Monday, January 28, 2008

Soc Gen: Claims of a promised €300,000 bonus surface

(FT Alphaville) The alleged SocGen rogue, Jerome Kerviel, was due to be charged with four counts on Monday, including abuse of trust and attempted fraud. Paris prosecutor Jean-Claude Marin said the trader had “cooperated fully,” although he now faces up to seven years in prison and a fine of €750,000.

But it is the bonus question that has caught FT Alpahville’s eye. Can this really be true? If so, SocGen’s position is starting to look seriously shaky.

Le Monde (hat tip to Alea) reports that Jerome Kerviel, the trader at the centre of SocGen’s €4.9bn in trading losses, has told police that he was guaranteed a bonus of €300,000 for his record year in 2007. He asked for double that.

Lawyers acting for Kerviel have already claimed that his trading was in profit to the tune of €1.5bn at the end of last year.

One disconcerting aspect of the SocGen scandal is the ability of such a junior trader to build such vast positions undetected. Kerviel was only paid €100,000, including his bonus, the bank claimed last Thursday, as the losses were announced. Or peanuts, in banking terms.

Some have suggested that the fact that Kerviel was a relative nobody - an upstart from the mid-office no less - was part of the reason he managed to hide what he was doing. No one thought he was up to the job of trading anyway - fraudulently or otherwise.

Le Monde adds on Monday that Kerviel’s basic salary was only €50,000, while his bonus in 2006 amounted to only €60,000.

So, according to the French newspaper, Kerviel’s bonus was set to increase fivefold - and he was aiming for a lot more than that.

We’ve been wondering why there’s no case on record where a “rogue” trader has been caught on the back of exceptional gains. Is this why?

SocGen is already facing questions as to why its internal systems failed to pinpoint what Kerviel was up to. Why did it only check net exposure, rather than gross? How did he have access to the right systems and passwords needed to carry out and hide his trades? Why had he taken so little holiday in the past year, against usual practises?

Now SocGen is accused of at best missing, or at worst deliberately overlooking, the most glaring red flag of them all. While Kerviel himself claims that the bank itself contributed to the massive losses by closing out his investments prematurely.

Exceptional or outsize gains tend to result from sharply increased risk. A trader whose “normal business activity” involved taking “very little market risk” shouldn’t be making that kind of money. If SocGen was lining up to more than triple his total pay, surely it should have been asking why.

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