Most Indebted Man

Ever heard of Jérôme Kerviel? He is the world’s indebted man: he owes, hold your breath, $6.3 billion. Nope, not a typo: that is indeed billion with a “b”. Wonder how someone can run up so much debt? Well, the guy was a trader for the French bank, Société Générale. Through a series of frauds, including hacked trading accounts, he bet way more of the bank’s money than they had ever authorized. And when his  bets went wrong, the bank lost $6.3 billion. And so the judge ruled that, after completing his 3 year jail term, Kerviel has to pay $6.3 billion to the bank as fines.

What I found interesting was that the fine is so ridiculously unpayable that it effectively might as well have never been imposed. So why then did the judge impose it? Is the law really an ass?

Not so, says Frank Partnoy, a former investment banker and current law professor. He explained the fine has two intents. First:

“They'll likely reach some kind of agreement where a significant percentage of any money he makes for the rest of his life will be paid into a fund to cover the fine. He'll be like Sisyphus pushing the boulder up the hill every day for the rest of his life.”

And secondly, it acts as a deterrent to the next guy who thinks of doing the same:

“…the sword of Damocles will be hanging over you forever if you're convicted of this sort of offense.”

But why is it that investment banks repeatedly seem to end up with such rogue traders? Again, two reasons as per Partnoy:

“The first is just the sheer size of the big banks. These are large organizations and it's impossible to police everyone's conduct.”

and

“(Senior bank managers) set up the risk management systems in a way that makes at least some rogue trading expected and almost inevitable...The idea is they give their traders leeway...(if you impose too many constraints) your traders aren't going to make as much money.”

The second reason is a bit scary: if a bank acts “responsibly” and places a closer watch to prevent such rogue traders, then they make lesser money than their competitors…well, at least until that rogue trader takes down the bank. But, and this is the critical point, until that point, everybody gets a bigger bonus. And worse, until that point, even risks being fired for bringing in less money than all their competitors who looked the other way!

No wonder then that Charles Prince, ex-CEO of Citigroup, once asked, “Isn’t there something that you can do to order us not to take all of these risks?”