France’s New Anti-Hero

Whenever Hollywood screenwriters decide to stop striking, they should look across the Atlantic for their next plotline. The scandal of French banking giant Société Générale and the rogue trader Jérôme Kerviel has all the makings of a movie. Undereducated underdog infiltrates the ranks of the snootiest Gallic bank, and, spurred on by the promise of limitless riches, proceeds to secretly gamble more than $70 billion of the company's money, losing $7 billion of it and tipping off a global market crash. Central bankers, presidents and prime ministers go into panic mode trying to stem the collateral damage.

You can't make this stuff up, but in fact that's just what Kerviel has been doing for a year or more at SocGen, using high-tech skills gained in the back office to orchestrate and conceal a series of fraudulent European futures trades that has resulted in the single biggest rogue-trader loss ever (chart). While SocGen is in no danger of being sold for a pound the way British bank Barings was post-Nick Leeson—it is far bigger and better capitalized—the bank is now in a severely weakened state that has left it a potential takeover target. A recent Citigroup report noted that despite its current troubles, SocGen"would potentially appeal to both large local and foreign banks."

The scandal has put a spotlight on everything from the fragility of bank risk-management systems, on which the safety of the global financial system increasingly relies, to the need for more seamless communication among central bankers (Fed chair Ben Bernanke was apparently unaware of SocGen's domino effect on global markets as he was slashing U.S. interest rates), to the ambivalence with which many Europeans, in particular the French, still view financial capitalism.

It's an attitude with a rich and deep history. Even as Balzac believed that "behind every great fortune there is a crime" and the late president François Mitterrand opposed the notion of "making money in your sleep," many French today view Kerviel not as a simple crook, but as a kind of martyr/scapegoat for a corrupt global financial machine. The glamorization of his story has already begun. Friends and neighbors remember him as an "honest and hardworking boy" who must have been manipulated, and have compared his look and manner to Tom Cruise (his cool movie persona, not the crazy YouTube one).

Kerviel was no statistical genius, and he hadn't graduated from one of the top Parisian finance schools, like many of his posh peers, but from a more humble regional university. That's one reason that he was sitting on the "Delta One" desk, a part of the SocGen trading operation that doesn't require sophisticated math. It may also be the reason that it has been easy for the public to embrace a man being called the "Che Guevara de la finance" and the "James Bond de la SocGen" by French editorialists, and is branded "stronger than Chuck Norris" on the French pages of Facebook, the postmodern ledger on which the scandal is being eagerly mulled over by thousands. Kerviel is more admired than reviled: a recent poll showed that only 13 percent of the French blame him for the SocGen scandal, versus 50 percent pointing the finger at bank management.

A similar anticapitalist impulse animates the protectionist official reaction to the debacle. Even as analysts speculate about what a prize SocGen would be for a bank like Britain's HSBC, President Nicolas Sarkozy's speechwriter Henri Guaino has said the French state "wouldn't stand by with its arms crossed" and leave SocGen "at the mercy of just any predator." Read: non-French ones. Industry buzz is that peers like BNP and Crédit Agricole are being encouraged to prepare takeover bids for SocGen. As Prime Minister François Fillon declared last week, "The Société Générale is a big French bank, and the government intends it to remain a big French bank that is an actor in globalization."

It's a statement that highlights the disconnect between French protectionism and the nation's own place in global capitalism. "France is actually one of the most open economies in Europe, and attracts a huge amount of foreign direct investment," notes Bank of America's European economist Gilles Moec. Paris in recent years has been gaining steam as a global financial hub, and SocGen was the jewel in that crown. If the anti-market rhetoric around SocGen continues, notes Gilles, there's a chance that "people take it at face value, and that could effect investor interest in France."

The second largest bank in France by market capitalization, SocGen was best- known for its pioneering work in equity derivatives, the complex financial instruments at the heart of much recent market turmoil, including the subprime debacle and various hedge-fund failures. "Since the mid-1980s, the Société Générale has been the magic bank with a very high level of sophistication," says Hélyette Geman, a professor of mathematical finance at ESSEC Business School outside Paris. In the past 10 years, the derivatives sector has expanded by a factor of 30, and so has the reputation of the bank, which sprinted past better-known competitors like Goldman Sachs, and was recently named a "modern great in equity derivatives" by the financial magazine Risk. Christian Noyer, the governor of the Banque de France, has in recent months boasted of the French edge in derivatives, touting his nation's expertise in "math and finance."

