French President Nicolas Sarkozy may be hinting strongly at the need for management changes at Société Générale over the bank’s record €4.9 billion ($7.2 billion) trading loss, and potential predators like BNP Paribas are circling, but SocGen’s beleaguered investment banking boss, Jean-Pierre Mustier, says he is committed to restoring the bank’s reputation.
“Many things may happen in the future, but today what is important is to reassure our clients, our staff and our shareholders, and to fight back,” Mustier tells Institutional Investor. To underline his determination, he has agreed to forgo any compensation beyond France’s minimum wage for two years.
Mustier’s corporate and investment banking division had been the crown jewel of Société Générale’s business empire, using its dominance in equity derivatives to generate 39.5 percent of the bank’s €4.3 billion in earnings in the first nine months of 2007. But the disclosure that rogue trader Jérôme Kerviel had built up an unprofitable €50 billion long position in European equity index futures has damaged the bank’s franchise.
“Clearly what we’ve got to do is restore the confidence that people have in Société Générale’s corporate and investment banking,” says Mustier. But the executive cautions against any knee-jerk reaction to impose a host of new risk controls. The key, he says, is to strengthen vigilance without shackling the bank’s skills and risk appetite. One early change: SocGen is now monitoring traders’ gross positions, rather than relying on anomalies in the bank’s net position to set off alarm bells.
“We would be missing the point just by introducing new procedures, which can always be hacked by a determined individual,” he says. “The accent going forward must be on permanently reviewing and constantly changing controls without destroying a model that has worked well for us.”
Perhaps ironically, Mustier can’t make the one change that might most effectively prevent a repeat of the Kerviel scandal — banning back-office employees from becoming traders — because it would leave SocGen open to discrimination suits from French unions, bank sources say. Kerviel had worked for five years in the bank’s middle office, which is responsible for auditing trading positions, before being made a trader on the group’s equity index arbitrage desk in 2005. Executives say he used his knowledge of audit procedures to avoid the bank’s risk controls. Kerviel told prosecutors, who placed him under formal investigation last month on charges of forgery, breach of trust and breaking into computer systems, that his motivation was to increase his end-of-year bonus by boosting trading profits.
“We won’t end the ability of middle-office employees to become traders,” says Mustier, “but from now on we will be much more careful when controlling traders who have past experience in the middle office.”
The pressure on Mustier as well as chairman and CEO Daniel Bouton to resign increased late last month when Paris prosecutor Jean-Claude Marin revealed that Kerviel’s efforts to hide unauthorized trading had begun as far back as late 2005 and that the German-Swiss derivatives exchange Eurex had alerted Société Générale to irregularities in Kerviel’s trades in November 2007.
At a meeting the day after Marin’s revelations, Société Générale’s board agreed to leave both Bouton and Mustier in place, but it appointed a three-person committee of independent directors, headed by former PSA Peugeot Citroën chief executive Jean-Martin Folz, to probe the investment banking division’s risk management with assistance from PricewaterhouseCoopers. The reprieve for Bouton and Mustier may prove to be only temporary if the committee, which is due to report on February 20, finds that risk management standards were lacking or not applied rigorously.
