Jerome Kerviel: Understanding Rogue Trading, Examples, and Consequences

Jerome Kerviel, a name that resonates with financial infamy, was a junior-level derivatives trader for the prominent French securities firm, Société Générale. His tumultuous journey began with a series of unauthorized and false trades spanning from 2006 to early 2008, resulting in a colossal loss of more than €4.9 billion in company assets. As we delve into the details of Kerviel’s life and actions, you’ll come to understand the complexities of rogue trading and its repercussions in the financial world.

Jerome Kerviel was born on Jan. 11, 1977, in Pont L’Abby, Brittany, France. He pursued higher education, earning a bachelor’s degree from the University of Nantes in 1999 and a master’s in finance from the University of Lyon in 2000.

In the summer of 2000, Kerviel embarked on his career at Société Générale at the tender age of 23. Initially stationed in the compliance department, he later transitioned to a junior trader position, focusing on derivatives.

Kerviel’s role was to capitalize on pricing discrepancies between equity derivatives and the market price of stocks on which those derivatives were based. He was tasked with balancing risk and reward, but his story took a dark turn as he delved deeper into the world of trading.

Before we dive further into Kerviel’s actions, let’s explore derivatives, the financial instruments at the heart of his trading strategy. Derivatives derive their value from an underlying asset, such as the price of corn, a stock, or an index. They come in various forms, including futures, options, and swaps.

Derivative trading involves managing risk, typically achieved by holding a long position (betting on an asset’s price increase) and a corresponding short position (betting on a price decrease). This strategy helps traders mitigate potential losses. For example, one might purchase Euro stock market futures while simultaneously shorting U.S. stock futures. Kerviel, however, chose to abandon this balance and make one-sided bets, leading to a high-stakes game that would ultimately cost him and his employer dearly.

With his background in Société Générale’s back office, Kerviel possessed an insider’s knowledge of the company’s trading policies. Exploiting this knowledge, he initiated a scheme in late 2006 and early 2008. To offset his one-sided bets, he created fictitious trades within the system’s computers and logs, rendering these transactions invisible to the bank’s oversight systems.

Initially, Kerviel’s strategy proved profitable. However, the success came with a looming threat. Fearful that the bank would uncover his deceit, he began intentionally generating losing trades to offset his initial gains, diving further into a web of deception.

In January 2008, managerial staff at Société Générale discovered the unauthorized trading activity. They took prompt action to unwind Kerviel’s positions, but the damage was done. The losses amounted to a staggering €4.9 billion, leaving an indelible mark on the financial world.

Kerviel maintained that his superiors were aware of his fraudulent trades but turned a blind eye as long as he was profitable. An appeals court in Versailles later concurred with Kerviel’s perspective, citing “managerial choices” rather than “occasional negligence” as the reason he escaped initial scrutiny.

The story of Jerome Kerviel remains an enigma in the world of finance. Accounts of his abilities as a trader and student vary. While some describe him as a “computer genius,” others portray him as an unremarkable trader.

Kerviel’s actions placed him among a notorious group of rogue traders who, collectively, have cost their employers billions of dollars through reckless and unauthorized trading activities. Notably, Kerviel did not personally profit from his risky trades.

During the legal proceedings, Kerviel embarked on a symbolic journey from Paris to Rome on foot to meet the Pope. Together, they discussed the pitfalls of capitalism and the financial industry.

Kerviel was eventually convicted of breach of trust and other charges in a French court in 2010. He received a minimum prison sentence of three years and was ordered to pay restitution of €4.9 billion. Despite his initial sentence, he served only five months in prison before his release. Additionally, his fine was later reduced to €1 million in 2016.

Jerome Kerviel, the rogue trader of Société Générale, left an indelible mark on the world of finance through his unauthorized and fraudulent trades involving derivatives. These actions led to a colossal loss of €4.9 billion for the bank. Kerviel’s legal journey resulted in a prison sentence, which he served briefly, and substantial fines that were eventually reduced to €1 million. His story serves as a stark reminder of the risks and consequences associated with rogue trading in the financial industry.

A rogue trader is an individual who trades on behalf of others, such as clients or a company, often engaging in reckless and speculative trading that defies company policies and risk management procedures. These actions frequently involve high-risk securities and significant capital investments.

Jerome Kerviel’s net worth is not in positive territory. Following his sentencing, he owed a staggering €4.9 billion, a sum later reduced to €1 million in 2016. Thus, he carries a negative net worth of approximately 1 million euros.

Currently, Jerome Kerviel works as an IT consultant at Lemaire Consultants, showcasing a transition from his tumultuous past in the financial sector to a different field.

Yes, Société Générale continues to operate as a global financial firm with a worldwide presence. Headquartered in Paris, the company offers extensive retail banking services, sales and trading, and investment banking.