The financial world was shaken to its core in early 2008 when Socit Gnrale, then counted amongst the most esteemed financial institutions in the world, announced that a single trader, Jrme Kerviel, had caused the bank a net loss of 4.9 billion euros. The bank's top officers were left reeling, caught completely by surprisehow could they have been blindsided by such blatant and flagrant violations of company policy? In the immediate aftermath of the incident, many critics pointed the finger at Kerviel, hurling accusations of personal greed and ambitionhe was la-beled a rogue trader and blamed entirely for the fiasco. However, when police raided Kerviel's home, they found none of the evidence that would condemn him as an unstable individual with uncontrollable, reckless urgeshis apart-ment was simple, with no luxurious extravagances, and he did not even own a car. As James B. Stewart writes in The New Yorker, "how could one person have amassed an exposure, as Kerviel had, of fifty billion euros without his superiors at the bank knowing?" He goes on to note that Kerviel quickly

gained the sympathy of the public, with 50 percent of respondents in a Le Figaro poll blaming Socit Gnrale itself for what happened. As the months rolled by and investigators painstakingly unraveled the mystery around the relationship between the trader and the bank, it became evident that this was more complex than a simple case of rogue tradingand the story that the bank's top level executives had no idea what was going on became less and less credible. For example, internal and external audits of the bank uncovered the fact that around 74 alerts about Kerviel's unusual trading activities slipped under the radar of the bank's risk systems. There is now also substantial evidence that highlights the ineffective super-vision of Kerviel's direct superiors, who rarely checked on the transactions of individual traders.

It is also important to consider the highly complex nature of the deriv-atives that Kerviel was trading indue to their, as implied by the nomen-clature, derived value, derivatives can fall and rise significantly in value in response to comparatively smaller changes in the market. Since there is an unavoidable element of unpredictability to markets, a trader can find himself abruptly deserted by his golden touch when the markets shift unfavorably. Kerviel discovered that he could avoid this by performing intra-day

trades, which would not show up on the bank's daily recordshe could offset any losses with false trades to cover his own tracks. He was encour-aged by his initial successes, and was even praised by his superiors for a job well doneKerviel says that while his superiors reprimanded him for his trading activities, he did not take it seriously, because he was not punished. Eventually, his supervisors appeared to grant him free rein, exempting his computer from the company's system of alerts.

This demonstrates that while it is evident there was some form of ERM

in place at Socit Gnrale, top executives did not implement it in the face of such potentially high profitsgreed overpowered caution. Kerviel believed his superiors approved of his strong performance, regardless of the methods he used, which seems a reasonable statement, considering he was given a bonus of three hundred thousand euros in 2007 for his trading performance. Kerviel was aware that his illicit trading was constantly setting off the bank's internal trading risk management systeminformation that was most definitely accessible to his superiorsbut since no one actually brought it up with him, he did not stop.

However, as the number of false trades built up, the bank could no longer turn a blind eye to Kerviel's actionscorrespondence with Deutsche Bank, one of the firms that Kerviel had forged trades with, revealed that it had no knowledge of Kerviel's contracts. Kerviel's house of cards came tumbling down in a matter of days, when further investigation of his hidden trades yielded losses of around fifty billion euros that more than cancelled his previous stellar gains. In the end, Socit Gnrale decided to liquidate Kerviel's trades instead

of hoping for a miracle in the markets that would turn the tides in their favor, which likely swelled the already enormous amount of loss; the bank also had to borrow heavily from Morgan Stanley and J.P. Morgan to avoid bankruptcy. All Socit Gnrale trading was temporarily halted, which re-sulted in a four percent drop in share prices, while Kerviel was taken to court and immediately sent to jail. In a nutshell, as Kerviel's psychologist succinctly summarizes, "the com-bination of the financial and personal success derived from his hidden trad-ing, plus the lax supervision by his superiors . . . had a strong effect in the reinforcement" of Kerviel's trading practices.6

by any means, the only Socit Gnrale trader who performed illicit trades for the sake of higher profit margins, which speaks to the extent to which profit was emphasized over risk management within Socit Gnrale. As such, it seems that it was not the case that Socit Gnrale did not have established risk management proceduresit was simply that its employees chose not to follow them for the sake of higher profits, which speaks to the importance of fully implementing ERM. While Jrme Kerviel certainly made rash decisions, he was ultimately just one weak link in an entire chain that was faulty and vulnerable to breakage.

From the above case, define (a) The central issue the case is describing, (b) The problems that need to be addressed from the case, (c) What considerations would one identify as the Chief Risk Officer, (d)Agree or disagree with the solution described in the case and provide support for your position, (e) Provide a concise summary of the items you considered and your conclusion.