1. What are the motivations of individuals who engage in unethical
conduct in organizational settings? Why did Kerviel do it? How did he justify his activities?
2. How did Jérôme Kerviel manage to conduct his unhedged trades? Why were they not detected by the bank’s controls? Was the bank in any way complicit in Kerviel’s highrisk
3. How could the bank’s control systems be improved to prevent rogue traders?
4. Does this incident shed any light on the causes of the 2008 financial crisis and the failure of banks to adequately manage and price risk? If so, what are the implications for bank regulation?
The Rogue Trader Jérôme Kerviel and his lawyer, Elisabeth Meyer
Photo © Agence France-Presse 01/2011-5613
This case was written by Mark Hunter, Adjunct Professor, and N. Craig Smith, INSEAD Chair in Ethics and Social
Responsibility. It is intended to be used as a basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright © 2011 INSEAD
TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION
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COPYRIGHT OWNER. A Routine Control Discovers the Unthinkable
The end of 2007 had been dreadful for the French Stock Exchange in general, and in
particular for the Société Générale (SocGen). Rumours of the exposure of the Eurozone’s
fifth-largest bank to the subprime credit crisis1 in the United States had driven down
SocGen’s market capitalisation by 23% since the summer. CEO Daniel Bouton had repeatedly
assured investors that “the situation is under control… our economic model is sound and our
strategy is working,”2 but investors remained anxious. On “Black Tuesday”, 15 January 2008,
fears that major US financial institutions were more exposed to defaulting mortgages than
they had previously admitted set off a global slump in stock markets.
That same Black Tuesday, a review of trading operations by the Direction Financière
(Accounting and Financial Affairs department, ACFI) was underway in SocGen’s Corporate
and Investment Banking division (SGCIB).3 (See Exhibit 1 for an organization chart). A main
purpose of the review was to ensure that the trades conducted by SGCIB’s Global Equity and
Derivatives Solutions (GEDS) unit met regulatory requirements under the Basel Accords,
concerning the amount of capital a bank must have on hand relative to its risk-adjusted assets
in case of unexpected losses.4 (See Exhibit 2 for an organisation chart of GEDS.).
At SocGen, equity derivatives – financial instruments whose value is based wholly or
partially on equities – were a major profit engine. Analysts believed that equity derivatives
might account for up to 80% of all SocGen’s investment banking revenues, worth several
billion euros annually.5 That took a lot of trading, and from time to time the “Cooke ratio” of
4 5 “Subprime” mortgage loans were initially made to individuals whose ability to pay might be doubtful.
These loans were then used as assets to back securities. Subprime loans made homeowners feel richer by
simultaneously monetizing their homes, and helped to boost housing prices, which in turn made it possible
for owners to obtain increasingly larger mortgages. However, interest payments were high, and when
homeowners defaulted massively on mortgages, securities based on the loans also lost their value. By the
fall of 2007 it was plain that even major financial institutions in the US were at risk of bankruptcy as a
direct consequence. For a brief account of this period, including graphs, see “The Current Crisis Explained
in One Thousand Words,” GlobalEurope Anticipation Bulletin No. 17, 16 September 2007, via
Gaëtan de Capèle, Anne de Guigné, et Yves de Kerdrel, « DB : La crise est sous contrôle ». Le Figaro, 14
In French, the division is called la Banque de Financement et d’Investissement.
There are two Basel Accords, both due to the Basel Committee on Banking Supervision, which includes
central bank and market regulator representatives of Belgium, Canada, France, Italy, Japan, the
Netherlands, the United Kingdom, the United States, Germany, Sweden, Spain and Luxembourg. The
committee issues recommendations which are typically enacted into law at the national level. The Basel II
accord focused specifically on the amount of capital that banks must set aside to cover financial or
operational risks, according to a simple principle: The more risk a bank assumes, the more capital it must
In 2004, 2005 and 2006, SocGen’s annual reports show €4.7, €5.7 and €6.9 billion of revenues for
Corporate and Investment Banking. Derivatives, which largely involve bets about how different
combinations of assets will perform in the future, dominated the CIB section of SocGen’s annual report for
2007. CIB reported itself the world leader in warrants, which enable investors to buy stocks at a specified
price, often to enhance the yield of bonds, CIB also claimed second place worldwide in exchange-traded
funds. These funds offer investors the valuation features of a mutual fund, combined with tradability that
allows investors to engage in arbitrage between the market value of fund shares and the value of the
underlying assets. The latter were considered highly innovative products. Other major activities included Copyright © 2011 INSEAD 1 01/2011-5613 capital-to-assets fell too low. Often the problem was a difference in values between the time a
trade was made and the time it was finalised. ACFI would identify and correct the
discrepancy to reflect the final value.