It's ironic, then, that Kerviel's disastrous trades were plain-vanilla bets on the movement of European stock exchanges. That, as much as anything, underscores the difference between this case and others like the complicated bond bets that brought down Barings. "Barings in Singapore was doing stuff that it hadn't done before," notes Howard Davies, director of the London School of Economics, and formerly Britain's chief financial regulator. "At SocGen, the cleverness wasn't in the types of positions being taken, but in the concealing of them."

But while the rogue trader may have lacked the proper French establishment credentials, what he had in spades was good timing, and technical prowess. Experts have been baffled by how tens of billions' worth of fraudulent positions, which theoretically would have required some margin calls to be paid out (especially in January's sinking market), could have been missed by the bank's management and risk-control systems.

While investigators and bank officials are still piecing together the details of the fraud, what's clear is that Kerviel cleverly chose some trades which wouldn't require immediate margin calls. Special IT codes garnered during time spent in the back office, and falsified documents further oiled the wheels of his nefarious activities. While SocGen management has called Kerviel a trader "without genius" who was "acting alone," French bloggers are touting his "lucidity" and bravery for standing up to a system that "brings up its shady dealings only when they are unfavorable to them."

Kerviel was cool under questioning. In November, the German-based derivatives market Eurex sent a letter to SocGen querying the volume of trades done by Kerviel. As he told the French police, he was "questioned … and manage to justify myself," following an internal investigation into his trading. Kerviel was finally caught out on Jan. 18, when a large bank he'd falsely named as a counterparty failed to recognize trades after being quizzed by SocGen.

While it appears that Kerviel was acting alone, a number of his direct managers and division superiors have already lost their jobs, and it's possible that Jean-Paul Mustier, the head of corporate and investment banking who built SocGen's derivatives business into a global leader, may still be let go. The board, meanwhile, is supporting bank chairman Daniel Bouton (despite implicit calls from Sarkozy for him to step down).

Whatever its ultimate outcome, the crisis has underscored large, nebulous worries about the stability and transparency of the global financial system that were much the talk of the World Economic Forum in Davos two weeks ago, and are on the agenda for the Group of Seven meeting in Tokyo this week. Already leaders like Sarkozy, as well as British Prime Minister Gordon Brown, German Chancellor Angela Merkel and Italian Prime Minister Romano Prodi are calling for stricter bank reporting stand-ards, more-robust credit agencies, better communication between central bankers and new financial-industry regulation. Italy would like to see a Pan-European regulatory body, and in Germany the Social Democrats have proposed regulation of bankers' salaries. Brown has argued that Europe shouldn't emulate the United States by overregulating in the wake of financial crisis, especially as a global economic downturn looms.

Politicians back in Paris are less sanguine. In fact, most are making hay with the SocGen crisis. THE ELYSEE AND THE SOCIALIST PARTY FLAY FINANCIAL CAPITALISM, screamed a Le Monde headline last week, uniting the government and the opposition around a common grievance. Sarkozy, who campaigned against "the excesses of financial capitalism," is undoubtedly feeling some pressure to send a message either in the form of greater financial regulation, or at the very least more protectionist rhetoric; a recent online survey of French voters found that 65 percent thought Sarkozy was right to encourage Bouton's resignation. Already the financial sector is trying to pre-empt government interference, with banks across Europe launching massive internal audits of risk-management controls. A handful are even tweaking compensation so that bonuses are paid out over years, providing a check on drive-by dealmaking that experts say will become much more common.

Kerviel's story seems likely to encourage this drive to clamp down on the titans of capital. Never mind that the number of financial disasters is not rising with the complexity of the world financial system, and that market volatility has fallen over the past two decades, thanks at least in part to the derivatives pioneered by banks like SocGen. The scale of the SocGen crisis reinforces the public perception of a system losing its moorings. And though Kerviel was making €100,000 a year, three times the average Frenchman, and was obviously gunning for an even heftier bonus, the French public feels a strange sympathy for him. Those who don't see him as a kind of maverick hero see him as a pitiful bit player swept along by forces out of his—and everyone else's—control. If nothing else, they feel a lot closer to him than to his bosses. Tank tops and T shirts reading JEROME KERVIEL'S GIRLFRIEND can now be had online for $17.99. Indeed, one group of the virtually faithful are thinking ahead; they've begun to petition "for Jerome Kerviel to have Facebook in Prison."

With Tracy McNicoll in Paris And Stefan Theil in Berlin

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