What went wrong at SocGen?

Well, the SocGen saga continues, with the commercial and investment bank reportedly publishing a report in French detailing how the trader Jerome Kerviel managed to evade controls.

Following publication of the report, IBM, the latest vendor to jump on the What Went Wrong at SocGen bandwagon, sent out an email reiterating the question everyone has been asking: How can you manipulate tens of billions unnoticed?

As I do not read French I am going to have to rely on IBM's interpretation of SocGen's interim internal investigation report, which reportedly claims that Kerviel's "position keeping and risk systems were unable to report such a large exposure because they [failed] to capture distant forward, incomplete and modified trades, and they were known to function improperly and be prone to recurrent errors."

An IBM spokesperson expressed amazement that a sophisticated organization was not capable of managing and properly reporting such simple transactions as stock future purchases, on the account that they were following unusual trading patterns (distant forward dates, multiple modifications, cancellations and transfers.)

Risk consultants from IBM Business Consulting Services outlined some of the major causes of large trading losses and stated that the "quality, coherence, and integration of position keeping systems," was crucial in counteracting some of these causes. "Effective position keeping" it said could also address employees trying to conceal losses and that "oversight mechanisms" which integrated monitoring, governance, and compliance requirements into a "holistic, focused, and practical framework," needed to be put in place.

Arguably however, there is only so much technology can do, and at some point a human needs to intervene or manage the process in order to prevent people who are clever enough from fooling or overriding internal risk control procedures and systems.

This is borne out by an independent report, which reportedly concluded that while risk control procedures were followed, "compliance officers rarely went beyond routine checks and did not inform managers of anomalies." According to the independent report, 75 warning signs on the activities of rogue trader Jerome Kerviel, were overlooked.