Thursday, 31 January 2008

SocGen: Europe’s Enron?

As the Economist points out today, it’s quite a feat to push France’s attention-hungry president off the front pages these days. But a young low-level trader in Paris has managed to do just that.

Last week it emerged that a rogue trader named Jérôme Kerviel has cost France's most venerable bank, Société Générale, more than $7-billion. For France, and indeed for all of Europe, Kerviel’s story has been captivating. Those at the top of the economic ladder see him as an evil genius, a scheming traitor who duped his vigilant employer by hiding his thieving through complex manoeuvring. Others, particularly on the French left, see him as a modern day Robin Hood, exposing the weaknesses of French capitalism.

Though SocGen, the biggest economic success story in a nation known for its mistrust of capitalism, has tried to portray the crime as genius in its deception, Kerviel’s own court testimony reveals that it was anything but. According to the French press, Kerviel has testified that his thieving began as early as 2005, merely by creating fake trades and pocketing the money himself. He also says it should have been obvious to his superiors because he was openly reporting making as much as €600,000 in a single day, a ludicrous amount for a trader to be making legitimately.

Already there are comparisons being made to the Enron implosion of 2001 in the US. Both seem to stem from a ‘bonus culture’ in investment banks fostering a short-term view of profit and a casual attitude toward risk. Le Monde, for instance, is deriding the catastrophe as symptomatic of an unregulated, unwatched system.

As Sarkozy met with UK Prime Minister Gordon Brown last night, it’s likely the conversations turned to the twin implosions of financial institutions both countries are currently dealing with. The Northern Rock crisis has caused Brown his own headaches, and he’s probably pretty glad that the SocGen scandal has provided a momentary distraction. But the fact that both state-owned institutions were pillars of their respective country’s economy means that both nations are going to have to take a more active role in regulating the economy.

Sarkozy was already indicating that he intends to step in that direction yesterday when he reportedly told fellow European leaders Angela Merkel and Romano Prodi that European leaders would need to adopt a “moralising capitalism” to “put order back in a system that sometimes seems out of control.”

Yet Brown’s plan to tackle the Northern Rock crisis is the polar opposite of Sarkozy’s plan for SocGen. Sarkozy has demanded that the leader of the bank be fired, and he’s said France will go to all lengths to block a takeover of SocGen in light of the massive loss (it is speculated that the bank is now vulnerable to a hostile bid by BNP Paribas).

Brown, on the other hand, has been actively trying to arrange a takeover of Northern Rock, and he doesn’t seem to care whether that offer comes from a domestic or foreign firm.

But dissatisfaction over both economic disasters could cause both leaders to change their current thinking, and perhaps even switch places. The popular lionization of Kerviel in France shows that people aren’t happy with the current system of state oversight. On the other hand, the UK media have reacted to the prospect of a Northern Rock takeover by a US private equity firm with much derision and scepticism, suggesting they want the government to step in and take a more active role to block such a sale.

Perhaps the most amusing illustration of Kerviel’s bizarre popularity is his facebook status. According to media reports, Kerviel lost almost all his Facebook friends on the day the crisis broke. But these were soon replaced by hundreds of internet admirerers. The group "Jérôme Kerviel should be awarded the Nobel Prize in Economics" now has 2,323 members.

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