1 post from 2008

I just love the SocGen case, even more so as it happens at the worst possible time: the economic cycle is coming down, the credit market is shut (no more syndication), banks' profits are down, and all have to write off some of the loans they contracted during the LBO boom.

To get back to SocGen, I never believed in the bank, just have a look at its corporate websites (yes, there are many ;)) and it's easy to realize how sloppy they are.

Like all French banks, they followed this attitude of "yes, we'll do some investment banking to better our image and be able to offer more services to our clients, but let's not do too much, because it's a risky business after all"

Well, that's what this kind of thinking does to you! You cannot be only a little involved. Either you devote all your energy to it, or just like other pan european banks you don't enter this business at all.

SocGen incentivized its back office stafff the French way (none) and anyone a litttle bit familiar with the other trading scandals like Barings, or Natwest in 98 knows that the losses could have always been spotted if back office had done their jobs. In all these cases, the common deminator is a weak back office. It is easy to believe that because it is not a profit centre, you do not need to recruit well paid, high calibre employees.

Anyone who's ever worked in France can imagine them doing their little 9 to 5 and counting minutes before they can end that very painful 35-hours work week. It is obviously hard to incentivize a division whose role is to make sure that risk is controlled (exactly like putting incentives on cops). On what should the incentive be based on? how many frauds you stop? how many checks you run? Investment banks work hard to stimulate traders' greed and appetite for success, and the back office's role it to put a cap on it. Well, it is hard - but you just have to do it.

For god's sake, how could anyone not notice a 5bn position? Surely, they just didn't look too close.

Unfortunately, it's a massive blow to France becoming more capitalistic. It was a good start, Sarkozy coming to power etc..

I also predict that other blows will happen at banks like Calyon, which seem to have SocGen for model, and just seem to hire the worst bankers available.

SocGen will surely be broken up into pieces with Calyon taking the Investment Banking arm and BNP the retail. It would be a perfect match as Calyon is desperate to develop in IB but cannot take on any more retail (antitrust issues) and BNP is looking to develop in retail.

What happened to SocGen is not just a massive hit on its balance sheet, it has damaged its reputation - and it is the most important thing in its business - for good.

There is also something I don't understand. The broker and trader were corresponding through the reuters chat, which history they knew would be very easily checked after the scandal became public. So why did they? Their converations show clearly that Kievel knew he would get caught at some point and that there was no way he could hold on to such a large position for long. My personal belief is that all these conversations are staged. The broker profited immensely from all these trades (Kiervel generated huge transaction costs) and surely they can find a way to split all this up.