Crisis Mis-Steps: Lessons from Société Générale

socgen.gifOne of the recurring themes of crisis management is that most harm in a crisis is self-inflicted, either in the first instance or because of a late or weak response, or both.

A second theme is that an effective response is often delayed by predictable mis-steps. Logos Institute has catalogued ten missteps that seem to be the common denominators of mis-handled crises. These ten missteps constitute predictable patterns that can be identified early and overcome, if only you know what to look for. One of these missteps is to ignore a problem that is otherwise evident.

A third theme is that these missteps are often caused or intensified by lack of humility among decision-makers.

These three themes were brought into sharp focus in today’s (Feb. 5, 2008) New York Times, whose business section has a detailed account of the missed warning signs at Société Générale, the French bank where a rogue trader cost the bank more than $7 billion.

The piece, “A Trader’s Secrets, A Bank’s Missteps: Hubris Helped Trip Société Générale,” includes a very compelling link to a timeline that lays out numerous red flags that were ignored or rationalized away by the bank.

In particular, on November 7 the surveillance office at the European securities exchange Eurex contacted Société Générale’s compliance department about trading over seven months by Jérôme Kerviel, a mid-level trader who had taken abnormal positions in derivatives trades. The exchange noted several suspicious transactions.

The bank took two weeks to reply, and it rationalized away the trades as driven by market volatility in the US and Europe.

Eurex wasn’t convinced, and sent a second note on November 26, asking for more detail on those suspicious trades. Société Générale replied on December 10.

Finally, on January 14, the bank itself discovered “abnormal counterparty risk” in Mr. Kerviel’s trading. After some back-and-forth with his supervisors, Mr. Kerviel finally confessed to his bosses that he had conducted improper trades, covered his tracks, and provided false documents to justify them. Société Générale then began unwinding his trades, losing more than $7 billion.

Why did the bank take so long? According to the Times, the bank has a culture that tolerates significant risk. Noting that the bank is named for warrior monks who fought in the Crusades, the Times concludes:

The soldier-monks of Société Générale prided themselves on rising above the passions that moved the masses. Similarly, Société Générale’s soldier-monks believe that they could manage both the risk inherent in betting on the markets – through complex computer models – and the ardor of their regular traders, through controls.

Their hubris was having too much faith in their power to do either.

The Société Générale situation is strikingly similar to the Kidder Peabody fiasco of 1994, when a rogue trader’s fictitious trades got past the firm’s compliance process and, when finally discovered, led to the demise of the once-storied investment bank. And to Baring’s Bank, the oldest merchant bank in London, which went under in 1995 after another rogue trader lost a fortune speculating on futures contracts.

The patterns are completely recognizable.

Société Générale’s situation reminds us how quickly bad things can happen to otherwise gifted and driven companies and leaders. Also that vigilance is key in protecting a company from the inevitable negative events that it may face. A rogue trader is a too-common character in the investment world; compliance departments are supposed to find them, discipline them, and protect the firm.

The Times quotes a Paris analyst diagnosing what may have happened in the French bank. Société Générale “was brilliant in their achievement, they were the world leader in derivatives. Maybe when you’re that good, you think you will never fail.”

Leaders can take a lesson from the words of Oliver Cromwell: “I beseech you… Think it possible that you might be mistaken.”

For more on recognizing the predictable patterns that cause reputational and other harm, see our best practices guide on avoiding crisis mis-steps.

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Posted on: February 5, 2008
Posted by: Fred

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