Era Business School, New Delhi

AJ; Ajay K Raina By Aman Chauhan (0121pg023) & Col Ajay K Raina, SM (0121pg014)

Era Business School, New Delhi

AJ; Ajay K Raina

Actors and the Storyline

• Société Générale is one of the oldest banks in France.

• Founded in 1864. • Nicknamed SocGen (pron

ounced "sock jenn"). • HQ in Paris. • France's third largest bank

by total assets.

• A universal bank split into three main divisions:- – Retail Banking and Specialized Financial Services – Corporate and Investment Banking (Derivatives, Structured

Finance and Euro Capital Markets); and – Global Investment Management and Services

Era Business School, New Delhi

AJ; Ajay K Raina

Era Business School, New Delhi

AJ; Ajay K Raina

Theme : Overstepping the Brief

• 3 categories of traders, each with her own motive.

• Lines crossed if a trader who has been mandated to churn in one category, steps into any of the other categories.

• Intrude, from the absolute safety of one into costly affairs of second and worse into dangerous arena of third, and spell disaster!

Era Business School, New Delhi

AJ; Ajay K Raina

What Happened? • J Kerviel joined SocGen in 2000.

• 2005- Mandated to look for arbitrage opportunities between DAX, CAC 40 and Euro Stoxx 50 indices.

• To err is human especially when temptations are huge.

• Creativity at work – fictitious trades. Portfolios A&B.

• Unhedged positions in tens of billions of Euros.

• Remember 2007/2008… fishing in troubled water!

• 2008 – over a period of three days, bank unwound his positions for a loss of €4.9 billion (or US$7.2 billion).

• The biggest till then.

Era Business School, New Delhi

AJ; Ajay K Raina

Going Gets Tough • It had happened in Jan 2008.

• Credit rating brought down; CEO resigned.

• March 2008 – SocGen lost a case against a Turkish Company who had acknowledged a consignment of 3250 Kg of gold instead of 15000 Kg as claimed by SocGen.

• March 2009 – AIG starts to sink, taking SocGen along with payment obligations of $ 11 Billion.

• October 2010 – Jerome Kerviel sentenced to 05 years imprisonment and obligation to pay €4.9 billion to SocGen (3 yrs; appeal pending+ reverse suit failed)

• Euro crisis 0f 2011 saw share falling by 57% after a wrong media news.

Era Business School, New Delhi

AJ; Ajay K Raina

The Tough Gets Going • SocGen sought €5 billion finance to tide over 2008

crisis.

• US govt’s bailout for AIG in 2008, averted $11 Billion loss.

• Successfully sued The Mail for the news article.

• Huge transformations in functioning.

• Posted profits in 2010 after two years.

• Was one of the four (out of 91) European banks to clear stress test in 2010.

• Stock rose to new high of € 52 in 2011-12, after touching low of € 18 in 2009 (now = €42).

Era Business School, New Delhi

AJ; Ajay K Raina

Era Business School, New Delhi

AJ; Ajay K Raina

No Lesson Too Small

• Utmost important to define unambiguous risk limits for traders.

• Monitor the traders once risk and limits defined.

Era Business School, New Delhi

AJ; Ajay K Raina

From The Economist SIR,

• Jérôme Kerviel is in trouble because without authorisation he used Société Générale’s money to bet on European markets, losing his employer some $7 billion.

• But imagine the embarrassment had Mr Kerviel made a profit of $7 billion, or possibly double that, if the markets had moved differently?

• The bank would have had to discipline, dismiss and pursue for fraud an individual responsible for a huge increase in net profits and a concomitant leap up the banking league table. ……….Michael Acott

(Johannesburg The Economist Letters, February 2nd, 2008)

Era Business School, New Delhi

AJ; Ajay K Raina