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05 March 2024

Rogues exhibit Napolean Syndrome

By Ryan Harrison


Jerome Kerviel, the man whose trading losses cost Société Générale $7.2 billion (Dh26.bn), has displayed all the classic symptoms of the Napoleon Syndrome. France’s greatest dictator rose from his relatively humble roots in Corsica to shake the foundations of French society and economy, leaving a lasting footprint on the world.


Kerviel’s journey from his small town of Pont L’Abbe, with a population of 7,800, to the employee at France’s second-largest bank who sparked the world’s biggest-ever trading loss has striking echoes of the Napoleonic condition. Previous sufferers have included Nick Leeson, who before bringing down financial goliath Barings in 1995 with his Dh3.11bn of secret losses, worked as a clerk with private bank Coutts in the United Kingdom, after leaving high school. He was born in Watford, north-west of London.


All three are rogue traders in some form or another who have taken ancient institutions by storm with dramatic effect.


Emirates Business examines the steps that make the two traders modern-day exponents of the Napoleon Syndrome, why Kerviel’s actions are reminiscent of Leeson in several ways, but also critically how the 13-year gap in their exploits has changed how the international economy recovers in the aftermath.


1. Moving from a small town to a large ancient structure Kerviel, whose father hammered metal into bed frames in a cinder-block workshop in Pont L’Abbe, was born in 1977 in the nondescript town in northwestern France. While his former bosses at Société Générale have portrayed him as the mastermind of an elaborate fraud, the towns- folk still maintain he is a model of the qualities they hold dear – discretion, modesty and industry. After getting an undergraduate degree at Nantes University, young Kerviel took a year-long course in a second-tier business school in Lyon.


In 2000, he got a job at Société Générale, where he worked in the back office. He was let loose in the ancient financial institution and, fast-forward eight years, has solely inflicted the worst losses in the bank’s history.


Barings, in a similar way a large rambling structure, allowed Leeson the chance to cripple it from within through losses in equity derivatives in Singapore.


Leeson, who was three years Kerviel’s junior when he pulled off his rogue trader routine, was the son of a plasterer in Watford. Teachers considered him a poor mathematician. With no financial experience, Leeson managed to find work at Coutts in the early 1980s, which was followed by several other banking jobs and in the early 1990s he began work at Barings.


2. Covering up The cover-up for both men was done with relative ease and right under the noses of the banks, whose executives simply failed to do their jobs of supervising traders adequately. Leeson and Kerviel entered the organisations into fairly innocuous jobs and responsibilities, but crucially by the end had control over trading and the settling of transactions – the key ingredient of the fraud.


Leeson worked at impressing his superiors and was soon promoted to the trading floor. Within a few years, he was promoted to manager of a new operation in futures markets on the Singapore International Monetary Exchange. His London bosses trusted him implicitly, as he gathered in large profits betting on the future direction of the Nikkei Index.


SocGen said Kerviel’s experience in administrating trades enabled him to bypass strict risk controls. It said he invented deals that, on paper, balanced out his bets.


Leeson earned his promotion to the trading floor because he was highly regarded for his ability to solve clearing and settlement problems that had plagued Barings’ back office.


3. Keeping the deception going It’s also important to note that both deceptions went on for a long time before being caught. Leeson’s rogue trading position – in an account numbered 88888 – had been in existence for two years by the time it escalated into the £860 million (Dh3.2bn) loss that caused Barings’ collapse in February 1995.


More than half of Leeson’s losses piled up in January 1995 as the Nikkei index fell. Kerviel built up a large hidden position earlier this month and the bank’s losses rose sharply this week as it struggled to close out that position. In the end, both Barings and SocGen buckled when faced with a individual with the authority to deal in multi-million assets.


4. Getting caught The way in which the two traders were caught out is where their stories depart. Leeson’s essentially optimistic view that Japanese markets would rise or at worst remain steady, was voided in January 1995 with the disastrous Kobe earthquake, which dealt a savage blow to the local stock exchanges. By the end of 1992, his account’s losses exceeded £2m, which ballooned to £208m by the end of 1994.


