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Solved HBR Case Study Solution: Societe Generale (A): The Jerome Kerviel Affair By Francois Brochbt (Download Now)

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Solution Pages: 3

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Word (.docx)

Questions Covered in the Solution

  1. If it were January 1, 2008, – that is, before Kerviel’s trades became known – and you were the CEO of Societe Generale, how would you feel about the robustness of your firm’s business model and risk management practices?
  2. Identify the Internal Control systems in place to address traders and trading risk
  3. Apply the fraud triangle to and discuss the elements found in the Kerviel affair
  4. Who to blame? Explain
  5. Is Kerviel a victim or a villain? