Jerome Kerviel socked it to SocGen with a whopping $7.16 billion loss. The biggest loss incurred by a rogue employee to date, which has rocked the foundation of a bank recently considered a pillar of the French and global economies. Now there is a good chance the bank will cease to exist in its current structure. The bank’s planned $8 billion stock offering may buy some time, but it may be too little too late as BNP Paribas and Credit Agricole circle an institution already dazed by a wallop of US sub-prime debt.
The shear size of positions and trading losses by Kerviel shocks and surprises the general public, but there are those that can remember similar situations not too long ago. Rogue employees bring down companies every single day. Brian Hunter lost $6.6 billion at Amaranth in 2006, collapsing the hedge fund. Nick Leeson brought down Barings in 1995 after losing $1.3 billion in improper trades. Kidder Peabody crashed and burnt after bond trader Orlando Joseph Jett racked up $330 million in losses.
What do these stories have in common? Poor risk management. In every single case, employees gambled firm assets against unmeasured risk…and lost. We learn time and again that without the proper controls, employees will burn you. The Association of Certified Fraud Examiners (ACFE) estimates that US organizations lose 5 percent of annual revenue to fraud. With a U.S. Gross Domestic Product for 2006 of $13.037 trillion, this suggests losses around $638 billion among all US organizations, despite existing anti-fraud controls.
The very technology put in place to improve trader productivity and to execute on more and more complicated transactions of more and more complex securities is sometimes blamed for rogue employee behavior. The availability of technology makes it easier in some cases to hide suspicious transactions. From the criminal’s perspective, the anonymity of bits and bytes make executing fraud a faceless victimless crime.
The shear size of positions and trading losses by Kerviel shocks and surprises the general public, but there are those that can remember similar situations not too long ago. Rogue employees bring down companies every single day. Brian Hunter lost $6.6 billion at Amaranth in 2006, collapsing the hedge fund. Nick Leeson brought down Barings in 1995 after losing $1.3 billion in improper trades. Kidder Peabody crashed and burnt after bond trader Orlando Joseph Jett racked up $330 million in losses.
What do these stories have in common? Poor risk management. In every single case, employees gambled firm assets against unmeasured risk…and lost. We learn time and again that without the proper controls, employees will burn you. The Association of Certified Fraud Examiners (ACFE) estimates that US organizations lose 5 percent of annual revenue to fraud. With a U.S. Gross Domestic Product for 2006 of $13.037 trillion, this suggests losses around $638 billion among all US organizations, despite existing anti-fraud controls.
The very technology put in place to improve trader productivity and to execute on more and more complicated transactions of more and more complex securities is sometimes blamed for rogue employee behavior. The availability of technology makes it easier in some cases to hide suspicious transactions. From the criminal’s perspective, the anonymity of bits and bytes make executing fraud a faceless victimless crime.
Don’t expect the SocGen story to be the last of its type. Companies need to take note of the techniques used by Kerviel and fight technology with technology. Without proper risk management and internal controls, we’ll see more banks losing firm and customer assets.
