Response to case study on Society Generale's Fiasco: Lessons in Risk Management: 1. What was the fraud that occurred?
A low to middle level employee known as Jerome Kerviel hedged unauthorized levels of derivative trading that left vulnerable 20 percent of the bank's equity. In other words, he exceeded acceptable level of risks in predicting the markets' performance and lost while doing that for several years without detection. 2. Reasons for the fraud:
Ambition. Jerome Kerviel did not graduate from a school that would be the equivalent of an IV League school here in the US. His assignment and remuneration demonstrated that, earning a fraction of the salary of his colleagues from more prestigious schools. He wanted to show them that despite his humble and modest beginnings he could compete with the best of them. And if you believe he single handedly perpetrated this giant scheme, which I personally don't, then he succeed in making his point. 3. Society Generale, prior to this massive scheme, boasted of the quality of safeguards that were in place to protect the public. Jerome Kerviel's exploits painted a totally different story: that the internal control system in place was nonexistent or inadequate at best. This bank had over 1000 internal auditors at the time of the fraud, and maintains not just one but two independent accounting firms in compliance with France's financial reporting requirements. In addition, the chairman of the board of directors is required to report on, in the annual report, the internal control system that is in place and to report on challenges the system could face. And all through the period the fraud was being committed, Society Generale was given a "clean bill of health" in unqualified opinion by its independent auditors. On the surface, this is good stuff. So, what happened?
Risk and Risk Management. Banks take risks that is what they do. It's the management of the risk that was the problem at SG. Inadequate supervision, I...
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