Great Depression Online Archive Issue:

A Proclivity For Fraud

Great Depression Online
Long Beach, CA
February 05, 2008

Inside This Issue You Will Discover…

*** A Fun House Mirror Maze
*** An Amiable Frenchman
*** How To Blow $7.21 Billion
*** And More

“There is an optical illusion about every person we meet.”  Ralph Waldo Emerson, Experience

A Fun House Mirror Maze

It starts innocently enough.  A tall tale.  Some slight embellishments of the facts.  For who doesn’t like a captivating story.

Then a harmless little white lie is needed to tie up some loose ends.  Then another lie to tie up those left by the last.  And then another…and another.  Soon all aspects of reality have been distorted like a fun house mirror maze at the county fair.

How far you take the deception is directly proportional to your level of appreciation of former President Bill Clinton’s infamous riposte, “It depends on what the meaning of the word ‘is’ is…”.

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And while some are grandiose and others find a sick thrill on pulling one over on their peers…there’s also the true deviant – the sociopath – who believes the fabrications they’ve constructed are the honest truths.

When big money’s involved almost anything can happen.

An Amiable Frenchman

Jerome Kerviel, age 31, was thought to be an amiable Frenchman.

Colleagues described him as a “‘Tom Cruise-type character,’” as reported by Julie Moult for UK’s Daily Mail.

“‘Like Tom Cruise, he’s not particularly tall but he has a presence.

“‘He’s also clean cut and generally very presentable.”’

Pierre-Antoine Souchard, reporting for AP, found that “Acquaintances described Kerviel as reserved and considerate, a young man who once taught children judo and held the door for elderly neighbors.”

But something went wickedly wrong.  For in late January, to the surprise of those who new him and to many who didn’t, the world found out that Jerome Kerviel, who worked at France’s second largest bank, Societe Generale, had a penchant for recklessness…and a proclivity for fraud.

We can only imagine how his boss choked on his coffee when he discovered that, while he’d been sleeping on the job, Kerviel had lost $7.21 billion hedging on European stock market indices.

“The bank said Kerviel had built up a position worth some $73.5 billion – which was eventually closed or hedged by last Wednesday with a loss of $7.21 billion.”

How To Blow $7.21 Billion

We’ll pause here to gawk at the mammoth sum of money that Societe Generale must wipe off the books.  And we’ll add that we couldn’t dispose of $7.21 billion even if we wanted to; we aren’t smart enough.

Purchasing a baseball team is about as big as we can dream.  But when Frank McCourt bought the Los Angeles Dodgers in 2004, the price tag was just $430 million.  At that price we’d have to buy 16-teams, or the entire National League, just to spend $7.21 billion.  Plus we could presumably sell them later to a greater fool and actually make money in the endeavor.

Again, our brain is too small to achieve such a magnificent triumph.  To blow $7.21 billion takes veritable brilliance.

So in case you’re curious, here’s how he pulled off the extraordinary feat…

“Kerviel had been investing the bank’s money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.

“Bouton [Societe Generale’s chief executive] said the trader had been betting throughout 2007 that markets would fall.  ‘He was therefore winning, virtually,’ he said.

“But the bank says he had overstepped his authority and was wagering more money than he should have.

“So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks.

“But markets dropped this month, and fast.  ‘This sad affair veered into a Greek tragedy: His virtual losing position became huge,’ Bouton was quoted as saying.”

Bravo.  That must be, without a doubt, the most pathetic way to blow $7.21 billion.  It’s a shame he didn’t even vacation somewhere tropical.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  It’s near impossible for total morons to blow big money.  To succeed at such a feat you must be a genius.  In fact, several years ago a Greenwich, Connecticut, hedge fun, which boasted two Nobel Prize—winning economist, lost $4.6 billion.  Poof…gone.  The fascinating tale of financial folly and of a zealot belief in mathematical models was documented by Roger Lowenstein in the National Bestseller, When Genius Failed: The Rise and Fall of Long-Term Capital Management.  You can pick up a copy from Amazon, starting at just $10.17, here: When Genius Failed: The Rise and Fall of Long-Term Capital Management.

 

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