In 2005, Jérôme Kerviel got something he had long coveted: the opportunity to become a trader for Société Générale (SOGN.PA). He had joined the Paris-based bank five years earlier, but as a graduate of a second-tier French business school, he was relegated to a job in its middle office, processing and overseeing transactions by traders whose jobs were far more glamorous and better-paid than his.
Determined to break into trading, Kerviel grabbed the first job that came his way, an opening on SocGen's so-called Delta One trading desk, which handles generally low-risk futures hedging on European stock market indexes.
Yet even at Delta One, Kerviel was dogged by his lack of credentials—a reflection of France's rigidly hierarchical education system, in which top students who gain admission to a handful of grandes écoles easily find prestigious jobs in government and business, while those who attend more ordinary schools find it far more difficult to advance. That frustration, and a desire to prove that he could play in the big leagues, led Kerviel to begin making unauthorized trades almost immediately upon joining Delta One. It was a decision that ultimately led to a $7.1 billion loss that could topple one of Europe's biggest banks.
A transcript of Kerviel's interrogation by the Paris prosecutor's office, posted on the newspaper Le Monde's Web site late on Jan. 29 and independently confirmed by BusinessWeek, offers a fascinating look into the mind of a rogue trader.
Following are excerpts:
On his hiring by SocGen in 2000: "I had no illusions. I knew perfectly well that I would be less well-paid than on other desks, that I would not be paid according to market standards, but that did not lessen my motivation."
On his advancement to the Delta One trading desk in 2005: "I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, as regarded my university degree and my professional and personal background. I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that."
On how his rogue trading began: "My first experience in this direction was in 2005. I took a position on Allianz (AZ) stock, betting on a fall in the market. Soon after this, the market fell, following the [terrorist] attacks in London, and we had a jackpot of €500,000 [now about $730,000].…I had already had the idea of a 'deal' to cover my position. I had mixed feelings because I was proud of the result but surprised at the same time. That produced a desire to continue, there was a snowball effect."
On how he took secret pride in his results, even as his trading spun out of control: "As of Dec. 31, 2007, my gains had reached €1.4 billion ($2 billion), which I had not declared to the bank. At that point I had been overtaken by events and didn't know how to present this to the bank. It represented undeclared cash of €1.4 billion. No one else had ever realized such a sum, which represented 50% of the total result of the equity-index division of SocGen. I didn't know how to deal with it, I was happy and proud of myself, but I didn't know how to justify it. Thus I decided not to declare it, and to hide the sum, I created an opposite fictional operation."
On the techniques he used to hide his trading: "I furnished false documents on these operations, false e-mails. I created a false e-mail and used features of our internal e-mail system—in particular, a function that allowed me to re-use the heading of an e-mail that had been sent to me, changing the content of the message. Then I could retype the text that I wanted, and the e-mail looked just like an original."
On his belief that superiors tacitly encouraged his activity: "In July, 2007, I suggested we should bet on a fall in the market, but he [my superior] did not want to. My bet proved a winner, a cash generator.…I had taken a [trading] position anyway with the consent—or at least not contested by—my No. 1 [apparently a higher-level supervisor] who helped record the transaction.…The transaction proved fruitful, and thus it was authorized, indeed supported by the hierarchy. After that, I had to take positions every day. Even during my vacation, my manager was calling me to ask what position to take. The incentive to take positions was at a maximum."
On why he thinks his superiors knew he was exceeding authorized limits: "I can't believe that my superiors weren't aware of the sums I was trading. It's impossible to generate such profits by taking small positions. This leads me to say that, as long as my results were positive, my superiors closed their eyes to the methods and the sums involved. A trader engaging in normal activity could not generate so much cash."
On the bank's lax supervision: "The simple fact that I didn't take days off in 2007 [he took only four days off] should have alerted the management. It's one of the primary rules of internal control: A trader who doesn't take vacation is a trader who doesn't want to let anyone else look at his book. I regularly received risk messages, alerting me that I had greatly exceeded my nominal cover. A few minutes later [during which he would create a fictitious transaction to mask the risk], a counter-message would be sent. The frequency of these alerts did not worry them. Because I was generating cash, the signals didn't worry them."