Tuesday, January 29, 2008

A Banquing Beungule

The old stereotypes are always the best

What should we make of the man who broke the bank at Tours Société Générale? The multibillion "fraud" executed by M Kerviel has set a new world record.

The original story from Soc Gen's management never sounded credible. One junior trader could not possibly build up losing positions on the scale we were meant to believe: even the sketchiest internal controls would surely have picked it up, and somebody must have noticed the massive cash outflows as margin calls were paid away.

The reality seems to be that the activity had been spotted, but for weeks or even months management did nothing. Presumably that was because- just like Barings management- they were too big to ask how all those convoluted trades were actually supposed to work. And when last week they finally did hit the panic button to close the positions, they compounded the whole problem by mounting such a monumentally cack-handed trading operation the entire global stock market moved massively against them (see excellent FT Alphaville round-up here).

Yet despite all that, the top men still think it's perfectly OK for them all to stay on. How arrogantly hopeless is that?

In truth, Tyler has never been able to fathom France's big financial institutions. Unlike their Anglo-American counterparts, profit often seems to come a long way behind La Gloire- the projection of Gallic power across the globe. Indeed, whereas our top banks grew from the bottom up, Soc Gen was actually established top down by a decree of Emperor Napoleon III. Its current head is an ex-government commissar. For such institutions, the shareholders interest has always been a secondary issue: one way or another French banks and insurance companies have been able to draw support from the French state.

So for small government types it's tempting to conclude this bungle is yet another example of public sector incompetence.

But of course it's not as simple as that. We've had plenty of rogue trader/incompetent management bungles in our private sector banks, and the Crock's management team reminded us that arrogant ineptitude is not the sole preserve of state commissars.

No, catastrophic bungles can take place in any organisation, be it public or private. The key issue is what happens then? What is the consequence?

In the case of Barings, the bank went bust (and was gobbled up for £1 by a rival). In the case of the Crock, that's what should also happen. But in the case of mega-bungling Soc Gen there's no way we'll ever see that- the worst case would be renationalision as a "strategic asset", with the French taxpayer picking up the pieces.

Which illustrates why state bail-outs are so very costly. Not only do they involve the cost of the bail-outs themselves, but they also encourage managements to conduct themselves without full regard to the risks of their actions.

PS Talking of moral hazard, what about the head of the IMF calling for massive fiscal reflation? The IMF! The reason of course is that since last September the IMF has been headed by a buggins turn French socialist poilitico, Dominique Strauss-Kahn. Wiki says: "A former Finance and Economics Minister in Lionel Jospin's "Plural Left" government, he belongs to the center-left wing of the PS. He sought the nomination in the primaries to the Socialist presidential candidacy for the 2007 election but was defeated by Ségolène Royal in November 2006." So much for the IMF.