A controller identified in reports only as “Agent 6”, working in the Accounting and
Regulatory Reporting sub-division of ACFI, noticed a problem with the Cooke ratio for eight
trades that originated from a trading desk called Delta One early in January 2008. The desk’s
main product was “turbo warrants”, which are a form of “barrier” options. Such options
become active or inactive when a price barrier is breached. The barrier can be above or below
the spot price of the option. The effect is to provide the insurance value of an option (one sets
a limit to the price and hence to one’s risks) while paying less of a premium, because what
one buys is the barrier, and not an ordinary option to buy or sell at a given price.
From another, more basic perspective, Delta One’s trade in turbo warrants was a form of
arbitrage. Arbitraging exists because markets are somewhat inefficient, so identical or highly
similar securities can be priced differently on different exchanges. Thus by moving securities
from one market to another, an alert trader can make essentially risk-free profits. The profits
will generally be small, unless the volumes exchanged are massive. But on the Delta One
desk, traders typically placed sums well under €1 million, and their combined risk, including
hedges, could not exceed €125 million.6 GEDS aimed at having €115 billion of assets under
management by 2010,7 so this was small beer.
Yet the sums that attracted the controller’s attention were, she said, “hyper significant” – a
total of €1.5 billion.8 Even more worrisome, there were no apparent counterparties to the
trades – the opposing buy or sell side of the deal – meaning that the bet might be unhedged.
Delta One traders were not supposed to make such trades. For example, if a trader bet that a
given security would rise, he or she must also bet that a similar security would fall; thus the
risk for SocGen was normally limited to the small difference in price between the two
securities. This time, however, the exposure might be total.
Agent 6 called a colleague in the GEDS sub-division that managed trading, sales and financial
engineering for an explanation. Agent 6 was told that the trades had been cancelled a week
ago, and was shown e-mails from the trader, Jérôme Kerviel, to prove it. But she could find
no other evidence to confirm the cancellation. Pressed for further details, Kerviel, a very busy
fellow in his early 30s, gave answers that Agent 6 could not understand. That was not
unusual: ACFI personnel were often young and lacked market knowledge, especially
compared to traders. That was one reason they typically deferred to traders when tension
But Agent 6 did not give up, and sought help from her hierarchy. The matter dragged on past
20:30 that night, then all through the next day, as one controller and manager after another –
two dozen in all – sought to clarify Kerviel’s business in a way that would satisfy regulations. 6
8 derivatives based on interest rates and currencies. CIB was also the number one stock and bond trader on
the Euronext market, where its expertise in programme trading was widely recognised.
Société Générale, General Inspection Services, “Mission Green: Summary Report.” 20 May 2008, p. 29.
Hereafter called Mission Green.
Document de Référence 2008, p. 5. The name is French for “annual report.” All such documents cited here
refer to Société Générale.
All details concerning the discovery of Kerviel’s actions are drawn from Mission Green, pp. 31-34. Copyright © 2011 INSEAD 2 01/2011-5613 Finally, on Friday 18 January, Kerviel explained the source of the problem: the wrong
counterparty for his trades was listed in the computer. He provided the name of a trader from
another firm as the right counterparty.
It seemed like good news on a dark day. SocGen had just lost another 8.2 % of its market cap,
after Christian Noyer, Governor of the Bank of France, announced that SocGen and another
major bank must lower the valuation of their assets in the US. Kerviel left for a weekend in
the Normandy resort of Deauville.
The next morning, a SocGen manager discovered that Kerviel’s “counterparty” knew nothing
of the trades. Kerviel was recalled to Paris and questioned by top managers, including JeanPierre Mustier, the head of CIB and himself a former trader. Further review showed that
Kerviel had been conducting unauthorised trades for months, and had made a profit for
SocGen of €1.4 billion on them by the end of 2007.
