Jerome Kerviel and the Society Generale Banking Scandal

Maria Bartiromo, the "money honey" of CNBC's financial broadcast network is one of the brightest and most accomplished women in the world today. Bartiromo is the anchor woman on CNBC's Closing Bell and she also anchors on the Wall Street Journal Report on the same channel. As such she's one of the few people capable of explaining what happened at France's Societe Generale Bank last week. Her morning report CNBC's financial news network told the story of a "rogue trader" who tripped up world financial markets.

For most people, the story may be difficult to understand. Stock and options trading is limited to a relatively small demographic of individuals. But most people recognize that large institutions like corporations, banks, and insurance companies have large scale participation in the securities exchange markets. In the U.S., securities trading is a heavily regulated business owing to the potential for massive investor fraud. The demise of the giant energy corporation, Enron, is an example of how badly things can go wrong. Enron has ceased to exist and it's Chief Executive Officer, the late Ken Lay, was ordered to prison for his participation in stock fraud and insider trading.

This story concerns a "low-level trader" named Jerome Kerviel and his unauthorized trading activities at Societe Generale. While financial newspapers like The Wall Street Journal reported the story, the daily morning news TV media largely ignored the story.

Kerviel is a handsome 31 year-old who figured out how to circumvent computer security and the rules and regulations governing world securities trade. Over the past year, while securities were booming, Monsieur Jerome played the securities markets like an intoxicated slot machine player who keeps winning. Kerviel gambled with investor's money until the financial markets dipped and the system Kerviel had manipulated so well finally sent up the red flags of margin calls. When the margin calls were not met, Societe Generale's financial executives took notice. Kerviel's activities contributed to billions of dollars in losses for Societe Generale and had an impact felt around the world.

With financial markets already trending downward, the giant bank's executive scrambled to conceal the fraud from the financial world. It's unclear when Societe Generale Bank reported the fraudulent trades to France's central bank but bank executives kept mum while they tried to "unwind the trades."

"Unwinding Kerviel's trades" meant looking after Societe General's money and showing little concern for outside investors. The bank secreted Kerviel's activities until they could cut their billion dollar losses and hedge against further declines. In "unwinding" Kerviel's unauthorized trades, Societe Generale dumped a large number of losing positions on the markets, limiting the bank's damage to a range of $5bn to $9bn. CNBC's website carried a report from Reuters which said that Kerviel's losses were initially in the range of $74 billion.

The "unwinding" is believed to have triggered massive programmed trading and panic which spread across the Atlantic. Many economic analysts say that the precipitous market decline in European trading is what moved the U.S. Fed Reserve to cut an unprecedented .75 percentage points.

The financial, political, and legal arithmetic has not yet been calculated. Societe Generale lost an estimated $9 billion but world financial markets lost trillions in the recent decline. Not all of the losses can be attributed to hapless Jerome Kerviel but the large amount of strategic selling engendered by Society Generale made already nervous markets plunge.

Societe Generale is pressing criminal charges against Jerome Kerviel who currently sits in jail. It is likely that Society Generale will be prosecuted for its role in hiding the fraudulent stock and futures selling activity and the circumvention of security market rules and laws.

Source: Mario Bartiromo on CNBC