On January 16, 1995, Leeson placed a short straddle in the Singapore and Tokyo exchanges, essentially betting that the Japanese stock market would not move significantly overnight. However, the Kobe earthquake hit early in the morning on January 17, sending Asian markets, and Leeson’s investments, into a tailspin.

In a final effort to recover the losses, he had bet on the Nikkei index of leading Japanese shares to rise. But his gamble didn’t pay off. Realising the gravity of the situation, Leeson left a note reading “I’m Sorry” and fled on February 23. Losses eventually reached £827m, twice the bank’s available trading capital.


Kerviel has told French prosecutors he made $735m last summer when global stock markets sank because of problems in the United States sub-prime loan market.


5. Calculating the loss Although SocGen suffered a savage blow to its balance sheet, and Kerviel has managed to rack up the world’s largest-ever trading losses, it seems that the damage will not destroy the institution. Leeson managed to bring down Britain’s oldest bank with the Dh3.11bn of losses, compared to the $7.2bn Kerviel has cost SocGen.


6. Measuring the impact on the market The biggest, and most worrying, difference between the rogue’s stories, is the lasting impact of their actions on global markets. It must be remembered that Barings collapsed during a thriving world economy in the 1990s that could stomach the losses. Kerviel’s losses for SocGen on the other hand may prove to have a more damaging, wide-reaching impact, as the prospect of a global economic downturn takes hold.


France must wonder whether the latest master rogue trader will contribute to a systemic failure in the rest of the French financial system, and what this could possibly mean for global stability.



Profile: Jerome Kerviel


Kerviel, 31, was born in Pont L’Abbe, northwestern France. He was formerly a low-level trader in the “Delta One” desk at Société Générale.


Kerviel’s job at Société Générale was to take minimal risk. The mission was to balance out positions on his book. But SocGen says flaws in its control system allowed the trader to leave the bank with a 50 billion euros (Dh215bn) exposure.


On a normal day, he would balance a bet that a stock market index would rise with a  contract on a futures exchange or another bet that the index would drop. For almost a year, Kerviel allegedly made real bets one way and fictitious bets in the other direction. His supervisors would see a balanced book when, in fact, the bank was exposed to hefty, real risk.


Though his moves exceeded his authorised limit, they were scattered on different balance sheets and drawn within the bank’s massive volume of daily operations on futures exchanges.


Kerviel allegedly would enter fictitious “forward” contracts, which – unlike contracts with futures exchanges – do not necessarily generate money flow until contracts reach maturity. He allegedly knew the calendar of in-house control, during which supervisors would scan his book. To elude controls, the trader erased fictitious positions right before the scan and re-created new ones immediately after to keep his book balanced out. The temporary misbalance did not trigger an alert.



Profile: Nick Leeson


Leeson, 40, is from Watford, Hertsfordshire, United Kingdom. In 1992, Leeson was appointed general manager of a new operation in futures markets on the Singapore International Monetary Exchange, just two years after joining Barings.


From that point onwards he made unauthorised speculative trades that at first made large profits for his employer, £10 million (Dh72m), which accounted for 10 per cent of Barings’ annual income.


But in 1994, his luck began to run out when the markets turned against him, the downturn accelerated by the economic impact of the earthquake in Kobe, Japan. By autumn that year, the losses stood at £208m. Leeson requested and obtained extra funds to continue his trading activities, as he attempted to extricate himself from the financial mess by more and more frenetic deals.


Alerted by the requests, his bosses carried out a spot audit in February 1995. They discovered that losses amounted to more than £800 million, almost the entire assets of the bank. Leeson had hidden the losses in an obscure account called Error Account 88888, which went to different managers from the house. He insists that he never used the account for his own gain, but reports since claim investigators had located approximately $35 million (Dh128.45m) in various bank accounts tied to him.


Management at Barings also allowed Leeson to remain chief trader while being responsible for settling his trades, jobs that are usually done by two different people. This made it much simpler for him to hide his losses from his superiors.