Who Is Jerome Kerviel?
Let me explain who Jerome Kerviel is. He was a junior derivatives trader at the French securities firm Société Générale. He got charged with losing more than €4.9 billion in company assets through a series of unauthorized and false trades from 2006 to early 2008. When the managers found out about the tens of billions of euros in unauthorized trades, they quickly closed out the positions, which were mostly specialized equity arbitrage trades, to limit the fraud. Many of those trades ended up with heavy losses because the market was falling at the time.
Key Takeaways
- Jerome Kerviel is a French rogue trader convicted of conducting false and unauthorized trades at Société Générale.
- To offset his one-sided bets with the opposite position that did not actually exist, Kerviel created fake trades in the system's computers and logs.
- To conceal his success, he began creating losing trades intentionally to generate losses to offset his early gains.
- Kerviel's trades resulted in losses of €4.9 billion in company assets.
- Kerviel served five months in prison and was required to pay €4.9 billion in fines, which was later cut down to €1 million.
Understanding Jerome Kerviel
Jerome Kerviel was born on January 11, 1977, and grew up in Pont L'Abby, Brittany, France. He earned a bachelor's degree from the University of Nantes in 1999 and a master's in finance from the University of Lyon in 2000.
He joined Société Générale in the summer of 2000 at age 23, starting in the compliance department. By 2005, he moved to a junior trader role working with derivatives. His job was to exploit pricing discrepancies between equity derivatives and the underlying stock market prices.
Understanding Derivatives
Derivatives are investment instruments that get their value from another asset, like the price of corn, a stock, or an index. You have various types, such as futures, options, and swaps.
To manage risk in derivative trades, a long position is usually offset with a similar short position. For instance, if you buy Euro stock market futures expecting the market to rise, you'd typically short U.S. stock futures to profit if markets fall, since European and U.S. stocks often move together. Kerviel started making only one side of these bets.
Kerviel and Unauthorized Trades
With years in Société Générale's back office, Kerviel knew the company's trading approval and regulation policies inside out. He used this knowledge in late 2006 and early 2008 to cover his one-sided bets by creating fake opposite positions in the system's computers and logs, avoiding detection by the bank's oversight.
At first, these trades made profits. But with that early success, Kerviel worried the bank would spot the fakes. To hide everything, he started intentionally creating losing trades to offset his gains with losses.
In January 2008, managerial staff at Société Générale discovered the unauthorized activity and unwound Kerviel's positions. The final losses came to €4.9 billion. Kerviel claims his bosses knew about the fraudulent trades but ignored them while he was profiting the bank. In 2016, an appeals court in Versailles agreed, ruling that managerial choices, not just occasional negligence, allowed his crimes.
Special Considerations
There are mixed reports on Kerviel's skills as a trader and student. Professors at the University of Lyon said he was an average student. The former Bank of France governor called him a 'computer genius,' but colleagues say he wasn't a standout trader.
Importantly, Kerviel didn't personally profit from his reckless trading, yet he joins the notorious rogue traders who have cost their employers billions through risky, unauthorized activities.
Fast Fact
While his case was under review, Kerviel walked from Paris to Rome to meet the Pope, and they discussed capitalism's issues.
Conviction and Aftermath
In 2010, a French court convicted Kerviel of breach of trust and other charges. He got at least three years in prison and had to pay €4.9 billion in restitution. He served five months in 2014 before release, and his fine was reduced to €1 million in 2016.
Jerome Kerviel FAQs
What does rogue trader mean? A rogue trader acts on behalf of clients or a company but does so recklessly, often ignoring policies and risk procedures, usually with high-risk securities and large capital on speculative bases.
What is Jerome Kerviel's net worth? He has a negative net worth. After sentencing, he owed €4.9 billion, reduced to €1 million in 2016, so about -€1 million.
What does Jerome Kerviel do now? He works as an IT consultant at Lemaire Consultants.
Is Société Générale still in business? Yes, it's a global financial firm headquartered in Paris, with offices worldwide, offering retail banking, sales and trading, and investment banking.
The Bottom Line
Jerome Kerviel traded derivatives rogue-style at Société Générale, causing €4.9 billion in losses. He was sentenced to three years, served five months, and his fine dropped from €4.9 billion to €1 million.
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