Home > Europe’s Enron moment has arrived
SOCIÉTÉ GÉNÉRALE’S TRADING SCANDAL
by DOUG SAUNDERS
LONDON — As Nicolas Sarkozy and Gordon Brown met for dinner in London last night, there was a distinct sense that both leaders were having an Enron moment: The sudden realization that the country’s most-respected industries are going to need more government oversight.
Both the French President and the British Prime Minister, who met to discuss the rattling economy and banking crises in an emergency summit with other European leaders, have discovered that their governments will need to take an active role - either in regulation or bailouts, or both - after recent disasters that have afflicted some major financial institutions.
It is the sort of nerve-testing moment faced by the United States in 2001, when Enron’s house of cards collapsed and Washington discovered a need to introduce strict regulation of the finance and accounting industries.
Mr. Sarkozy spoke to other Western European leaders of "moralizing capitalism" and attempting to "put order back in a system that sometimes seems out of control," his aides said.
His comments came amid allegations a young trader cost one of France’s venerable banks, Société Générale SA, more than $7-billion.
Mr. Brown might sympathize - to a point.
He, too, is being forced to step into the financial markets, to find a way to bail out failed mortgage lender Northern Rock.
The Labour Prime Minister will certainly agree with Mr. Sarkozy about the need for more regulation, more supervision and a more active role for international agencies in keeping balance sheets clean.
On the face of it, the two countries would at first appear to be headed in very different directions.
France claims to be doing everything it can to prevent a takeover of SocGen, whose loss of more than $7.2-billion in three days of unwinding the unauthorized positions of trader Jérôme Kerviel last week has left it extremely vulnerable to its long-time archrival, BNP Paribas.
"The government will not let Société Générale become the object of hostile raids from other banks," Prime Minister François Fillon told reporters yesterday. "The government is very attentive to any risk of the destabilization of Société Générale [and] will not allow Société Générale to be the target of hostile raids by other banking establishments."
Mr. Sarkozy’s aides have made similar remarks in recent days, and confirmed yesterday that he does not intend to let a takeover occur. The prospect of a large share of state ownership is not beyond consideration. After all, a large number of French banks, including BNP Paribas, were state-owned until quite recently, and the government holds stakes in many companies.
But his dining companion is facing the opposite direction. For weeks, Mr. Brown and his bank governor have been doing everything they can to arrange a takeover of Northern Rock, or a foreign or domestic buyout, by either domestic or foreign investors. By Feb. 4, they hope to have a suitor, and favourites include a U.S. private equity consortium, Five Mile Capital Partners.
So far, so typical: Britain is sticking to its hands-off, ask-no-questions approach to industry, allowing mergers to occur as they may and paying no interest in the nationality of a company’s investors. That hands-off approach, in contrast with the American post-Enron mood of regulation, has helped make London the world’s main financial centre. And France appears to be pursuing a state-heavy, managed approach based on economic nationalism and expensive protection of venerable national institutions, a tactic that has kept its large companies in French hands.
But beneath the surface, seismic shifts are visible in the approaches taken by both countries. The financial meltdown of 2008 may well be remembered as the turning point for Britain and France, when both countries began to switch places.
The change in France was visible this week on the streets. The French public and their media, watching a much-loved bank that employs 120,000 people fall victim to the ill-considered actions of an unsupervised futures trader, have taken a decisive position: They are siding with Jérôme Kerviel, the trader, and turned against the bank.
Mr. Kerviel is now regularly likened to Alfred Dreyfus or Che Guevera. After losing all his Facebook "friends" on the day the crisis broke, he now has thousands of new ones, on groups with names like "Jérôme Kerviel should be awarded the Nobel Prize in Economics"
This public mood makes a full government bailout of SocGen seem increasingly unlikely. As finance minister in 2003, Mr. Sarkozy saved the engineering firm Alstom from bankruptcy with a partial government takeover. Last year he oversaw the merger of France’s three largest energy companies into a partly state-owned energy giant that angered European competition regulators.
Given the new mood in France, the fiscal and political stakes of an expensive state bailout may be too high. Mr. Sarkozy’s pragmatic approach and his rhetoric of economic reform may have landed him in the very un-French position of leaving a giant to its fate. It seems very unlikely, according to Paris business media, that SocGen’s senior management will escape with their jobs.
Mr. Brown is in almost the opposite position. Despite his athletic effort to find a suitor for Northern Rock, Mr. Brown is essentially giving a competitive face to something that bears a strong resemblance to a government buyout. When the British government decides on a buyer for Northern Rock shortly after Feb. 4, its $52-billion in emergency loans will be converted into triple-A-rated bonds that will likely be tied to a government equity stake in the bank - a very French-sounding solution.
"What the events of last autumn have shown and what the beginning of this year have shown," Mr. Brown’s Chancellor of the Exchequer, Alistair Darling, said last night after the dinner meeting, "is that governments do need to take the appropriate action to support the economy - whether it is the world economy or their own economy."
But the meaning of "appropriate action" seems to be changing as these crises unfold. In Britain, there’s been a lot less interest in the old French phrase laissez-faire; across the Channel in France, there’s a sudden interest in the Anglo-Saxon concept of "creative destruction."
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TRADING SCANDALS: A HISTORY
The Société Générale trading scandal marks France’s coming of age in the world of market scandals. A look at other watershed events:
U.S. Enron Corp. (2001)
Energy trader Enron Corp.’s demise claimed thousands of jobs and more than $60-billion (U.S.) in market value amid inflated profits and hidden losses.
In an attempt to restore investor confidence in the markets, U.S. lawmakers enacted Sarbanes-Oxley in 2002, which imposed sweeping standards on how public companies are run and audited.
U.K. Barings Bank (1995)
Singapore-based futures trader Nick Leeson, then 28, amassed $1.4-billion (U.S.) in losses.
Barings, one of Britain’s oldest banks, was crushed by the losses, and was bought by ING for £1. Mr. Leeson was sentenced to 6? years in jail. The Bank of England came under new scrutiny and a new focus was placed on how trading floors are supervised.
CANADA Bre-X (1997)
Calgary-based Bre-X soared from a penny stock to a $6-billion (Canadian) company, only to collapse when it was discovered its stated Indonesian gold reserves were a fraud.
Bre-X will go down as the world’s largest mining scandal, notable for its almost complete lack of accountability by anyone involved.
JAPAN Sumitomo Corp. (1996)
Sumitomo in 1996 reported losses of $2.6-billion (U.S.), run up in 10 years of unauthorized trading carried out by its former head trader, Yasuo Hamanaka, who was trying to corner the copper market.
The scandal triggered investigations into trading practices worldwide, particularly at the London Metal Exchange, where 95 per cent of all copper trading is conducted.
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THE ROGUE ON THE RECORD
Excerpts of testimony from alleged rogue trader Jérôme Kerviel to investigators
probing massive losses at Société Générale SA, published by Le Monde daily
and confirmed by the Paris prosecutor’s office
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The bombs
My first experience in this direction dates back to 2005 ... I then took a position on Allianz, betting the markets would fall. It just so happened that a little while later, the market fell after the London bombings and it’s the jackpot: €500,000.
The buzz
I then got the idea of a deal to cover my position. I have mixed feelings because I’m proud of the result and surprised at the same time. It makes you want to continue, there’s a snowball effect.
The motivation
Above all, I have earning money for my bank in mind. That’s my No. 1 motivation, and in no way is it to enrich myself personally.
The blind eyes
I can’t believe that my superiors were not aware of the amounts I was committing, it’s impossible to generate such profits with small positions, which leads me to say that when I’m in the black, my superiors close their eyes about the methods and volumes committed.