Rogue Trader Jerome Kerviel 'I Was Merely a Small Cog in the Machine'
The fall of Societe Generale trader Jerome Kerviel became symbolic of the entire financial crisis. In October, he was sentenced to five years in jail for losing almost 5 billion euros of his employer's money. In an interview with SPIEGEL, he says his bank knew exactly what he was doing and that his trades were nothing unusual.
SPIEGEL: Monsieur Kerviel, in early October, a Paris court sentenced you to five years in prison, with two suspended, and ordered you to pay 4.9 billion ($6.7 billion) in restitution to Societe Generale, the French bank and trading house where you worked from 2000 to 2008. How did you react to the sentence?
Jerome Kerviel: I see it as a major injustice. It felt like someone had repeatedly whacked me over the head with a bludgeon -- at first with the five years of imprisonment, and then with the multi-billion euro fine. And the bank has been cleared of all complicity.
SPIEGEL: At your current salary of 2,300, you would have to work over 177,000 years just to pay the fine.
Kerviel: The judge simply adopted the line of reasoning used by the lawyers of my former employer, Societe Generale. This judgment doesn't factor in any of the mitigating circumstances that we presented during the trial. People obviously were trying to protect the bank and the financial community in Paris. And, to do so, Jerome Kerviel had to be "shot down."
SPIEGEL: The Paris daily Le Figaro described you in the courtroom as follows: "A lonely man takes deep breaths, sitting groggily with hanging head." Were you really that surprised by the court's decision?
Kerviel: It pulled my legs right out from under me, it was so unexpected. At first, I was paralyzed. More than anything, I was anxious on my mother's behalf that I would have to go straight to prison. The whole affair has been very upsetting for her. I don't understand the verdict; it negates the financial crisis and rests the blame on me alone. We presented the court with evidence that many traders had been doing things in a way similar to how I did them and that my bosses knew what was going on. And then the bank is cleared of all complicity...
SPIEGEL: The court, however, didn't buy your defense. Your fine is the same amount that your employer says it lost in unwinding the open, unauthorized positions on your trading book in a three-day selloff in January 2008, when markets were plummeting worldwide. Never before has a bank employee caused so much damage by betting on stock prices.
Kerviel: In the process, I didn't make a penny, I didn't enrich myself personally and I didn't commit any fraud. I only wanted to be a good employee who generated as much profit as possible for his employer. I was merely a small cog in the machine -- and now I'm suddenly supposedly the main person responsible for the financial crisis.
SPIEGEL: In 2005, you were promoted to a position as a junior trader and quickly began to distinguish yourself. How did you accomplish that?
Kerviel: I specialized in German stocks. After a few months, I took my first position, on Allianz stock, betting on a fall in the market. At first, I was in the red. But, then, the attacks on London's subways caused stock prices to collapse. The bank reaped 500,000 in profits from my transaction.
SPIEGEL: How did your superiors react?
Kerviel: When I spoke with my supervisor about the deal over lunch, there was a bit of a scolding: As a trader with only six months on the job, I wasn't supposed to take those kinds of positions. Still, right after that, he praised me and increased my freedom to make speculative deals from 2 million to 5 million. That is typical for the contradictory world of the trading room: Risk limits were exceeded on a daily basis. The bosses knew that, but there were never any admonishments.
SPIEGEL: But even with 2 million or 5 million to gamble with, you still weren't satisfied for long.
Kerviel: I continued to raise my stake higher and higher after noticing that my superiors would cover up for me out of their own self-interest and for the benefit of the bank. In late 2006, I established a major short position on the DAX, Germany's stock index, worth several billion euros, which I sold off for a 20 million profit in February 2007. Since the transaction with the Allianz stocks, none of my superiors had taken me to task again. I was making consistently large profits. Within three years, my bosses had raised my targets by 1,700 percent. That shows that they knew exactly what was going on.
SPIEGEL: And then you had delusions of grandeur and began gambling with billions.
Kerviel: I didn't feel like I had delusions of grandeur. With the support of my bosses, I was caught up in a spiral of always making more and more. In March, I saw that the risks associated with American subprime loans had gotten out of control, and I made a bet that there would be a crash. I was so enthralled with my idea that, little by little, I took out positions worth 30 billion. But, between March and July, the stock market experienced a continuous climb, which exposed me to massive potential losses of up to 2 billion. The bank covered my losses every time. And, every day, it would pay for my losses on the stock market -- without saying a thing.
SPIEGEL: But then came the turning point.
Kerviel: In July, the market had its first panic attack, and I was able to pull out with a gain of 500 million. Still, I was convinced that the markets would continue to fall, so I got back in with 30 billion. From dawn till dusk, I would stare at the screen, trading enormous amounts, hardly getting any sleep and making 1.5 billion in profits for the bank before the year was up.
SPIEGEL: You worked at the so-called Delta One trading desk, which handled generally low-risk futures hedging on European stock market indexes. The maximum official risk exposure for that desk was 125 million. How did you end up having several billion euros to play around with?
