French Bank Trainwreck

What a surprise! The French bank Societe General is now painting themselves as a victim in their own trading scandal.

French trader 'concealed deals'

The trader at the centre of an investigation into losses at Societe Generale has admitted to hiding deals, according to the Paris prosecutor.
Jerome Kerviel told police he concealed his actions to "appear like an exceptional trader and earn higher bonuses", the prosecutor said.

Last week, Societe Generale revealed a 4.9bn-euro ($7.1bn; £3.7bn) loss, which it blamed on Mr Kerviel.

Bank management puts it this way:

Speaking on French radio, Daniel Bouton, chief executive of Societe Generale, said: "This fraud has been committed by a great pretender, who has succeeded in navigating the many sophisticated control systems that we have, to permanently conceal what he was doing, while also going about his normal activities."

Let me be clear, this guy Kerviel deserves everything they can throw at him shy of the chair. But having said that, how do you hide deals this big for this long?

How could they have "many sophisticated control systems" and be taken like this?

Because their controls were deficient or nonexistent, that's why.

Here is how a good internal control is supposed to work. In my own professional investing activities, when I make a trade I keep my own log of my activities and give a trading ticket made up by myself to a third party who reports to somebody else, and who keeps track of all this and internally audits the results.

The original trade tickets and original account statements then go to this third party who reconciles everything and ensures that the trades were conducted per existing law and policy and as I logged in to begin with.

On a regular basis, we reconcile our two journals and the original statements to make sure everything matches. I also give the third party a heads up before each future trade so they know what is coming.

All of this is then regularly reviewed by an independent auditor who cross-examines me on any trades they feel like to ensure that I adhered to the rules. The auditor then reports to my Board of Directors on all investment activities.

So you have not only a watchman, but somebody watching the watchman.

The bottom line is, for me to ever trade against the rules, I would need to have a conspiracy with both the third party verifier and the independent auditor for it to not get caught but quick.

Not going to happen.

Getting back to the French scandal, my guess is some others at the bank had an idea what was going on, but looked the other way as long as they thought a profit was there.

Now that the stuff has hit the fan, nobody knows anything.