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The disappearing bezzle

The societe generale scandal

30 January 2008

12:00 AM

30 January 2008

12:00 AM

My friend Herbie from the Last National Bank of Boot Hill understood about rogue traders. When another hapless bank owned up to losses ‘due to unauthorised trading’, he added: ‘They mean nobody authorised the guy to get it wrong.’

Now that a French trader called Jerome Kerviel has set a new record by losing £3.6 billion, Société Générale, whose money it was, is left to wonder how it happened and to search for some deep, dark conspiracy. It looks more like a familiar story with extra noughts on the end. A swashbuckling trader buckles when he should have swashed, and then tries to double up and cover up. The money all goes to the people on the other end of his deals.

This happened to Lloyds in Lugano and to Allied Irish Bank in Baltimore, and to a Japanese bank whose man in New York would never take a holiday and kept the books to himself. Most memorably, it happened to Barings, when a swashbuckling trader called Leeson, out in Singapore, doubled up and broke the bank.

For him and for Barings, the moment of truth came at 1 a.m. when Leeson had vanished and the accountant from London forced the lock on the drawer of his desk, to find the telltale records and the scissors and paste he had used to fudge the documents he needed. This was an extreme case of what old hands call TIDS — Tickets In Drawer Syndrome. No wonder they say that the desks in a dealing-room must not have drawers.

These old hands learned to rely on their noses and ears. They would listen in to the market, they would talk to their opposite numbers in other banks, they would pick up a pattern of dealing and ask themselves if it made sense. Whether anyone at SocGen asked questions like these about Kerviel’s dealings, we shall now have the chance to find out.


None were asked at Barings. All the way up to Peter Baring, the chairman, everybody wanted to believe in this star dealer. They had told the Bank of England that his dealings were essentially risk-free and very profitable — as if there were no contradiction in terms or no link between profit and risk. Their bonuses, all of them bigger than Leeson’s, were riding on him. The only man not on a bonus was the lowly accountant who rumbled the fraud.

That, too, is a familiar story. Bankers win their promotions by winning new business, taking on new risks for new rewards and showing what stick-in-the-muds their competitors are. (Example: Adam Applegarth at Northern Rock.) By the time the new business goes bad, they can expect to have picked up their bonuses and moved on to higher things, possibly at other banks. No bonuses accrue to the man who clears up the mess.

That happens when, as now, the banking cycle turns down and the markets boil over. The bezzle shows up, as J.K. Galbraith explained in The Great Crash — still in print and never more topical. In heady times, he argued, fraudsters successfully embezzle money, but the people whose money it is or was believe that they still have it. So the bezzle is counted twice over, there seems to be even more money about, no questions are asked and the times become even more heady.

In the end, doubts set in. Bankers work out the true cost of lending money to emerging banana republics or to subprime trailer trash. They wake up and ask questions. They send the accountants in, and the bezzle comes to light and shrinks. Put like that, SocGen’s loss looks like a textbook instance of a disappearing bezzle.

This time round, in fact, bankers have found so many new reasons for writing off billions that an old-fashioned dealing-room fraud must almost come as a refreshing change. They can look at the true cost of trading elaborate financial instruments, and turn to another topical classic, Fred Schwed’s Where Are The Customers’ Yachts? ‘While the millions are being stolen,’ says Fred, ‘the billions are being lost. Nothing crooked — just bad luck and bad brains met together in an effort to do something that couldn’t be done in the first place.’

So some or most of SocGen’s missing £3.6 billion will have been lost to other banks, whose managers must now be grateful for what they can get. Perhaps they will learn by example the limits of mathematical modelling — SocGen loved to boast of its wonderful systems — and make more allowance for chance and human nature. They might even learn to use their ears and noses.

Having got that far, they ought to reflect on Herbie’s insight. Nobody authorised Leeson or Kerviel to get it wrong — but who would have known if they had got it right?

How many other hard-pressed dealers have fudged their records, doubled up and won? How many other senior managers have taken the result at its face value, awarded themselves a share of the credit and declared bonuses all round? How big is that bezzle? Perhaps we and they should hope that we never find out.


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