Gold News

Regulator Wanted! No Experience Required

The only real upshot of the banking scandal at SocGen will be more red-tape for the financial regulators...

JEROME KERVIEL – now famed the world over as France's worst-ever financial mishap after John Law – apparently claimed on his most recent resumé to enjoy judo and sailing.

   Did he mention running up $7.1 billion in losses for his employers, too?

Something of a loner according to the world's media (only 11 friends on Facebook!), he's also been called a "computer genius" by his colleagues at Société Générale in Paris.

But that genius earned him a mere €100,000 last year – "peanuts in the banking world" as the British press put it this weekend. So what gives?

Kerviel certainly seems bright enough to bring down a bank. He studied economics at Nantes and then Lyons, one of France's top 10 universities, before joining SocGen in 2000. But he only worked as a back-office drone, filing and checking other people's trades for two years (otherwise known as "risk-control and security systems" in the media reports), before graduating to Trading Assistant (a.k.a. middle-office drone) on the European equities desk, plugging numbers into SocGen's stock-market derivative positions.

"He spoke very little, answering questions with nothing more than a yes or a no," winks a colleague who clearly spotted Kerviel was a wrong 'un but failed, mysteriously, to alert anyone. And behind the weirdo stare, this low-grade bean-counter was in fact a criminal mastermind – or so everyone says – bent on gambling three times SocGen's entire stock-market cap by "hacking through four separate fire-walls" said French finance minister Christine Lagarde to CNBC today.

Monsieur Kerviel then chose "very specific operations which didn't involve any cash movements...placing transactions which did not require immediate confirmation" from senior management, says Jean-Pierre Mustier, head of corporate & investment banking at SocGen.

In short, and to judge by the public statements of SocGen's management, Kerviel also kept a white fluffy cat on his lap and a fish-tank full of piranhas just below the trap-door in his hallway. "The nature of his fictitious and fraudulent operations were constantly evolving," pleads Daniel Bouton, SocGen's CEO, in an interview with Le Figaro.

"And when the control systems detected an anomaly, he managed to convince control officers that it was nothing more than a minor error."

Zut alors! This sad loner was able to fool all of the people pretty much all of the time, including the time that SocGen's risk-management team actually got round to scrutinizing his book after an urgent tip-off from Eurex – the European derivatives exchange itself.

Why didn't the 2,600 people apparently working in "risk management" at France's second largest bank bother to dig deeper? Ah well, Kerviel was a criminal genius, remember. Everybody says so. Albeit a criminal genius stuck in bean-counting roles for six years who managed to scrape barely half the average stock-trader's salary when he finally got a trading position.

It could have happened anywhere, or so everyone would have you believe – and they might just be right – even if Kerviel did lack the brains and balls to really get ahead in the competitive, cocky world of financial trading.

On the other side of the trade, meantime, and protecting the world's investors and savers from the skew-eyed evil geniuses working Excel spread-sheets at French investment banks today, sit the regulators. You might think they're busy enough right now, simply trying to keep up with the world's evil financial geniuses.

But if they're busy now, just wait until the politicians are finished trying to cover their own posterity.

"We have to put a stop to this financial system which is out of its mind and which has lost sight of its purpose," spat French president Nicholas Sarkozy on a trip to India last weekend.

"The point of a financial system is to lend money for economic activities, which, in turn, generate profits. It is not to go and speculate on different activities which create enormous flows and profits in a few hours."

Oh really? Just what does Monsieur Le President think derivatives are used for today – creating economic value through prudent lending? Jerome Kerviel struggled to make $150,000 a year in a job that regularly pays nearer $300,000 plus year-end bonus. Even when the authorities at Eurex queried his trading, the "risk management professionals" at SocGen fell for his schtick (it seems) and missed the sheer size of the positions he'd built up.

Either that, or they did know what was happening...and the rumors of a €300,000 bonus ($447,000) if Kerviel's high-risk model paid off – and the latest claims that Kerviel showed a €1.4bn profit at one stage in late 2007 – are more than just chatter.

It's not just the high-octane world of derivatives tom-foolery that's bamboozling government regulators and their elected bosses, however. "The failure of Northern Rock, while primarily a failure of its directors, was also a failure of its regulator," reckons John McFall, the UK member of parliament who's just led an official inquiry into Britain's first banking run in 130 years.

His report expressly recommends that any new powers of banking regulation – and like all good reports, it demands there be plenty – go to the UK's central bank, rather than the current UK regulator, the Financial Services Authority.

"We propose the creation of a new post of Deputy Governor of the Bank of England and Head of Financial Stability," the Treasury Committee's report concludes – seemingly unaware that the BoE already has a deputy governor responsible for financial stability. Sir John Gieve was appointed Deputy Governor in Jan. 2006, with specific responsibility for the Bank's Financial Stability work.

But don't you see? "The deputy governor should be someone with senior banking experience," counters Michael Fallon, another member of the Northern Rock inquiry. "You can't have someone like Gieve, a civil servant without any banking experience."

So just who should the government look to hire instead? A senior banker wanting to lose all his Facebook friends by stamping on their business models in between rounds of golf? Gieve is the perfect man for the job of monitoring financial stability, in our opinion here at BullionVault, because the task is next-to-hopeless – and he's a career bureaucratic with experience of lost causes in spades.

