July 07, 2008
La Grande Bouffe
The French are past masters of the art of Farce and the French Banking Commission are determined to uphold this great tradition.
On July 4th, the Banking Commission of the Banque De France issued a press release that was clearly designed to be overshadowed by the twin French obsessions of the 'Long Summer Vacation' and the Tour De France. The short statement (released only in French) announced that the Commission had slapped a fine of Euro 4 Million on Societe Generale (SG) for 'serious failings' in Jerome Kerviel affair.
The verb 'slap' here is however much too strong, more like a tickle with a feather duster by a saucy French maid. Euro 4 Million is less than .1% of the Euro 4.9 Billion lost by Kerviel; it is within the range of rounding errors in the massive write-down of assets that followed the fiasco. Where were the additional capital charges (as in the NAB case), the mandated reorganization of risk management functions (as in the AIB case) or the forced retirement of the Chairman and CEO (again as with the NAB)? Nowhere!
In a joke worthy of the great satirist Moliere, the Commission stated that, in deciding on the size of the fine, it took into account the bank's prompt response to the problems when detected. It should be noted here that SG took more than 6 months to complete a purely internal investigation, by supposedly 'independent' directors, which concluded that the board (and its directors) were not at fault for the serious control deficiencies in the organization*. SG's chairman, Daniel Bouton, must literally have been laughing all the way to the bank at the size of the fine?
'La Grande Bouffe' (The Big Feast) is a film of the 1970s in which four successful businessmen decide to eat themselves to death on fine food and succeed in doing so. In 'The Meaning of Life', Monty Python paid homage to this cinematic masterpiece in a sketch in which the gluttonous M. Creosote, an obese diner, stuffed himself full of food before finally exploding when offered a 'very thin mint' by the Maitre D' to finish his meal.
What a metaphor for the recent excesses of the financial markets?
Investment banks, such as Societe Generale, have gorged themselves on rare delicacies, such as CDOs and equity derivatives, before finally blowing up, spewing vomit over all the other customers in the restaurant - unfortunately, in this case, the rest of us. Regulators have played the Maitre D' in this travesty, doubtless warning the diners that their debt waistlines would be expanded by such gluttony, but, at the same time, commending them on their choice of a very fine Pomerol to accompany their fifth stuffed quail.
Maitre D's (and regulators) are obsequious at the best of times, rarely criticizing their peers in public. However, one can only imagine that the more muscular supervisors, such as the SEC and APRA, must be preparing to thoroughly handbag their French colleagues (at the next meeting of the private dining club that is the Basel Committee) for such an appallingly weak response to the biggest ever operational risk failure.
How can anyone take seriously the 'home-host' regulations of Basel II when a home regulator turns out to be such a wuss? To be effective, there must be some general agreement on the size of penalties for banks that transgress international banking rules, otherwise what teeth will 'home host' rules have? By wimping out, the French Banking Commission appear to have driven yet another steak (sorry about the bad pun) into the sclerotic heart of the corpulent carcass that is Basel II.
What is the lesson here? Open a bank in Paris and do precisely what you want is the obvious answer. Regulatory Arbitrage is back on the menu!
However, the curtain has not yet come down on the 'Societe Generale Affair'. In the final act our handsome hero, Jerome Kerviel, is to be put on trial for his indiscretions. But Jerome's lawyer has already stated that, in response to the charges, he will launch a counter-claim for damages for unfair dismissal - you truly could not make this stuff up.
Critics have noted that this comedy will surely 'run and run' but unfortunately, for the banking community, the story of Societe Generale and French Banking Commission is not only a true farce - it is a joke!
* See the previous blog 'SG + PWC = MIA' for details of the non-investigation by Societe Generale.
Posted by pjmcconnell at 05:51 PM
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