BI and Societe Generale?

Much has been written about the approximately 5 billion Euros that Société Générale lost because of Jerome Kerviel, a junior arbitrage trader. What’s interesting about it from a BI point of view?

Can BI help?

First, it’s worth noting that Société Générale is a big Business Objects customer, so their problems came despite having having the best BI tools available 🙂

What’s in a number?

How much did Kerviel lose? He argues that he didn’t lose the 5 billion — the bank did, by trading during (and presumably exacerbating) a huge drop in the market. He argues that if it had taken more care, it could have lost less money on the position, or even made a profit.

The bank retorts that the consequences of discovery would have been catastrophic: Kerviel had positions of up to 50 billion euros, and the bank’s capitalization was only 30 billion. So they had to act quickly, in complete secrecy (they angered French President Nicolas Sarkozy by not informing him until after the positions had been closed, and he has not-so-subtly called for the resignation of the bank’s chief executive).

Apparently, Kerviel was a billion or so up sometime around Christmas, and a billion or so down just before his fictitious counter-trades were discovered. When it goes to court, what value should be taken into account?

It’s a simple example of the “one version of the truth” problem I wrote about in a previous post: in a world full of uncertainty, we have to get more and more used to the idea that the best numbers in the world can only approximate “truth” to any meaningful extent.

The importance of governance, risk and compliance

The bank argues that its controls were adequate, and that Kerviel managed to avoid detection because of his “computer genius” and systems knowledge. Others suspect that more than one person was involved in the deception.

Overall, it’s hard not to agree with the conclusion of Nick Leeson, the trader that caused the collapse of  the 230-year-old Barings Bank in 1995 (he lost “only” 860 million pounds)

“You’re still looking at a situation where the systems and controls aren’t good enough; the people in place to look after those systems and controls simply aren’t good enough either”

Companies are just now waking up to the fact that “unexpected events” probably have a much bigger on their profitability and long-term survival than any amount of painstaking improvements to cost efficiency. The lead-paint toy recalls, including the Thomas the Tank Engine series are another recent example.

Today, organizations typically have a bewildering variety of different processes and systems for different departments: SOX compliance, trade risk, environmental risk, legal risk, etc. 

Industry analysts including Gartner now look at governance, risk, and compliance as a fast-growing emerging market, and companies are starting to invest in packaged solutions designed to be deployed across the enterprise.

The winners are those most prepared

One little-noted aspect of the whole thing is that somebody gained 5 billion. Big, random events can be extremely beneficial — for those that are prepared for them.

2 comments to “BI and Societe Generale?”
  1. Pingback: BI Implementations Must be Risk-Adjusted | BI Questions Blog

  2. Great Article! We engage on a daily basis with many GRC officers from F1000 clients in highly regulated industries. I would agree that governance, risk and compliance definitely have a role in providing critical business intelligence which may assist companies in preventing and detecting crises such as the Societe Generale situation. Governance is the culture, policies, processes, laws, and institutions that define the structure by which companies are directed and managed. Risk is the effect of uncertainty on business objectives; risk management is the coordinated activities to direct and control an organization to realize opportunities while managing negative events. Compliance is the act of adhering to, and demonstrating adherence to, external laws and regulations as well as corporate policies and procedures.
    The marriage of the three terms enables a synergy that is gained by encompassing all three activities in a consolidated process. Traditionally, companies would evaluate and monitor GRC in separate silos. Only recently, our clients are beginning to understand the importance of breaking down those silos so each function can share data and provide a more holistic view to senior management. Additionally, we are seeing companies using software to effectively and efficiently manage their policies, controls and applicable regulations/standards along with developing a risk register of potential operational, reputational and financial risks. Both components can then be linked to questions in assessments to gather intel in regards to risk exposure and compliance with the governance material. Finally, findings may be generated and tracked to mitigate the risk of non-compliance.
    Thanks for the information … spot on!

Comments are closed.