Remember 2003, when so many Americans hated France for refusing to participate in the Iraq invasion? The airwaves were filled with insults about "effete" and "cowardly" Frenchmen, the phrase "cheese eating surrender monkeys" was on lips across the nation, and rich patriots were boycotting Rhône wine in the spirit of national sacrifice. Well, munch on a Freedom Fry and ponder this: Finally, after one stunning revelation of big bank lawlessness after another, a banker is going to jail... in France.
That's a bit of a national embarrassment, n'est-ce pas?
Jerome Kerviel was sentenced today to five years in prison (with two years suspended), and was ordered to pay the equivalent of $6.7 billion US in damages. There are a number of questions about Kerviel's case, although the most puzzling one for American banker sensibilities might be the fact that he never profited personally from his massive trades. That part of Kerviel's psychology is incomprehensible to the Wall Street mind: He made his firm billions of dollars, yet earned less than $200,000 US per year for his efforts. A true American shark would have nothing but contempt for a sucker like that.
Guess who got off pretty much scot free in the whole deal? Société Générale, the bank that employed him. If the name sounds familiar, here's why: Société Générale was one of beneficiaries of the US taxpayers' largesse when, as a counterparty to AIG, the government directed AIG to pay the French bank $11.9 billion. That's 100 cents on the dollar for what AIG owed Société Générale for credit default swaps and CDS collateral postings.
Newspaper reports about Kerviel say that he generated more than 1.4 billion euros in profits during a single year. And yet there was so little curiosity about his activities that he was still able to bet more that $50 billion euros, more than the entire market value of the bank that employed him, without getting caught. As an AP story reported, " an internal report by the bank found managers failed to follow up on 74 different alarms about Kerviel's activities."
Despite the warnings, Société Générale was shocked -- shocked -- to find out that gambling was going on in there.
In that sense, the judge's ruling was, to say the least, odd. While the French are to be applauded for their willingness to indict a banker, the court's ruling bent over backward to exonerate and placate the bank itself. The court ordered Kerviel to reimburse the bank for the entire amount it allegedly lost. While Kerviel will actually never be able to do that, it was the judge's was of saying that the bank bore absolutely no responsibility for what occurred on its premises. It was also a repudiation of Kerviel's assertion that other traders were doing the same things he was. Instead of reprimanding the bank for its horrible risk management practices -- controls so sloppy that the entire bank could be put at risk by mid-level employee -- presiding judge Dominique Pauthe praised the bank's response to the crime once it had happened.
If the bank had left the vault doors open, presumably the judge would have praised it for sounding the alarm after it had been robbed.
But then, Société Générale has a way of getting lucky where the authorities are concerned. The US decision to pay the bank the full value of its AIG obligations demonstrates that. Think about it: In the course of a year, an allegedly "rogue" trader wreaked so much havoc that it cost Société Générale $6.7 billion -- and the US government honored an obligation for nearly double that amount. Had the US let AIG go down or refused to honor this obligation, SocGen's fate might have been very different. Instead it survived this incident, is planning to hire 1200 traders and bankers, and saw a little stock bounce from today's decision.
The French bank seems to have done well by its association with Goldman Sachs, too, after Goldman brokered a number of its arrangements with AIG. It's important to remember the role those two firms played in the months preceding the financial collapse. As Bloomberg News reported:
Banks that bought swaps as protection against losses on mortgage-linked assets demanded cash collateral as the market value of the securities plunged last year, overwhelming AIG's ability to pay.
"It was precisely that drain of liquidity to Goldman and SocGen that put AIG in a position of illiquidity and ultimately threw them into the government's arms," said Charles Calomiris, a finance professor at Columbia Business School in New York.
In other words, they had already bled a lot out of AIG before it collapsed, and yet were still able to receive 100 cents on the dollar where others might have been forced to settle for less. As with the Kerviel affair, SocGen's oversight appears to have been lax when it came to its AIG agreements. David Fiderer properly notes SocGen's casual indifference to a major investment, deferring that task to Goldman. Not that Goldman didn't work for its client (and itself) in return: It's been accused of engaging in serious gamesmanship over its valuation of some of the securities in question. Many Americans who are already outraged over AIG's counterparty payouts may not know that AIG believed it had overpaid Goldman $1.56 billion, or that Goldman had refused to have its valuations reviewed by a panel of independent firms.
One of the open questions about l'affaire Kerviel is whether he acted alone. At the very least, there were enormous gaps in SocGen's internal controls. At worst, the bank looked the other way while one or more of its traders generated huge profits.
But the real question is for our country, not France: Where are the US indictments and convictions? We've already discussed the curious decision not to prosecute anyone at AIG. But then, the French don't have our SEC, which has so often chosen to cut sweetheart deals that leave bank shareholders on the hook for the illegal behavior of bank executives, while letting the bankers themselves walk away with their freedom and their bonuses. Senators aren't the only ones upset about that. Judges are furious with these slap-on-the-wrist SEC agreements.
In fact, "sweetheart deal" was the phrase a judge used to describe the SEC's agreement with Barclay's Bank. The Barclay's case was the fourth in a series of cases where banks violated international law only to be let off easy, prompting the judge's comments. As the New York Times reports:
"Judge Sullivan asked why the government had not indicted and prosecuted the foreign banks, rather than agreeing to the settlements. He also asked whether any individuals from Barclays were being held responsible, though no one else has been charged in the case.
"One must wonder what the penalty is, said Judge Sullivan ...
Judge Sullivan's comments was part of a litany of judges' complaints along the same lines. These judges understand that criminal prosecution of banks -- and bankers -- has precisely the deterrent effect we need to protect society. We've seen rampant bank criminal behavior go unpunished, from stock fraud to forged mortgage documents to laundering drug money.
The French court's air kiss to Société Générale was unacceptable, given that bank's negligent (or complicit) role in Kerviel's action. So in one sense, Kerviel's the fall guy (even if he's not the hero some of the French seem to think he is). But at least Kerviel's conviction and sentence might have a deterrent effect on future bankers. The US bankers who engaged in criminal behavior are walking around free. They're writing big checks to political candidates, whining that nobody likes them and, of course, drinking nothing but the best French wines.
DISCLAIMERS: Two potential conflicts of interest here -- I used to work for AIG, and I'm one-quarter French. When I was about 18 years old I mentioned that second fact to a very pretty young Parisian woman in my broken French as our train approached the Gare du Nord, to which she responded in true Gallic fashion: "How nice for you."
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
He can be reached at "email@example.com."
Website: Eskow and Associates