Friday, January 25, 2008
Reverse Peter Principle
There are two really spectacular aspects of the Jerome Kerviel story, the French rogue trader responsible for $7 billion in losses at Societe General. The first leaped out at me from the very first accounts, namely that although his trades were being described as fraud, it was hard to see where his angle was. Now the WaPo confirms that he was basically balancing the books by recording fake trades to offset real ones, but he wasn't cashing out his positions.
Which leads to the second spectacular aspect. Were it not for the global sell-off that hit the markets Monday, his positions were potentially winning ones. Not only that, some analysts are speculating that the global panic was in part caused or at least contributed to by Societe General's secret liquidation of his unauthorized investments. Which leads me to wonder why SG would cash out winning positions just because they were unauthorized, especially on such a massive scale? Surely there was a more measured way to deal with the problem.
As for Kerviel's angle, it's possible that he was playing long, intending to cash out gradually over time. But it almost seems from the coverage that he was trying to prove something (ie. that despite not coming from the best schools and upper crust society, he "belonged"), more than profit from his trades. Unfortunately for Kerviel, though, by the logic of these things (ie. the relevant legal statutes) he's most likely going down.
But every time I read about a criminal mastermind or hacker savant, it occurs to me that outlaws suffer from a reverse Peter Principle. Regardless of his authorization, Kerviel's trading record apparently looked pretty good up until Sunday night. And I'm not sure how many traders were looking too hot as of Monday evening. So it could be that, judging his record from a legal "absolute value" perspective, he deserves a promotion. At the very least, his ability to devise methods to avoid security detection seems like it could prove pretty valuable to Societe General in the future. Instead he'll be doing time, while some other trader rises to the level of his own incompetence.