SocGen=Barings=Kidder, etc.

As the information on the latest "rogue trader" continues to trickle out, I'm reminding of the recent past where there have been similar happenings. Of course, most everyone remembers Nick Leeson, who from his remote location in Singapore, managed to bring down one of the oldest and most venerated banks in England, Barings, which was subsequently sold to ING for a single pound. I'm sure many of you remember Joseph Jett, the STRIPS trader at Kidder, Peabody, whose manipulation of the system there generated at $300 million loss and was the catalyst for then parent GE to sell Kidder to Paine Webber in 1995.

While all the details on Jerome Kerviel's actions are not known publicly yet, his motives in this scenario continue to be a mystery. While Joe Jett was clearly in it for the money (he was the highest paid Kidder employee in 1994) as was Nick Leeson to some extent (he didn't quite see the financial benefit that Jett did), it doesn't seem as if Kerviel was going to make anything on this. Maybe he hated the bank, or his bosses. Revenge can be a good motivator. Perhaps he did it for a same reason mountain climbers climb mountains, because the opportunity was there. It should be interesting to find out.

What is similar in these, and a few other situations, is that there was one guy that knew not only the systems and procedures of the firms they worked for, but also knew the markets. Being a market professional, that is an increasingly rare combination. This is good news and bad news. The good news is that there aren't that many people that could pull something like this off. The bad news is that there are few people that could recognize what is going on. These days, most traders come out of firm training programs, which may help them prepare by loading them up with product knowledge but gives them little, if any, exposure to operational elements of the business. In addition, few people stay at firms long enough to get the comprehensive background necessary to be a scam mastermind. Of course, a team of people could do it, but as past history shows, it doesn't seem to work that way.

The sad part about these three examples was that they weren't caught by some routine checks and balances inherent in the system, but because the fraud became so large that each firm's viability came into question. I'd like to say it can't happen again, but I think everyone realizes that isn't the case. It can't happen everywhere, because some firms do their job in this area very well. One final note: To all those people out there that said to me over the years that this couldn't happen in a European bank, you should stop throwing stones from your glass house.