PARIS -- In the early afternoon of Saturday, Jan. 19, Jérôme Kerviel was on a weekend break by the sea when he got a call on his mobile phone from his boss at Société Générale.
"We need some explanations," said a manager of Delta One, a lowly trading unit that handled humdrum, low-risk trades, according to people familiar with the conversation.
Mr. Kerviel, who was in Deauville, a fashionable seaside resort famed for its horse races and palatial casino, was told to get back to the office in Paris. He caught a train for a three-hour journey to Société Générale's headquarters.
Today, two weeks after Mr. Kerviel's beach break was cut short, a picture is starting to come together of the junior trader who, undetected, caused the largest single trading hit in banking history. Previously unreleased details of the transaction that first brought him down, along with interviews with bank executives, prosecutors and Mr. Kerviel's own lawyers, reveal a man who knew the risks but thought he could beat them -- and whose undoing has exposed the frictions within one of France's proudest and most elite banks.
Calling in a Doctor
Mr. Kerviel arrived at the bank around 7 p.m. on the night of Jan. 19. He was marched into the offices of Jean-Pierre Mustier, a former paratrooper and academic whiz with a buzz-cut who heads Société Générale's investment-banking division.
At the beginning, Mr. Kerviel was questioned about a single trade that had been discovered the evening before and aroused concern: a transaction with a German brokerage house that had seemingly lost the bank €1.5 billion ($2.22 billion). He gave little away at first. "He's a very silent man," said a senior official. "It was a lengthy process."
As the meeting dragged on into the night, Mr. Kerviel eventually admitted that the German trade was fake, according to bank officials. Worse, it was just one of numerous fictitious transactions booked by Mr. Kerviel to mask a mass of real and highly risky deals. Mr. Mustier and fellow executives grilled Mr. Kerviel until three in the morning.
Stress levels rose to the point that, fearful Mr. Kerviel might crack under the strain, they called in a doctor. After monitoring the trader's condition, the doctor said he could go home for a few hours sleep and then return in the morning, according to people familiar with the meeting.
By Sunday, Société Générale was forced to confront a shocking truth: Mr. Kerviel -- a junior trader paid a modest annual base salary of around $70,000 -- had gambled more than the bank's entire worth in high-risk bets. Some €50 billion was on the table -- and the roulette wheel was about to start spinning again with the opening of markets on Monday morning.
Mr. Mustier entrusted one of his best traders with the task of unwinding the bets. The result, by the time the information was released to the public on Jan. 24, was a loss of $7.2 billion -- the largest single trading hit in banking history.
The disclosure shook world markets and has led French bank BNP Paribas SA to begin considering a bid for Société Générale. The bid could include French bank Credit Agricole SA.
Numerous accounts from those involved, including Mr. Kerviel's own testimony, suggest that at the root of the debacle was an unstable mix of forces: the frustrated ambitions of a striving provincial and the hubris of his managers.
Each tended to disdain the other. Mr. Kerviel admits to openly flouting the rules imposed by his superiors. Bank executives, meanwhile, say they missed a series of warnings, both internal and from outside, about the risks Mr. Kerviel was taking.
The trader, in his testimony to investigators, scoffs at the bank for missing an elementary sign that something was wrong: he only took four days of holiday last year. "It is one of the first rules of internal controls: a trader who doesn't take holidays is a trader who doesn't want his books to be seen by others," he said.
Mr. Kerviel, the son of a hairdresser and metal worker raised in a small town in Brittany, occupied one of the lowest perches in derivatives trading at the bank. But he yearned to prove that he could match and even exceed better educated and more highly valued colleagues. At one point last year, said a lawyer involved in the case, Mr. Kerviel asked for a bonus of between €600,000 and €1 million -- far beyond what a trader at his level would normally receive.
Mr. Kerviel was well aware of his lot at the bank. "But this did not dampen my ambitions," he said during questioning by police last weekend, according to a partial transcript.
|He thought he had a special flair': Prosecutor Jean-Claude Marin, left, on Mr. Kerviel|
While Mr. Kerviel burned with a sense of his own worth, Société Générale paid little attention to him or other nuts-and-bolts traders on Delta One and focused instead on nurturing so-called "quants," traders with advanced academic degrees who used complex mathematical models to make money for the bank.
