The new revelations that are coming in from Société Générale every day prove once again that, if you do not learn the lessons of history, you are doomed to repeat them.
The scandal of how a young trader was allowed to build up positions that brought about losses of nearly five billion euros (Dh27.1bn) for the French bank has many echoes of the 1995 collapse of British investment bank Barings. Many experts have pointed out the similarities between the two – the presence of an individual at the heart of trading and settlement functions; the creation of false accounts to cover losses; the growing desperation with which the “rogue trader” tried to recoup his losses through wild bets on the financial markets, which were moving inexorably against him.
There are other striking similarities between Jerome Kerviel, the alleged “rogue” behind the SocGen debacle, and Nick Leeson, the man who brought down Barings. It seems as though both Kerviel and Leeson acted not out of motives of personal gain – except in so far as they wanted to maximise their bonuses. Kerviel, like Leeson, will probably end up in jail. But there the similarities end, and when the differences between the two scandals are examined, another historical precedent comes to mind – the collapse of Enron in 2001.
If SocGen turns out to be more Enron than Barings, the French authorities, and the European financial system, have a far more serious situation on their hands.
The details of exactly how Kerviel was exposed are still coming to light, but one essential fact has emerged so far – SocGen uncovered the irregularities itself, while Kerviel was still actively trading. This is the opposite of what happened with Barings, where the first the British bank knew something was wrong was when Leeson went missing without approval.
The implications are significant, and they do not augur well for SocGen’s senior management. They realised the extent of the damage, and unwound the positions Kerviel had taken voluntarily in open market before going public with the “rogue trader” sensation.
This is very reminiscent of the rush to dissolve Enron’s “special purpose entities” in the days before the full extent of the American scandal became apparent. The question will be asked of SocGen, as it was of Enron executives at the time: how widespread was the practice of creating fake accounts and how soon did senior executives come to be aware of it?
There are other striking similarities between SocGen and Enron, not least in terms of scale. While Leeson built up losses of a comparatively modest $1.7bn (Dh6.2bn) or so, Enron collapsed with liabilities of $23bn. The $7.2bn SocGen wrote off for Kerviel’s trading actually represented positions of more than $70bn, a figure verging on the Enronesque. Finally, the repercussions from SocGen could be as just significant as those from Enron. Barings was quietly allowed to go bust by the British authorities, but there was never any possibility of a systemic collapse of the banking system in the UK.
Enron’s downfall was pursued relentlessly by the US authorities, jail sentences and multi-million fines were savagely handed down, and laws changed radically to clean up American business. For a while, the entire US capitalist system was in disrepute.
SocGen is already a cause célébre in France, and its ripples look certain to affect a European financial system in turmoil from the global credit crunch. But the Paris authorities should look west to Texas, rather than east to Singapore, for precedents to their investigations.