On October 17th, Caisse d'Epargne (CDE), a medium sized French retail bank, announced that the firm had lost some $800 million due to unauthorized trading in equity derivatives. The French Finance Minister, Christine Lagarde (real name - I kid you not), was livid and sent the French Banking Commission (FBC), the local regulator, to find out what had happened and to ensure that other banks were complying with market regulations.
But, zut alors, wait! Isn't that precisely what Mme. Lagarde sent the FBC to do after losses of $7 Billion at Societe Generale (socGen) just a few months before?
It was, of course, exactly what she asked and those comedy Clouseaus, the FBC, came back with 'rien', in fact 'rien de rien'; absolutely nothing; clean bill of health; tick in the box; all's well that ends well; back to the banquet before the main course.
In their report to the Minister*, the Krazy Kops reported that, although serious problems had been apparent for some considerable time, no fault could be found with the management and directors of SocGen, nor with the regulatory system, nor with the French government. It should be noted that the FBC relied on an internal inquiry, led by SocGen board members, to arrive at these startling conclusions. But to show they really, really meant business, the FBC fined SocGen the colossal sum of $4 million - ouch! French pride was restored.
What message did this fiasco send to other banks?
Experts, including regulators, agree that 'tone at the top' is THE key to creating a robust 'risk culture' in any firm. If the Board and senior management are not seen to 'walk the talk' as regards risk management, then how can ordinary staff take risk management seriously. What is the worst than can happen? A fine of $4 million - peanuts!
What can be expected from the FBC this time? I suspect much the same: pick and fire a few scapegoats; kick off an 'independent' inquiry; retire for long lunch; produce a report that says 'horrible mistake, one-off, could not have been foreseen, etc.'; stop for dinner; and then impose a slap on the wrist before retiring for a night-cap?
The situation is preposterous. Why has Mme. Lagarde not sacked the clowns at the FBC for incompetence and found someone more adept at complex financial investigations, such as Police Chief Wiggum of The Simpsons? Any report by the FBC is already compromised by their inability to properly regulate CDE after the SocGen affair.
While the last rites on Basel II might not have been pronounced yet, it is obvious that many of its concepts are already history, not least its 'home host' regulations. How can one take seriously a situation where one regulator has to defer supervision of a multi-national firm to its 'home' supervisor when that home-regulator is a weak as last year's Beaujolais Nouveau?
One further point is obvious! When the time comes to consider new regulatory architectures after the current crisis, existing banking supervisors should not be allowed anywhere near the deliberations. Most so-called 'senior regulators' have been tainted by scandals taking place under their very noses that they failed to act upon. How can they be trusted to come up with any new ideas?
The original 'Grande Bouffe' (the Big feast), was a cinematic masterpiece in which a number of very rich men succeeded in eating themselves to death on the finest gourmet food. The film was seen as an indictment of bourgeois overindulgence and has echoes in the recent excesses of the global financial markets. Regulators have been part of that intemperance when, though not indulgent themselves, they failed consistently to act decisively when deep-seated problems, such as over-consumption of debt, were apparent. They too should be judged.
That said the French regulators are clearly talented chaps and, if surplus to requirements in the new regulatory world, can find roles in one of the many re-incarnations of French masterpieces of farce, such as 'Le Cage aux Folles', literally 'cage of mad-women'. They would feel at 'home'.
In other entertainment news:
Johnnie Depp has agreed to play the lead, Jerome Kerviel, in 'Societe Generale - the Disaster Movie', with Helen Mirren as Mme. Lagarde (worth the ticket price alone), Frodo will play President Sarkozy and Herman Munster will have a cameo as Henry Paulson.
It is also reported that the BBC has knocked back 'Traders', the follow up to the hit 'Extras' by Ricky Gervais. The BBC stated that not even Ricky's genius could make the financial markets more excruciatingly bizarre than real life.
* See the previous blogs 'La Grande Bouffe' and 'SG + PWC = MIA' for details of the non-investigation by the FBC at Societe Generale.