For many years, this approach paid off. Société Générale earned a reputation as a world-class center of sophisticated derivative trading. Its prestige seeped into popular culture: In the 1999 movie "Rogue Trader," a film chronicling the collapse of Barings Bank, Société Générale is mentioned as the rising trading power.
The quants, many of them Ph.D.s in mathematics or astrophysics, mostly came from elite French colleges, as did Mr. Mustier, the head of investment banking and a graduate of two of France's most selective engineering schools. Mr. Kerviel, in contrast, went to second-tier colleges in Nantes and Lyon, where he studied to become a back-office controller.
Even when confronted with the first evidence of the audacity and scale of Mr. Kerviel's misdeeds, "we didn't think it was possible," said a senior Société Générale executive. "I kept thinking: Who is this guy?"
Société Générale, a bank that traces its roots to Napoleon III in 1864, has staked its modern future in part on its mastery of its highly-complex, mathematics-driven equity-derivatives trading business. It is a big money-spinner and powerful marketing tool for the bank.
In the fall of 2005, Mr. Mustier and a lieutenant gave a presentation of the business at the bank's mirrored-glass, multitower headquarters in Paris. The title of the pitch: "Well-armed to outperform the industry."
'Bingo, 500,000 Euros'
At the same presentation, executives played up the computer systems and staff the bank used to ward off risk. The bank's equity-derivatives unit hadn't had any "major incident" in 15 years, they said.
Only a few months earlier, Mr. Kerviel had joined this very division of the bank. His unit, Delta One, was the lowest rung on the ladder. Trading required little of the mathematical sophistication used by Société Générale's big-time derivatives traders, the "quants."
Mr. Kerviel had dual tasks. The first was selling packaged investment products with lofty names such as "Everest" or "Kilimanjaro."
His other job consisted of betting on whether European stock markets would rise or fall. The roughly 20 traders on the Delta One desk were supposed to offset each bet that a stock index would rise with another bet in the opposite direction in order to keep risk at minimum levels. The difference between the parallel bets would generate either a profit or a loss.
Even though he was low in the pecking order, Mr. Kerviel believed he had the talent to excel and was determined to prove it.
"He thought he had a special flair, a capacity to sniff out market trends," said Jean-Claude Marin, the Paris prosecutor involved in the case.
Within months of joining Delta One, Mr. Kerviel began putting his chips all in one direction, rather than hedging bets as he was supposed to do.
For example, in the summer of 2005, he bet on a market tumble. Soon after, a group of Islamic suicide bombers attacked the London transport system. This sent European markets into a dive and Mr. Kerviel's fortunes soared. "Bingo, 500,000 euros," Mr. Kerviel said, recalling the episode during his testimony to investigators. He said he was "both proud and surprised by the results," and this made him want to continue. "There's a snowball effect."
Mr. Kerviel's jubilation fed what Mr. Marin, the prosecutor, last week described as "an addiction."
For the next 18 months, Mr. Kerviel kept breaking the rules, but within modest margins, according to both the trader's testimony and Société Générale officials.
He knew how to avoid detection, having started his career at the bank in 2000 in the back-office, or so-called "mine," where hundreds of clerks process and monitor transactions of their better-paid trading colleagues.
By January 2007, Mr. Kerviel was making bolder bets -- and getting away with it even when he lost money.
He wagered, for example, that the German share index DAX would fall. Instead, the index increased from 6596.92 to 6789.11 that month, leaving him in the hole. But, he told prosecutors, the loss went unnoticed by his managers because during that period of the year "there is no cross-checking control within SocGen."
Jean Veil, a lawyer for Société Générale, says the bank had rigorous controls throughout. Bank officials say they couldn't detect Mr. Kerviel's gains or losses because he masked them with fake trades, creating the illusion that all his positions were hedged.
By February 2007, the markets dipped slightly, and Mr. Kerviel was able to trade his way from a large loss to a gain of €28 million. He told prosecutors that he was "proud and satisfied" by this change of fortune.
By early spring 2007, however, the subprime-mortgage market in the U.S. put Mr. Kerviel and many other investors and traders around the world on a roller-coaster.
