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28 March 2024

Finance whizkid to rogue trader

Published

Greetings from Biarritz in south-west France, where I've been chairing a couple of investment seminars for a well-known international firm of lawyers.

The city is an inspired and inspiring choice of venue. The coastline is as rugged and craggily defiant as you'd expect. The warm rollers crashing in from the Atlantic have a savage power that requires immense strength of any opposition. The architecture of the cliff-top hotels and mansions that preside over the spectacular beach head is mostly late Victorian (a hundred and a bit years old), and consistently fine.

As I sit here and look down on the bathers, herded into a narrow space between safety flags, I ruminate on the danger they face, and how it is managed.

Meanwhile, several hundred kilometres to the north and east in the capital of this country, a story of what looks at first instance to be poorly supervised risk enters a new chapter. This week the central criminal court in Paris sees the beginning of the trial of Jerome Kerviel, the trader accused of losing $9 billion (Dh33.03bn) of Société Générale's money, and then covering up those losses. Kerviel has been stigmatised (somewhat prematurely in my view) as a rogue trader. His crime has been described as the equivalent of filling a room with $100 bills – and then setting fire to it.

The image is strong, but doesn't quite hit the mark. First, you'd need to fill a three-bedroomed house with $100 bills to store the $9bn it cost to unwind Kerviel's position. Second, setting fire to the cash does not explain or describe what happened. The money did not go up in smoke. It was lost in trading. The capital got redistributed in the zero-sum game, the institutional equivalent of online poker, that is dealing in the global financial market.

A number of pressing issues will come to the fore during the course of the trial. First, and perhaps most importantly, is the question of what, if anything, Soc Gen's compliance officers were doing while these losses were being accumulated.

Estimates vary, but the huge French bank apparently had roughly two thousand people working in compliance at the time of the discovery of the losses in late 2007 (the story broke in January 2008). It's all too convenient to suggest that Kerviel was some sort of Lee Harvey Oswald (the single-handed assassin, allegedly operating all alone, who managed to kill US President John F Kennedy, back in the day). It's convenient, but not to my mind, convincing. Where were the supervisors, the financial equivalent of the Biarritz lifeguards? I for one will be watching the facts, as presented in court, with the greatest of interest.

The second issue is that of how the media report financial stories, and how the public approaches the world of finance. The key question, surely, is how could such a sorry mess occur? The reporting of events took a long time to get round to the real explanation, which lies in the human stories behind the markets.

There's a certain type of tale that journalists call "human interest stories". It's shorthand for a type of "soft" story about people rescuing cats from trees, acts of kindness, miraculous recoveries from illness, etc. It's also sloppy thinking. If a story isn't of interest to humans, it's not a story worth reading.

It's the human element that makes news stories worth reading, just as it's the human element that engages us in novels. Whether they are set in a bank, a nuclear laboratory, a law office or the legislative debating chamber, it's the decisions and conduct of humans, and the consequences that flow from these decisions, which must engage our interest. Sadly, the prevailing tenor of the journalism surrounding finance has been to erect a barrier to understanding. The attitude is best summarised as that of "it's all complicated, and we should leave it to the experts". The price of disengagement is obvious to all now.

What both journalism and publishing need is a 'Fever Pitch moment'. By this, I mean a book or a film that distils the excitement of finance and the markets into an inclusive thing that everybody can understand and enjoy.

In Britain, Fever Pitch wrested football from white male proletarian thugs and legitimised it for bourgeois sentimentalists. Once upon a time following football meant that you were a hooligan. Now, the team you support is part of your personal branding, something understood the world over. SocGen's loss is also my gain. While I haven't been on the winning side of any of the unsuccessful bets made by Kerviel's Delta One investment vehicle, the story has helped

my novel, Meltdown, in a startling way. Meltdown, published in hardback weeks before the SocGen story broke, pre-figures the real-world story. Consider the fictional narrative: a single, young, Paris-based trader loses billions. The activity can be hidden because of internal politics – connections with the IT and back-office departments and possibly outside collusion. Once the story breaks, the media blames his activities for the extreme turbulence of the markets. Amid a rising tide of panic – exacerbated by hysterical reporting – the trader is sacked and then goes missing.

Finally, there's the star system. My fictional villain, initially mentor to then persecutor of Meltdown's hero, is the ultimate star trader. These are the types who make so much money that they become gods in their own little universe. Senior management doesn't question the golden goose or the cash-generative black box. They let the stars – and in real-life Kerviel was an aspiring star – set up their own departments; they give them huge bonuses. They want to believe in the stars because it's easier that way.

In Meltdown, the young hero is a scapegoat who goes on the run, proves his innocence, saves the world, and gets the girl. I fear that this is where fiction and reality may part company.

- The writer is a journalist, author and commentator on international business affairs.

The views expressed are his own