes managers were aware of his methods but never spoke up as long as things were going well.
"I cannot believe that my superiors did not realize the amount I was risking," he said in the interrogation. "It is impossible to generate such profit with small positions. That's what leads me to say that while I was [in the black], my supervisors closed their eyes on the methods I was using and the volumes I was trading.