In his testimony, Mr. Kerviel says that he began to read up on the subprime woes in the U.S. He noticed that many experts believed the subprime problems wouldn't halt the markets' upward trend. He decided to bet that it would.
Initially, he was wrong. Between March and July, the market rose, exposing him to a large potential loss. Société Générale said that at one point during this period Mr. Kerviel had an unhedged exposure worth €30 billion, with a net loss of €2.2 billion.
In early April 2007, according to Mr. Kerviel's testimony, a Delta One manager received an email from Société Générale's back office warning of a problem and confronted him about it. "I was told to sort it out," Mr. Kerviel said. Société Générale says that on such occasions Mr. Kervial would often produce fake emails to calm concerns.
But by July, the market dropped, reversing Mr. Kerviel's losses. Suddenly Mr. Kerviel found himself with a €500 million gain.
This created another problem: how to tell his bosses. He had outsmarted the market but couldn't boast about it because it would reveal that he had been wagering way beyond what he was supposed to and hiding the bets with fake trades.
"I found myself very intimidated by these 500 million euros and, above all, by not knowing how I would let people know about it," Mr. Kerviel said.
Mr. Kerviel claims that the bank's security systems often sounded the alarm, but he would easily deflect inquiries. But at a modern glass building on the western outskirts of Frankfurt, Mr. Kerviel's trades were getting noticed.
A Close Call
On Nov. 7, the Trading Surveillance Office at Eurex, the derivatives exchange run by German exchange group Deutsche Börse, sent an email to Société Générale to find out why Mr. Kerviel was sending a massive volume of trades through the German futures exchange, Société Générale officials said.
The bank's back office forwarded the email from Eurex to Mr. Kerviel, who skirted the request for details by saying he didn't want to reveal his trading strategies to competitors, according to Société Générale's lawyer.
Eurex sent a second email, saying it needed a better explanation. In the end, Mr. Kerviel managed to provide a response that convinced his bank and Eurex that there was nothing untoward.
By the end of December, Mr. Kerviel's books had a gain of €1.4 billion -- all of which was hidden from the view of his supervisors.
By now, keeping all his trades hidden required constant juggling and vigilance. He needed to regularly delete and re-enter his fake trades in order to avoid being detected. Mr. Kerviel continued skipping holidays. In one instance, he told managers that he was in no mood to take time off because it would remind him of his recently deceased father, according to Société Générale officials.
In January of this year, as markets churned, Mr. Kerviel was scrambling to conceal the €1.4 billion gain in his book.
On Jan. 3, the trader confected a series of fictitious transactions to mask the gain. He booked a trade in the name of a German brokerage house.
The move triggered an alarm bell within Société Générale's systems, requiring the bank's back office to check the credit worthiness of the brokerage.
When asked for details, Mr. Kerviel tried a last gambit: He said he had made a mistake naming the brokerage and that actually the transaction was with a more respected bank, Deutsche Bank, according to a Société Générale lawyer.
The back office began a series of checks. Mr. Kerviel kept trading. By the evening of Friday, Jan. 18, previous gains had evaporated. Mr. Kerviel was sitting on a hole of around €1.5 billion.
Having weathered previous close calls, Mr. Kerviel figured he could fix the problem at the start of trading the following Monday, according to his testimony. He went to the beach in Deauville.
But that night, the risk-management system he had fooled so many times picked up on his position. Checks revealed that Deutsche Bank hadn't recently traded with Mr. Kerviel. Mr. Mustier, the head of investment banking, got a call late Friday to tell him this.
The following morning, Mr. Mustier and other executives gathered to dig into Mr. Kerviel's books. The trader got a call on his mobile phone summoning him back to Paris from the seaside.
Grilled late into the night at Société Générale's headquarters, Mr. Kerviel acknowledged that the trade with Deutsche Bank never existed and then revealed far more disturbing news: his books contained genuine trades that exposed the bank to a €50 billion risk. A fire warden on duty on Saturday night recalls seeing Mr. Kerviel leave. "He was not looking so good," the guard said.
A week later, Mr. Kerviel turned himself into police. After two days of questioning, investigators asked Mr. Kerviel: "Are you a gambler?
"No," the trader replied. "I shoot pool."