Kerviel: My supervisors had deactivated the system of alerts. If I had wanted to, I could have even invested 100 billion in a single day. My bosses removed all the safeguards off my computer.
SPIEGEL: Nevertheless, Dominique Pauthe, the presiding judge, considered it proven that you were the "deviser of a coherent system of deception" and convicted you of "breach of trust, forgery and unauthorized use of computer systems." Do you honestly believe you are innocent?
Kerviel: I only employed methods that had already existed in the bank and that I learned there. I didn't make anything up; other traders were trading in a similar way. I only had to make sure that, when evening came, it looked like the trading limits had been observed. In order to conceal my trading positions, I would conclude offsetting transactions that would make it appear in the trading system as if the exposure had been neutralized. The internal monitors saw that I didn't have any trading partners for these hedges, but no one ever said a thing. Sometimes it involved position worth up to 50 billion. In this way, within two years, I was able to trade a total of 400 billion in securities with counterparties unknown to the bank.
SPIEGEL: Did the real magnitude of your trades really never draw the attention of your supervisors?
Kerviel: No, it did. Already in April 2007, they received an e-mail saying that I was making bogus trades with nonexistent counterparties on a massive scale. My bosses told me that I should take care of the problem. Over the course of 2007, they received many more e-mails on the same issue.
SPIEGEL: Describe what your typical day at the bank looked like.
Kerviel: I would get to the bank before 7 a.m. and oftentimes only leave it around 10 p.m. It was stress and adrenaline and a passion for the job that allowed me to make it though it all. Oftentimes, I wouldn't even go outside to get something to eat.
SPIEGEL: How did you make it through it all? With drugs?
Kerviel: Never. For me, it was passion. At the time, I found this virtual life completely normal; the only thing I paid attention to was the ups and downs of securities on my computer. Whenever I did go out, it was only with my coworkers from the trading room.
SPIEGEL: Some traders say that their role model is Gordon Gekko, the financial shark played by Michael Douglas in the 1987 film "Wall Street." Was that also the case with you?
Kerviel: Absolutely not. There are a number of quotes from the film that people are still fond of using in the trading room. For fun, I often think of Gordon Gekko's piece of advice: "If you need a friend, get a dog." Unfortunately, that speaks to my own experiences.
SPIEGEL: In the opening scenes of "Wall Street: Money Never Sleeps," a recently released sequel, Gordon Gekko gets out of prison after serving almost eight years for insider trading and securities fraud. Like you, he is writing a book about the dark side of the financial world and ultimately gets his revenge by making more money than he ever had in his life. Have you thought to revenge, as well?
Kerviel: No. That doesn't help anyone. I only want the truth to be known, for everyone to take responsibility for their actions.
SPIEGEL: Have you already fielded requests from film producers about buying the rights to your life story?
Kerviel: There have been some inquiries. But I'm not interested in that. For the last two years, my only goal has been to defend myself. People have been digging around in my life. It was announced that police had found a Koran while searching through my apartment. So, then, people thought I was working for al-Qaida. Ridiculous.
SPIEGEL: Daniel Bouton, the former chairman and CEO of Societe Generale, once called you a "terrorist" for having risked 50 billion with your speculative trading. That figure was roughly equivalent to the market value of the entire bank.
Kerviel: My only goal was to make the largest profit possible for my employer. I was caught in a spiral that -- with the support of my bosses -- continued to lead up and up.
SPIEGEL: Supervisory bodies issued 70 risk alerts to Societe Generale.
Kerviel: In reality, there were many more warnings. But the higher-ups had gotten deeply involved in the speculation themselves. There were limits in terms of how much exposure each individual trader could take on, but no one paid any attention to them. Like I already told you, my supervisors had deactivated the system of alerts on my computer.
SPIEGEL: During the trial, executives from Societe Generale testified "that you were in no way authorized, or could not have been authorized by your bosses, to take such risks, which represented a potentially fatal danger to the bank."
Kerviel: At no point did they ever say to me: "Jerome, stop it with all this stupidity!" On the contrary, they encouraged me to build up trading positions and take risks. In the summer of 2007, I took a two-week vacation. Every morning, they would call me for advice on how to manage my positions. After just one week, I was forced to come back.
SPIEGEL: Had the risks snowballed out of control?
Kerviel: No. They saw that there was money to be made and insisted that I return.
SPIEGEL: After your vacation, did the bank force you to lower your trading positions?
Kerviel: Just the opposite. At the end of the year, they told me that I was only supposed to make these kinds of trades for the bank and that I would be relieved of all my other responsibilities. They encouraged me to take on risk.
SPIEGEL: Have you really gotten your mind around the fact that no single individual has ever gambled with so much money on the stock market as you have?
Kerviel: Nobody knows everything that's hidden in the balance sheets of banks. In fact, they are completely impenetrable. To invest 150 million, it only takes a second. For 1 billion, you need four seconds. Things go so quickly with computers that you lose any sense of the amounts involved. The international market is so big that it absorbs all orders in just a matter of seconds. The wheel continues to spin faster and faster. It's insane.
