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Trading & Options · Profile from Trading and Options Research Companion

Société Générale and Jérôme Kerviel

The Paris bank whose junior trader on the Delta One desk, Jérôme Kerviel, hid directional index-futures positions of EUR 28bn (30 Jun 2007), EUR 30bn (31 Oct 2007) and finally EUR 49bn long (built 2–18 Jan 2008) behind fictitious offsetting trades. The bank found the January position on 18–20 Jan 2008 and closed it out on 21–23 Jan 2008, into one of the sharpest European sell-offs of the credit crisis. The unwind lost EUR 6.4bn, which, net of a hidden EUR 1.5bn profit from 2007, gave the EUR 4.9bn loss the bank announced on 24 Jan 2008 (Société Générale General Inspection, "Mission Green" summary reports of 20 Feb and 20 May 2008). Kerviel's desk had a net market-risk limit of EUR 125m; his concealed long position was roughly 400 times that. The bank raised EUR 5.5bn in a rights issue weeks later, and the French banking supervisor, the Commission Bancaire, issued a reprimand (blâme) and a EUR 4m fine (decision of 3 Jul 2008, published 4 Jul 2008). Kerviel was convicted on 5 Oct 2010 and sentenced to five years, two suspended, and ordered to repay the full EUR 4.9bn. On 19 Mar 2014 the Cour de cassation upheld the conviction but quashed the damages, and on 23 Sep 2016 the Versailles appeal court cut them to EUR 1m because the bank's own control failures had contributed to the loss. For a trading book this is the clearest case of a survival failure hidden inside an arbitrage desk: an arbitrage desk (in principle market-neutral) used as cover for one man's directional bets on index futures, and a control system that checked the net position against a limit but never checked whether the offsetting trades were real.

At a glance

Entity
Société Générale S.A. (Paris), corporate and investment bank SG CIB; Global Equities and Derivatives Solutions (GEDS); Delta One desk, "Delta One Listed Products" (DLP) sub-desk (Mission Green, May 2008)
Type
Bank trading desk; rogue-trade and control-failure case
The trader
Jérôme Kerviel: joined Société Générale's middle office in summer 2000 and became a junior trader on the Delta One team in 2005 (Wikipedia, citing press — reported); described by the bank as a trader "on the Turbo warrants market within the equity derivatives division" (Mission Green)
Headquarters
Paris (La Défense)
Ownership / structure
Listed (Euronext Paris); a French universal bank supervised in 2008 by the Commission Bancaire (Banque de France), now by the ECB and the ACPR
The event
Unwind of a hidden EUR 49bn long index-futures position, 21–23 Jan 2008: EUR 6.4bn loss; EUR 4.9bn net of 2007's hidden EUR 1.5bn profit (Mission Green, 20 Feb and 20 May 2008)
Instruments
Mainly DAX and Euro Stoxx 50 index futures on Eurex, plus FTSE 100 futures and single stocks; concealed by fictitious forwards, deferred-start trades and "pending" futures (Mission Green)
Regulators and courts
Commission Bancaire (EUR 4m, Jul 2008); AMF (inquiry into financial information); Paris criminal court (5 Oct 2010), Paris appeal court (24 Oct 2012), Cour de cassation (19 Mar 2014), Versailles appeal court (23 Sep 2016)
Moves in this profile
Six. This is a single-event entity (rule 6): the profile covers one trader's hidden positions, the unwind, and how the bank, the supervisor, the courts and other banks responded. Société Générale as a bank has no profile in the Finance KB
Signature moves (incl. failures)
Delta One, turbo warrants and early "spiel" trading (2005–06); the hidden short futures positions of 2007; the EUR 49bn long, its discovery and unwind (Jan 2008); disclosure, the EUR 5.5bn rights issue and the Commission Bancaire sanction (2008); the criminal trial and appeals (2010–16); the industry's rogue-trader reviews (2008–11)

6 strategic moves analysed

Each one gets a full strategy file in the companion: context, the decision, the financing, what happened, and the lesson.

  1. 2005

    Delta One Turbo Warrants and Spiel Trading

    Rogue trade or control failure — the origins: tolerated intraday bets that became concealed overnight positions

  2. 2007

    Hidden Short DAX and Euro Stoxx Futures

    Large trade or position — unauthorised and concealed

  3. 2008

    Disclosure Rights Issue and Commission Bancaire

    Capital raise / loss response / regulatory and enforcement action

  4. 2008

    EUR49bn Long Futures Discovery and Unwind

    Loss and blow-up response — discovery of a concealed position and forced unwind

  5. 2008

    Industry Rogue Trader Reviews

    Regulatory and industry response / risk-limit and control change

  6. 2010

    Criminal Trial and Appeals

    Regulatory, enforcement or legal action