The world or high finance is a-buzz regarding the expoits of "rogue" trader Jerome Kerviel. Many followers of this story are inetrested in how Mr. Kerviel kept his big bets hidden for so long. I would like to discuss why he did it and why it took so long for him to be caught.
Jerome Kerviel has stated that he wanted to prove that someone from modest beginnings and a non-descript educational background could trade with the big boys. Coming from a similar background, I can understand his feelings (though I cannot excuse his actions).
I too went to a non-prestigious university (CUNY) and come from a very middleclass background. I worked my way through school while holding down an operations job on a Wall Street trading desk. Eventually I landed a job trading corporate bonds. The traders who were from similar backgrounds as myself were cordial. Some were even supportive. The traders who attended prep schools and prestigious private colleges (some of them Ivy's) looked down there long noses at me. I was once told by a superior that they would never consider me a "real" trader, no matter what I did.
This was partially true. Eventually, I was given the responsibility of running my small firm's retail corporate bond / preferred security trading book. However, when bonus time came around, my bonus was a fraction of what some "better educated" traders in lesser positions. My base was also lower. Having a young family and a mortgage (and realized I was still being paid better than the general population) I kept doing my job producing the best years my firm's retail trading department ever had before or since. There was no monkey business, just smart trading within the firm's limitations. Eventually I traded government bonds, high yield and even helped out the municpal desk, gaining a deep knowledge of the fixed income markets. Still, I was a second class trader. My revenge came when my firm was purchased by a larger firm. All those traders were laid off and I was hired by the new owners. Some of these traders went on to be successful, others are out of the business.
How in the world did Jerome Kerviel's superieors. The 2/2/08 edition of the Wall Street Journal discusses how the controls in place at Societe Generale almost caught Mr. Kerviel and how he cleverly remained one step ahead of them until recently. Bull!
If Mr. Kerviel's superieors were doing there job, he would not have been able to have run his scheme for more than a month. Three factors came into play
1) Mr. Kerviel's superiors were blinded by dollar (euro) signs. Not just those generated my Mr. Kerviel, but those being generated in large numbers during the asset bubble known as the housing boom.
2) Societe Generale had too much faith in their own controls and never imagined that a middleclass boy from Britanny who attened a regional college could ever be intelligent enough to create such a scheme.
3) SG believed that it's highly-educated, elite management team and traders were infallible. If they couldn't conceive it, it couldn't be done. SG management still hasn't explained earlier writedowns unrelated to Mr, Kerviel's scheme.
Similar culture's of elitism exist at U.S. banks and brokerages. Some have pushed out talented old school traders and have repalced them with quants. The biggest offenders are some of the firms with he biggest writedowns. Who knows, maybe there will be a U.S. version of Soc Gen, unless it can be covered up before it leaks to the press.
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