Jerome Kerviel, an Ambitious Outsider
Hidden behind the rosy outlook depicted in Societe Generale's 2006 financial results were two fires smoldering in its CIB. One, exposure to U.S. subprime residential mortgage-backed securities (MBSs), was about to spread like wildfire throughout the world's financial sector and engulf several larger and more ambitious banks than Societe Generale. The other, unauthorized speculative trading in European equity markets, was about to drive a huge hole through Societe Generale's reputation and profits at the hands of a single trader, Jerome Kerviel.
Kernel's position in Societe Generale's CIB was unlikely to be noticed. He was one of seven traders in the Delta One Listed Products (DLP) team, a part of the Equity Finance section in the Equity Arbitrage group of the CIB's Global Equities & Derivative Solutions (GEDS) business unit. At the end of 2006, the CIB had almost 5,000 front office personnel worldwide. GEDS itself had a head count of over 1,300. GEDS's proprietary trading activities comprised two groups – volatility and arbitrage. As these names imply, GEDS's volatility traders were charged with profiting from directional trading positions, while the arbitrage traders looked to profit from long/short combinations of offsetting positions by capturing mispricing between assets with similar market sensitivity. A common feature of arbitrage trading is that price differentials are typically very small, which requires large notional amounts of offsetting trades in order to capture meaningful profits.
Kerviel joined Societe Generale in August 2000 at age 23 to do modeling and process automation in CIB's middle office. In July 2002, he was promoted to trader assistant in CIB's Delta One Equity Derivatives product team, responsible for position valuations, price reserves, and risk analysis. In March 2004, he was appointed junior trader for the purpose of proprietary arbitrage trading in listed equity derivative products, including stock futures, indexes, exchange-traded funds (ETFs), and customized equity options such as turbo warrants.
Though inconspicuous in Societe Generale's big picture, Kernel's career progression was quite an impressive achievement considering his modest origins. He grew up in a small town on the coast of Brittany, and obtained a bachelor's degree in finance in 1999 at the University of Nantes, a provincial town in western France, and a master's degree in financial markets organization and control in 2000 at the University of Lyon. Just as executive positions in France's leading financial institutions were considered reserved for the alumni of elite colleges such as the Ecole Nationale d'Administration that Daniel Bouton had attended, so high-earning trading positions were also considered to be the preserve of graduates from France's top 23 business schools known as grandes ecoles, like Jean-Pierre Mustier.