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Excusez-moi, s’il vois plait!
By Lauren | January 28, 2008
French bank Société Générale has just demonstrated to the world that business ethics are not a uniquely American issue. Already facing a €2 billion writedown due to its exposure to subprime mortgage-related investments, Société Générale reported on January 24th that a single, low-level trader had generated another €4.9 billion in losses by making unauthorized wagers on European stock market futures. The bank quickly fired the trader, Jérôme Kerviel, as well as his immediate supervisors. Still, an immediate apology is clearly in order to investors who trusted the bank to maintain effective risk management procedures to prevent the kind of “pure fraud” of which Monsieur Kerviel stands accused.
In fairness to Société Générale, the subprime mortgage mess was generated not in France but in the United States, where the Wall Street Journal reports today that U.S. banks and securities firms have their own soul-searching to do. Columnists Randall Smith and Kate Kelly report that opportunities for fast profits in the subprime mortgage market generated tremendous pressure on banks and investment houses to break down their risk management systems. The WSJ article advises that, although banks and investment houses use sophisticated computer modeling techniques to manage risk, human judgment is needed to evaluate the numbers. An overemphasis on profitability leads to looser risk management controls and creates the opportunity for huge losses that computer models and manuals alone are not enough to prevent.
No kidding.
Does anyone ever pay attention to history? Not the history of ancient Rome or the Middle Ages, but history as recent as the savings & loan crisis of the 1980s. That little disaster, a product of deregulation, slack enforcement of the remaining rules and excessive investor enthusiasm for the “next new thing,” happened a mere two decades ago. If history is any predictor of the future, we’ll spend the next several months or years analyzing what went wrong in the subprime mortgage market, writing new rules to keep it from happening again, and excoriating the various people who yielded to demands from investors for bigger profits delivered at record speed.
Meanwhile, let’s hope that U.S. banks and investment houses aren’t watching Société Générale’s embarrassment too smugly. It may soon be their turn to say, “excusez-moi.”
Topics: Apologies, Business Ethics, Corporate Governance, Risk Management |