Mustier recalled telling Kerviel, in order to keep him talking, “If you really earned [so much],
you’re really good. What you did is annoying, but it’s not major.” Kerviel replied: “As long as
you need me, I won’t do anything stupid.”9 Another source remembered the scene differently:
Mustier said, “You have broken the rules. You understand that we can’t keep you. But don’t
worry, my wife works for a hedge fund. She will easily find you a job.”10
The collegial mood vanished with a fresh discovery: since 2 January, Kerviel had built up an
unhedged long position on index futures. He had bet €49 billion, equivalent to 181% of the
SocGen group’s total capital of €27 billion.11 A “long” bet means the bettor hopes the markets
will rise. They were falling. No bank has the right to make such bets. No bank could survive
such a bet if the markets continued to fall. SocGen in Crisis
On Sunday, 20 January, SocGen CEO Daniel Bouton offered his resignation to the board but
it was rejected. The issue, said Bouton, “had nothing to do with a catastrophe due to our
strategy [or] a false appreciation of our risks… The board therefore considered [that] I had to
set the bank straight.”12 SocGen’s unions agreed, believing the bank’s survival was at stake:
“We perfectly understood that [h]is resignation would allow a liquidator to be named at the
head of the bank.”13
The following morning, Bouton pleaded with Michel Prada, president of the Financial
Markets Authority (AMF), the French regulator, for time to quietly unwind Kerviel’s
13 Géard Davet , “19 janvier 2008, le jour où tout bascule”, Le Monde, 15 February 2009.
The incident was originally reported by William Emmanuel in his book “Trader: l´Affaire Kerviel ou la
folie du système financier”. Paris: Ed. du Toucan, 2008. The author, a correspondent at Reuter’s Paris
bureau, published this book within three months after the scandal began.
Source: Document de reference 2008, p. 19.
Anon. “La SocGen surmontera rapidement le choc – Bouton”. Reuters, 25 January 2008.
Michel Marchet, National Delegate at SocGen for the CGT union, quoted in Anon., "L'immixtion des
politiques n'est pas saine". Challenges.fr, January 29 2008, via
ne.html. Copyright © 2011 INSEAD 3 01/2011-5613 positions and raise new capital. Though SocGen was legally obliged to immediately inform
the markets of events that could affect its stock price, Prada believed “it would be very
dangerous to announce this fraud without also showing an appropriate response”. Prada
implied that not only SocGen but also the French banking system was threatened. Invoking an
exception to the law, he granted Bouton three days to act before the stock exchanges were
informed. It was a “heavy secret” to carry, Prada said later.14
In one way it was no secret at all. Over the next three days, SocGen accounted for between
5.7% and 8.1% of the total volume in futures indexes on the EUROSTOXX and DAX
exchanges as Kerviel’s stakes were dumped.15 Because “every sale of a title on a market
has… a lowering effect on its price”,16 SocGen would be selling at a loss. It did not help that
the DAX index had already fallen by nearly 10% in the weeks before SocGen dumped
Kerviel’s positions. As the International Herald Tribune commented, “The timing could
hardly have been worse.”17 After subtracting €1.4 billion in profits that Kerviel’s unauthorised
trades had made for the bank in 2007, SocGen’s losses were €4.9 billion.18 To cover the
losses, J.P. Morgan and Morgan Stanley agreed to provide €5.5 billion in new capital.
By 23 January, SocGen was in control of the situation. The Minister of the Economy,
Christine Lagarde, and President Nicolas Sarkozy were informed at 08:00.19 Christian Noyer
informed his counterparts at the European Central Bank and the US Federal Reserve Bank.
Finally, Bouton revealed the affair in a public letter and a newspaper interview on January 24:
“The management of Société Générale has discovered an internal fraud of major size [that
was based on] extremely sophisticated and varied techniques.” He said the holes in SocGen’s
controls had been identified and fixed, and that “I have put an end to the functions of the
managers, including executives, responsible for the supervision and control of these
operations.” The loss of €4.9 billion would “not stop the bank from earning a net profit for
2007”. New capital would guarantee that SocGen “will regain the profitable growth which has
characterised it for many years”. Bouton also revealed that further subprime losses amounted
to €2 billion.20 14 15 16
20 Société Générale : la Fed et la BCE prévenues avant l'annonce des pertes
Christine Lagarde, “Rapport au Premier ministre concernant les enseignements à tirer des événements
récemment intervenus à la Société Générale”. Ministry of Finances, 8 February 2008, p. 4. Hereafter called
Nicola Clark and David Jolly, “Société Générale loses $7 billion in trading fraud”. International Herald
Tribune, 24 January 2008.
