January 25, 2008

Were Bonus Motivations Behind the $7.2bn Fraud?

IN WHAT COULD PERHAPS be described as a really big "oops," French financial giant Société Générale has admitted a rogue trader managed to rack up some $7.2 billion -- yes, with a b -- in losses through bad bets on the futures markets. Somehow, the trader managed to conceal from his superiors the positions leading to the losses, despite reported employment of some 2,000 people in the firm's compliance office. The losses are so staggering that it wiped out much of the bank's yearly profit.

The man now accused of pulling this off is 31-year-old -- hey, he's my age! -- Jerome Kerviel, who bet wrong on "plain vanilla" futures positions reportedly worth some $60 billion. As for why he did it, no one knows. However, his trade union has speculated that perhaps Kerviel -- who earned less than $150,000 per annum -- may have been trying to boost his bonus package. The Daily Telegraph of Australia reports:

The trader had worked for the bank since 2000 and earned a salary and bonus of less than AUD 168,000. The bank said he netted no personal financial gains from his operations.

(Michel) Marchet of the CGT said his union was concerned that Kerviel may have been trying to get spectacular results as a way to boost his bonus, and added the system of bonuses for traders was "something we want to talk about with management."

"It's possible that he took positions with exaggerated risks, and when he had losses he tried to hide them - but with the stock market crisis, and an error that he seems to have committed, he was found out," Marchet said.

I mean, I don't know about you, but less than $150,000 seems awfully low even for a run-of-the-mill trader, especially when one considers M Kerviel was at the mercy of the French State each time he opened his pay packet.

M Kerviel was reportedly single and pulled down about 100,000 euros a year (about US$146,000). In income taxes alone -- at least, based on my calculations, based on this site -- he paid 38,583 euros on that salary and bonus. He paid 8,000 euros in social insurance taxes. We're now down to 53,417 euros. If we assume M Kerviel paid an overall rate of 16 pc for his VAT-based purchases (the rate varies from 5.5 pc to 19.6 pc) he's now down to 44,870 euros per year. And I haven't even gotten to the renter's tax, the television tax, or any of the other taxes the French Government has dreamed up, which are apparently legion. I mention all this not to indict the French tax system but to emphasize how little, at the end of the day, M Kerviel was drawing in pay.

All that said, consider -- this from no less a source than The Economist -- that a decent, furnished, one-bedroom apartment in Paris -- where the bank is based -- costs roughly 2,000 euros a month.

I mean, I'm better off than this guy -- and he's a trader! (I pay less than half that for my decent two-bedroom apartment in Manchester, N.H. Plus, given my line of work, I have no need to buy expensive suits, spend fancy evenings out on the town for work, spend an insane amount of money on coffee and croissants, etc.)

I do not, of course, condone M Kerviel's actions -- not in the slightest. It is one thing to screw up your own finances but when you screw up other people's finances, you have committed a grievous and unpardonable sin and must pay for it dearly, at least in my book. I'm just shocked that he got paid so little. When I say "little," I am not talking in absolute terms, of course, but in terms of the industry in which he works and the compensation which those in that industry draw.

One wonders if he was just spectacularly incompetent, or held in amazing contempt at his workplace, or what. But certainly it lends credence to the theory the man was perhaps facing financial problems and saw a large bonus as a way to fix those. Why else would he have done it, aside from insanity? A man does not slave away for eight years at a financial house because he wants to be the next Herostratus.

Strangely, M Kerviel has conveniently disappeared after word of this affair came to light. For reasons not entirely understood, his bosses did not separate M Kerviel's head from his neck, but instead allowed him to depart -- and before calling in the police. As The Telegraph of London reports:

Mr Kerviel is said to have admitted the alleged fraud after being confronted by his boss on Saturday, but the bank admitted last night that it now had no idea where he was.

Because the bank delayed calling in the police, Mr Kerviel still has his passport and may already have left the country.

If M Kerviel has indeed fled, that was probably a good idea, considering the legions of angry ex-coworkers who now would like nothing more than to dismember him. After all, he's probably now thrown their bonuses in jeopardy and as such would be as popular as bubonic plague. But there's no need to worry -- as the bank's chief executive put it, "He's not received a bonus this year, and probably won't be asking for one."

Well. Thank God for that. Although I would advise the Department of Homeland Security to keep a sharp eye out for M Kerviel. After all, in America, pesky issues such as "performance" and "return on investment" have no bearing on "compensation" in certain fields. He might have figured this out. He could be heading our way -- and quite frankly, we've got enough problems.

Posted by Benjamin Kepple at January 25, 2008 12:28 AM | TrackBack
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