Peter Wilson, Europe correspondent | January 26, 2008
THE SCARIEST thing about Jerome Kerviel is not that he managed to commit the world's biggest solo bank fraud of E4.9billion ($8.2 billion).
The truly frightening thing is that the damage could have been much, much worse because the 31-year-old junior trader at French giant Societe Generale had worked out how to beat the security systems of one of the world's great banks.
If the nondescript young trader had not made one relatively simple error last Friday he could have cost his bank 10 times as much money, wreaking enough damage to threaten banks and economies around the world.
As it is, Kerviel, a low-flyer who was never going to be a star banker, contributed to this week's massive sell-off of shares around the world, reducing the savings of millions of investors and helping to push the US Federal Reserve into its biggest interest rate cuts in two decades.
Kerviel's secret build-up of massive speculative investments in the name of Societe Generale forced the bank to launch a costly fire sale that we now know exacerbated the fall in share prices from Sydney to New York.
Embarrassed bank officials in Paris have revealed that Kerviel's unauthorised trades cost his employer four times the losses accrued by Nick Leeson, the man who broke Barings Bank, and 22 times those of the rogue currency traders who cost NAB $360million in 2004.
It was scandals such as those that led banks around the world to spend hundreds of millions of dollars devising sophisticated systems to prevent further frauds by keeping tight controls on their own traders. SocGen alone has a compliance team of more than 2000 workers, with instant checks on cash flows, and computerised alert systems to detect suspicious activity.
The man in charge of those defences, SocGen corporate and investment banking chief Jean-Pierre Mustier, was driving home on Friday night when he got a call telling him something was wrong.
When he got back to the bank's glass office tower in La Defense, the business district in the west of Paris, Mustier was told that a compliance officer had detected something fishy about a transaction.
It was the early hours of Saturday before Mustier and his team realised that Kerviel seemed to be behind the problematic trade.
Kerviel had begun his career eight years earlier in the unglamorous middle and back offices that help supervise the traders.
A clean-cut, good-looking man who had graduated from a mid-ranking university in Lyons with a masters degree in finance, he spent five years learning the details of the compliance system.
A judo teacher and excellent English speaker, he was also something of a computer geek and took a close interest in how the various security systems worked to monitor the traders.
Some banks make a point of keeping people with those skills away from the trading floor to stop gamekeepers becoming poachers, but the backroom people often agitate for a chance to move over to where the bigger salaries are.
Kerviel was given his chance in 2005, although his salary package stayed below E100,000 ($165,000), less than 10 per cent that of a star trader.
His job was to place relatively simple transactions to reduce the risk of other investments.
If the bank's traders bet heavily that the German market would fall, he was supposed to make balancing investments in case they were wrong. But that is not what he did.
Late last year, he started taking his own punts on the markets, using his computer skills and understanding of the compliance systems to remove the limits on the amounts he was authorised to invest.
Kerviel got around the detection systems by setting up fake companies to hide his rapidly growing transactions. Using other traders' passwords, he hacked into the system to approve his own trades and skilfully "switched off" the automatic warning systems designed to flag any unusual trading patterns.
Bank executives say they only detected a problem last Friday because he forgot to turn off those alarms on one transaction.
On Saturday afternoon, Kerviel was called in from his $3300-a-month apartment in Neuilly-sur-Seine, a walking distance from the office, and locked in a glass conference room with Mustier and his team for questioning that went all night.
"He said he had come up with a great new trading strategy, and if he was given time it would make a lot of money for the bank," one executive said.
He had made a small profit last year and some losses in the past few weeks but they could be turned around, he insisted.
To their horror, Mustier's team discovered he had placed bets worth more than $80 billion of the bank's money.
"He understood he was taking huge positions but I don't think he understood the impact," Mustier said.
"He kept telling me during the night that he had discovered a new trading technique which was performing very well."
The bank insists he worked alone, and Daniel Bouton, the chairman and chief executive, said Kerviel was not siphoning off any money for himself.
"His motives are totally irrational. It doesn't seem that he was able to benefit from these colossal trades and directly he did not."
Philippe Collas, of the bank's global investment management division, said: "This wasn't done to get rich. What was his motive? I don't know. Maybe he wanted to prove himself. It's difficult to get money out of a bank -- as soon as you try you will leave atrace."
Executives speculate that he may have wanted attention or approval. Others say he had recently suffered personal problems including a family death -- believed to have been his father -- and a break-up with his girlfriend.
Kerviel had gambled on European markets rising, and when he helped Mustier to uncover his punts they showed losses of E1.4billion ($2.34billion).
The bank decided those investments would have to be quickly and quietly sold off when trading resumed on Monday.
"We had no choice," Mustier said. "For the sake of our shareholders we cannot speculate with such a large position."
Bouton said: "If we had announced it on Monday morning, the loss (for the bank) would have been 10 times higher. Its scale would have destabilised the whole market."
To keep a lid on things they allowed Kerviel to go home, rather than reporting him to police.
He kept his passport, but his lawyer said yesterday: "He is not running away. He is at the disposal of the police."
The problem was that it proved a disastrous time to be selling.
In the early hours of Monday in Paris as they drew up their plans for the sell-off, the Australian market was tanking, suffering its biggest fall since the 1987 crash. Tokyo followed it down and the French were locked into selling into a falling market.
By some estimates, SocGen's sales added 10 per cent to the volume of sales of European indices futures, exacerbating the price falls.
The slumping prices prompted the interest rate cut by the US Federal Reserve, which had not been alerted to the French bank's sell-off.
The falling markets tripled the bank's losses on Kerviel's deals. Six of his supervisors have since been sacked, SocGen's credit rating has been downgraded, and trust in even the most elite banks has been badly dented.
Without that single slip-up last Friday, Kerviel would have been free to plunge his bank even deeper into the red, and there is no reason to believe "le rogue trader" was the only trader in the world capable of breaking a bank.