France’s official Commission bancaire (banking commission) noted in July 2008 that in SocGen’s
statements, “the establishment speaks of a loss of €4.9 billion, which corresponds to the aggregation of the
loss of 2008 with the profits realised in 2007 (€1.4 billion euros) on the fraudulent positions on futures of
Jérôme Kerviel". This report is not indexed on the site of the commission at www.banque-france.fr. It is
quoted from Nicolas Cordi, “Qui a perdu 4,9 milliards d'euros à la Société Générale?”. See
www.libération.fr, Nov. 19 2008, at http://cordonsbourse.blogs.liberation.fr/cori/2008/11/dernireauditio.html.
Rapport Lagarde, p. 3.
Daniel Bouton, open letter to the public, 24 January 2008, quoted from Agence News Press. Copyright © 2011 INSEAD 4 01/2011-5613 Those losses were hardly insignificant, yet far lower than the subprime damage inflicted
through the beginning of February 2008 on Citigroup (US$18 billion), UBS ($13.5 billion),
Morgan Stanley ($9.4 billion), Merrill Lynch ($8 billion), HSBC ($3.4 billion), Deustche
Bank ($3.2 billion) and Bear Stearns ($3.2 billion).21 In a matter of weeks, Bear Stearns
would collapse under the weight of its losses and be taken over by JP Morgan Chase at a fire
Bouton indicated that now the worst was behind SocGen. He added that for six months he
would take no salary or bonus. It was a gesture of solidarity with his shareholders and
employees. But debate over who bore what responsibility was only beginning – on the
internet as well as at the highest levels of government and civil society. Was Kerviel truly the
criminal genius depicted by SocGen’s leaders, or was he being punished for his bosses’ sins?
The most glaring question was also the hardest to answer: How could an institution whose
leadership was generally regarded as the best in France come to this? SocGen’s History: From Private to Public to… Private Again
The “Société Générale” – literally general business firm – “to promote the development of
commerce and industry in France” was founded in 1864 under the leadership of industrialist
Eugène Schneider. The bank survived the 1930s Depression largely by working on loans for
the State and its colonies. After the war, it was nationalised. In the 1960s, the bank expanded
both at home and abroad. Deregulation in France allowed SocGen to gain expertise in capital
markets and investment vehicles. In 1986, the parties of the Centre-right took control of the
National Assembly from the Socialists, and symbolised their vision of the economy by
privatising SocGen. There were charges of partisanship when a “hard core” of shareholders
was constituted by the government, ostensibly to protect the bank from predators. In 1988, a
takeover attempt by financiers close to the Socialists was launched but failed. SocGen was
clearly a strategic asset for the French elite. Daniel Bouton: The French Elite at SocGen
SocGen operated on a global scale, yet it was widely believed that non-French managers hit a
“glass ceiling” in their careers there. Daniel Bouton candidly admitted in 2003: 21
22 Anon., “Subprime Pain: Who Lost How Much?” Rediff News, 6 February 2008, via
At the moment Bear Stearns collapsed, investment bank Lehman Brothers Holdings Inc. announced record
quarterly profits of $1.5 billion. CEO and Chairman, Dick Fuld, claimed that "We expect to see various
opportunities from the market dislocation." (Quoted in Grace Wong, "Lehman sees more subprime woes.”
CNNMoney.com, March 14 2007, via
http://money.cnn.com/2007/03/14/news/companies/lehman/index.htm.) Lehman would deny that it faced
losses from subprimes until June, when it disclosed a $2.8 billion quarterly loss. By September, after
rebuffing offers from outside investors, Lehman was bankrupt. The US government allowed it to fail. This
is widely considered as the moment when the financial crisis became catastrophic and global. Copyright © 2011 INSEAD 5 01/2011-5613 “There is no ceiling but the point is that we have not yet succeeded in having
enough elevators to bring the non-French people to the top executive positions.”23
Nationalisation had bequeathed SocGen an internal culture modelled on the French State,
where leadership is the province of an elite meritocracy. The elite’s core consisted of
graduates of a very few state-run grandes écoles (literally “great schools”).24 The greatest of
all was the National Administration School (known by its French acronym, ENA, which
admitted only 90 French students and 40 foreigners each year.25 From 1984 to 2007, French
Prime Ministers had been ENA graduates in all but four years.