A Whitehall policy-wonk from the age of 24, Gieve really showed his talents as Permanent Secretary to what used to be called the Home Office. The Justice Ministry as it's now known underwent something of a re-branding after three political chiefs had to resign inside five years. Gieve worked for them all, but the department he ran was entirely "unfit for purpose" claimed one of the hot seat's brief incumbents – and running the department day-to-day was Gieve's responsibility.

Indeed, the man now charged with over-seeing the UK's financial stability seemed to have real trouble using Excel spread-sheets back at the Home Office.

"Accounts contained numerous errors and internal inconsistencies," said the official auditor's report in Jan. 2006. He refused to sign off the Home Office's internal accounts for the last year of Gieve's tenure.

"In particular, amounts relating to cash, Exchequer funding and non-retainable income...were contradictory and did not reconcile between the different places in which they appeared in the accounts," the auditor stated.

"There were also material omissions and misstatements, for example the value of the private prison estate was incorrectly recorded in the accounts."

Sir John is no accountant, of course. That's why he nabbed a deputy guv'nor-ship at the Bank of England three weeks before the auditor's report on his Home Office accounts was released. The perfect man for the job!

"It is clear that the distinctions between different types of financial institution – banks, securities firms and insurance companies – are becoming increasingly blurred," announced Gordon Brown on taking office as UK finance minister in May 1997. Now enjoying the slings and arrows that go with being prime minister, "there is a strong case for bringing the regulation of banking, securities and insurance under one roof," he concluded back then, axing the Bank of England's supervisory role and giving it to a new 'super regulator' that would become the Financial Services Authority three years later.

Yes, the very same Financial Services Authority that failed in its duty to monitor and regulate Northern Rock.

"Is the creation of a such a regulator feasible," asked The Banker magazine in June 1997. "Will it necessarily be more effective, and should it be attached to the central bank? In a business dependent on trust and confidence why abandon a well respected institution in the hope that a less prestigious one will do better?"

Even the head of the Bank of England, "Steady" Eddie George himself (career central banker; no private-sector banking experience), found it hard to bite his tongue, despite winning independence on setting interest rates within one week of Gordon Brown (career politician, plus a brief stint as lecturer & journalist; no banking or business experience) becoming Chancellor of the Exchequer.

"Former BoE supervisors have expressed concern over whether credibility could be maintained in a single institution which is responsible for both the mis-selling of pensions and systemic risk," The Banker magazine went on.

"And BoE governor, Eddie George, has warned that the new and expanded [regulator] risks becoming over-bureaucratic and too inflexible in taking a one-size-fits-all approach to financial regulation.

"Other have worried over how the BoE staff, and the culture they bring with them, will blend into the new 'super-SIB' structure. Some fear the different purposes of regulation will themselves become blurred within a single organisation."

British readers might find all this...written almost 11 years ago...wearisomely familiar. The looming collapse of Northern Rock's aggressive short-term borrowing model was utterly missed by the Financial Services Authority last summer, even as the global credit crunch bit. It was left to the current BoE governor, Mervyn King (career academic; no private-sector banking experience) to warn – vaguely – of the risks to stability posed by the UK's record credit binge.

But as Helen Liddell, then economic secretary to the Treasury, put it in May 1997, re-arranging the UK's regulatory structures was just a "management issue" which would be solved.

And government can resolve anything it chooses, right? Most especially the multi-trillion international financial markets...where the world's brightest brains sweat bullets trying to turn a quick buck even quicker.

P.S: New customers here at BullionVault often ask if we're regulated by the Financial Services Authority. The answer is no. Here's why...

PHYSICAL gold bullion is explicitly excluded from European and UK rules governing the securities, credit and derivatives markets. Because physical gold bullion is simply a lump of metal that you either own or not.

BullionVault arranges nothing but the sale, purchase and secure storage of real gold bullion, held in the form of Good Delivery gold bars and kept safe – on your behalf – in market-approved vaults. The gold remains your personal property, with full legal title, for as long as you choose to own it. The only differences from holding the gold in your hand are the dramatic cost savings you'll enjoy, plus the greatest physical security you'll find for gold bullion anywhere on earth.

Your ownership comes without condition, and it would entirely survive our liquidation. You, the owner, simply employ us to arrange custody on your behalf – and that makes us subject to English and international property law.

If we attempted to rip you off, in other words, we would go to jail. The clear statement of your property rights in our Terms & Conditions, plus the fact that customers pay an annual storage & insurance fee (albeit just 0.12% p.a.) make gold-ownership through BullionVault a matter of law, rather than guidelines or "principle-based" rules. (Click here to Learn More about the BullionVault Service and the unique protections it gives you...)

   The UK's investment regulator, in contrast – the Financial Services Authority – has just got round to bringing its first ever criminal case for insider dealing, despite being the statutory prosecutor for insider dealing since 2000.

   "That’s a long while," as Sara George of Allen & Overy noted to the Financial Times. Not least because the regulator itself says insider dealing is "rife" in the City of London, affecting almost 24% of takeover and merger announcements in 2005 – utterly unchanged from the proportion subject to insider dealing in 2000, the year the FSA became responsible for preventing it.

   As for fines, the FSA's preferred slap on the wrist, the largest single censure of a retail finance firm to date was this month's £1 million fine (less than $2m) of HFC Bank for giving "unsuitable insurance advice". HFC is part of the HSBC group. The parent's latest interim report showed that it earned that much – pre-tax – every 36 minutes.

   The FSA's largest fine all told was £17 million ($33m) charged to Royal Dutch Shell for lying about its crude oil reserves in July 2004. The oil giant's net income at the time was £24m per day.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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