SPIEGEL: In October 2007, Eurex, the German-Swiss derivatives exchange, reported to Societe Generale that one of its traders, a certain Jerome Kerviel, was manipulating the German stock index. What triggered the report?
Kerviel: I had made a 30 billion bet that the DAX would go down. I profited from the fact that the markets actually did tank in the fall of 2007. I liquidated my position, thereby helping to stabilize the market. Market participants sensed that the market was being manipulated and complained about it to the German exchange. It launched an investigation and saw that I was helping to stabilize the DAX.
SPIEGEL: By then, at the latest, the bank must have alerted to what was going on.
Kerviel: One evening, the bank's risk-management officers approached me and questioned me about my strategy in Germany. Later, my boss told me that I should come up with empty responses for written questions from the Germans and under no circumstances reveal my trading strategy. All of my superiors saw this letter.
SPIEGEL: Was the stock exchange satisfied with your answers?
Kerviel: Not entirely. In November, they sent a second letter. From that, it was clear that I had taken positions in excess of 1 billion within a matter of two hours and had far exceeded my limits. Of course, my superiors saw that one as well. Once again, I was required to prepare a second, noncommittal written response, which was then forwarded by the bank.
SPIEGEL: Did the bank's internal risk monitors do nothing more than that?
Kerviel: No. There's a lot of hypocrisy involved because everyone sees everything but no one says anything. You don't align yourself against a bank's business model.
SPIEGEL: Were you the only trader who worked like this?
Kerviel: At the end of my book, there are several termination notices that clearly show that this was standard practice in my Delta One division as well as in the bank.
SPIEGEL: Your boss testified in court that he didn't know what his traders were up to. He claimed that he didn't have either the means or the training to be able to monitor their activities better.
Kerviel: He wanted to save his own skin, too. At one point, when the judge was reading aloud to him an e-mail addressed to him that discussed a trade of mine worth 1 billion, he stated that he had never read the crucial second paragraph -- only the first and third paragraphs. That's how things went throughout the whole trial. The executives constantly repeated that they unfortunately never read the details closely, that they weren't traders themselves.
SPIEGEL: And the judge believed them?
Kerviel: For being allegedly so incompetent, they certainly demanded a lot in bonuses, between 700,000 and 2 million. I was shocked that they got away with their testimony in court. There are dozens of e-mails attesting to the fact that they knew about the transactions.
SPIEGEL: Are you calling for your former superiors to also be punished with prison sentences?
Kerviel: That's not what this is about. But I find it unjust that I am being held completely and solely culpable and liable. The verdict against me serves to rescue the system and the image of French banks.
SPIEGEL: Speaking of you, the prosecutor told the court: "He deceived his superiors, his friends, his coworkers."
Kerviel: I didn't deceive anyone. I provided my colleagues at work with millions so they could reach their targets. My bosses benefitted from me when they were negotiating their bonuses. They boasted about how my results increased so they could demand more money. And, today, they say they didn't know a thing.
SPIEGEL: Still, after the bombshell dropped, they all lost their jobs.
Kerviel: As far as I know, all but one of them has found another job.
SPIEGEL: During the trial, your attorney said: "Kerviel was formed, formatted and deformed by Societe Generale. He is their creature." Isn't that taking things a bit far?
Kerviel: I only know one thing: Everything I learned about the banking business, I learned in the banking towers of the Societe.
SPIEGEL: Still, no other trader has exercised his or her freedom of action as ruthlessly as you did. You can't escape personal responsibility for this.
Kerviel: I did unreasonable things. But I am also an employee who was encouraged by his superiors for three years to keep on doing things in exactly the same way. I only used the exact techniques that I learned in my bank. Perhaps only the scale was bigger. I have never dodged my responsibility. But I cannot accept the fact that I am being portrayed as the only person who bears any responsibility.
SPIEGEL: Can banks really control people like you?
Kerviel: Of course. But you have to want to. Having more controls and regulations goes against efforts to pursue consistently higher profits at a time when all banks want to maximize their return on equity.
SPIEGEL: What's missing? The will?
Kerviel: That's undoubtedly the case at Societe Generale. It wasn't an issue of technology: In the bank, there were systems of alerts that could react in a nanosecond. France's Banking Commission fined Societe Generale 4 million on account of the scandal. That shows that it assumes the bank bears partial responsibility.
SPIEGEL: You will remain free pending your appeal, which might take a few years. Likewise, in addition to your prison sentence and fine, the judge also barred you for life from working in the financial-services industry. Are you relieved that your days as a banker are now behind you?
Kerviel: Not everything is said and done. Together with my attorney, I will eventually have to prepare for proceedings before the appeals court and find experts who support my version of the story. Still, ever since the scandal came to the public's attention, things have gone much better for me personally. I now know who my real friends are. I now have time again to visit my mother in Brittany. We say things to each other that we had never said to each other before. I now know what's truly important in life.
SPIEGEL: Thank you for speaking with us, Monsieur Kerviel.
Interview conducted by Christoph Pauly and translated from the German by Josh Ward.