Saturday, January 26, 2008

Kerviel questioned

Jérôme Kerviel, the accused "rogue trader" in the Société Général scandal, is in police custody and being questioned. And we're learning that it could have been a lot worse. He's alleged to have cost the bank over $7 billion but it is thought he was actually playing with at least ten times that much -- perhaps 80% more than the bank's market capitalization.

For my part, I am being rather skeptical that one guy alone could have pulled this off. Could one man really have played with that much money, unsupervised? Surely a bank with €467 billion in deposits should have some better security checks than existed here. And if the management at SG knew about the fraud last weekend, why did they wait until well into this week to announce it?

Somehow, we think our banks and trust companies are safe, that it couldn't happen here. Well, we're not in a fishbowl. We have tenticles in the major financial centres in the world, and so do the Canada and Québec Pension Plans. Other public pension plans have desks dedicated to the derivatives markets. As well, it's worth remembering that since deposit insurance was created in Canada forty years ago, 43 financial institutions protected by such insurance have collapsed. Many of us still remember the collapse of two rather minor banks in 1985 -- the Canadian Commercial Bank and the Northland Bank -- and the shock wave that created.

Banks here have had to write down quite a bit due to the sub-prime mortgage crisis, as well as the Enron and Worldcom frauds. If one of the Big Six here actually collapsed, it would be an earthquake. Yes, deposit insurance would pick up the losses but most of us would not be able to wait the 60 to 90 days for the check representing what we had deposited in the failed institution to come in the mail. And most bill collectors don't work on that long a cycle.

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