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Sustainable Finance: Trial for Trader and Financial 'Mastermind' Jerome Kerviel Kicks-off in Paris
On Tuesday June 6, France's new anti-hero and former Societe Generale trader Jerome Kerviel, accused of breach of trust, forgery and manipulation of computer data, strode into the courtoom in Paris. Kerviel is accused of masterminding a $4.9 billion loss in futures markets, severely damaging SocGen's reputation, while ushering in the 2008 global financial meltdown. As Kerviel entered the courtroom, accompanied by his lawyer Olivier Metzner, the 33-year-old former trader broke an occasional smile. Behind Kerviel, two rows of lawyers sat crowded in the Palais de Justice, ready to attack the reputation of an industry they believe embraced and encouraged a culture of risk. For many in France, Kerviel has become a symbolic hero, tragically caught in the middle of a dangerous financial game perpetuated by the global banking industry. Raised in provincial France, Kerviel rose quickly in the French banking sector, despite lacking the typical elite education most traders within the industry employ. He defied norms, moving to the front lines from an administrative position by exploiting opportunities and taking financial risks.
And yet, despite a plethora of accusations from SocGen, the situation has left many investors scratching their heads? How could one man hide billions of dollars in trades from his superiors? And why did Kerviel engage in such behavior when evidence shows he gained nothing personally from it? Yes, Kerviel's actions overstepped the limits of rational judgment. Adamantly, his lawyers argue it was his superiors who pressured him to comply. If such accusations are true, one must ask why the leadership of one of the largest organizations in France felt compelled to take such aggressive financial risks? While many accept that Kerviel repeatedly broke the rules and pushed daily trading limits, many also believe that Kerviel's colleagues employed similar tactics on a regular basis. In fact, thousands of computer records of SocGen trades suggest that Kerviel and his colleagues had been bending the rules for 12 months before he was "caught". As his lawyers are likely to argue, as long as Kerviel was making profits, management continued to turn a blind eye.
Financial markets have a long history of embracing maverick operators. In a world where fortunes are built and lost in seconds, risk taking and speculative decision making are often embraced. Despite even the most damning accusations from SocGen, it is hard to imagine how one man could have pulled off such significant moves alone. Leading up to the discovery of the losses, there were unprecedented volumes of futures contracts being traded which exposed banks globally to significant financial risk. It is hard to believe SocGen was unaware that such large volumes of futures contracts were being traded from their desks. For many, this trial provides evidence of a wider malaise that remains unaddressed within the banking industry. Moreover, this trial and recent trials in other countries highlight the systemic deficit of ethical values that exists in an industry obsessed with wealth and profit. Yes, new sophisticated technology will help improve banks internal controls, but in the end, it is people's behavior that ultimately counts.
To provide change, leaders in the banking industry need to ensure that the high-minded business principles are ingrained in all banking personnel, while changing the cultures that exist within institutions globally. Unfortunately, many believe this trial will do little more than highlight a system that is inherently vulnerable. Bankers, like every profession, continually face difficult choices and challenges, while making decisions influenced by a variety of external priorities and pressures. Regardless of the verdict, it is clear that the pursuit of wealth and power will continue to influence the risks traders and financial leaders take as they seek to address shareholder's appetite for larger investment returns. In the short term, this trial may reduce the tendency of individuals to engage in negligent behavior while encourage organizations change their cultural practices. Tragically, without serious cultural change, it is only a matter of time until the global financial sector finds itself on trial in another location.