A trader with the French bank Société Générale has been implicated in fraud that cost the bank $7.3 billion. Knowledgeable of the various security mechanisms meant to prevent this sort of fraud, Jerome Kerviel was able to hide his transactions from controllers. It appears that Kerviel did not perpetuate the fraud for his own gain. In the words of this Washington Post article*, Kerveil was “creating losses through successive transactions of buying dear and selling cheap.”

There are several lessons to be taken from this event. The first is that even powerful financial institutions can be vulnerable at points they have not even considered. Nick Leeson, though similar unauthorised transactions, caused the collapse of Baring Bank, one of the world’s oldest financial institutions. Second, large banks can be considered so important for the economy that a portion of their risk is made public. Although French President Nicolas Sarkozy has said there will be no bailout for SocGen, I will not be surprised if some sort of backdoor assistance is offered. Third, this $7.3 billion did not simply disappear. As the futures in which Kerveil was investing were heading south, sellers were seeking buyers. How often did Kerveil step into that fray and alleviate the potential losses of another player in the market? Essentially, SocGen subsidised other market participants to the tune of $7.3 billion.

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D. T. Cochrane is a new father who thinks about business, power and social economic change. His profile picture is of the Crab Nebula. It is the remnants of a supernova. Current scientific theory says that they seed the Universe with the ingredients of life.
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