Bouton, who was born in Paris in 1950, graduated from ENA at the young age of 23 and
became the State’s youngest Inspector of Finances. By 1988 he was Director of the Budget,
the highest non-political job in the powerful Ministry of the Budget. He joined SocGen in
1991 and became executive vice president for investment banking and risk management in
1993, under the presidency of Marc Viénot, an executive with an unmatched reputation for
integrity and prudence. When Bouton succeeded Viénot as CEO and chairman of SocGen in
1997, France was just emerging from a wave of corruption cases that culminated in the
suicide of Prime Minister Pierre Bérégovoy in 1993, and the indictment (and later conviction)
of former Elf CEO, Loïk Le Floch-Prigent, on embezzlement charges. Legislators responded
by creating new categories of business crime. Bouton agreed that a liberal economic system
“cannot tolerate fraud”, but said it was an “illusion” to imagine that “the multiplication and
aggravation of penal sanctions can constitute an effective protection against the fundamental
risks of strategic error or poor management.”26 The French elite had always taken pride in
serving the state above private interests; now members like Bouton were seeking to protect
the private sector from the tradition of centralised economic control. SocGen’s Strategic Dilemma
Bouton’s first great strategic move, an attempt to amicably acquire the Paribas27 bank, led to a
hostile takeover attack on both by the Banque Nationale de Paris (BNP). Bouton managed to
keep SocGen intact, but Paribas was seized by BNP. The event made it cruelly evident that
SocGen lacked scale. Euromoney magazine warned in 2003:
“SocGen is big enough to be important and to count among the core group of
major European companies but not of the size to play with the big boys... [so]
Bouton has only two options: eat or be eaten.”28 23
27 28 Jennifer Morris, “France's banking model.” Euromoney, April 2003, pp. 42-43.
In French, grandes écoles. Besides the Ecole Nationale d’Administration (ENA), the most famous and
influential is the Ecole Polytechnique of Paris, founded by Napoleon.
Source: ENA. See http://www.ena.fr/index.php?page=formation/initiale/statistiques
Daniel Bouton, Président du groupe de travail, “Pour un meilleur gouvernement des entreprises cotées.”
Medef, Sept. 23 2002, p. 2.
Originally the Compagnie Financière de Paris et des Pays-Bas (Finance Corporation of Paris and the
Netherlands), later renamed the Compagnie Financière de Paribas, and finally Paribas just before its
Jennifer Morris, “The Crisis of Identity at Société Générale”, Euromoney, April 2003, p. 36-41. Copyright © 2011 INSEAD 6 01/2011-5613 The path ahead was narrow. On the one hand, SocGen’s retail base in France was its fortress,
as Bouton explained:
“We have a model in which the client is tied to the bank for a long time. Our
banking relationships are on average 17 years old and we sell 7.3 products per
client. In the US, it’s an average of three. So the business model is one of highquality, deep, broad relationships between the customer and the bank. [That]
makes the revenue base extremely resistant and makes it difficult for any player to
enter the French market.”29
However, such relationships were slow and costly to construct and maintain. Moreover, its
mainly French clients and shareholders tended to be conservative and risk-averse. So when
asked if SocGen might increase revenues by growing its proprietary trading activities, using
its own capital, Bouton dissented: “Proprietary trading is something that has to be managed in
a very restricted way. We are not casinos and we do not wish to become casinos.”30 Jean-Pierre Mustier Transforms SGCIB
Answers to this dilemma came from Jean-Pierre Mustier, who became head of SGCIB in
2002, at the age of 42, after his predecessor died in a car crash. Mustier had attended the
Ecole Polytechnique and the Ecole des Mines, both grandes écoles where engineering was the
basic curriculum. But he cultivated an image as a new kind of French manager – a former
paratrooper whose career had begun on the trading floor instead of working for the State.
Where the French elite affected a cordial but distant manner, Mustier conveyed enthusiasm
and intense interest. A colleague said, “He knows the name of every person who works for
him, what they do, how long they’ve been doing it and how much they get paid.”31
Mustier had joined SocGen in 1987, when the bank created a world-leading options trading
operation that centralised computer, mathematical and trading resources. He recalled that with
his boss Antoine Paille, “We explored the optionality of just about anything and everything in
an absolutely exhaustive, systematic way.” Thus Mustier became a world-renowned creator of
the “high-margin intellectual property” of sophisticated financial instruments.32
In 2001, he persuaded Bouton to combine SocGen’s debt capital operations with the financing
division, thus bringing loans, bonds and interest rate and currency hedging into the same shop
as structured finance products. These were quite different cultures, but within a year of the
change SocGen had moved firmly into the top 10 players for Euro-denominated bonds for the
Under Mustier, SGCIB and SocGen’s subsidiary Lyxor Asset Management functio...
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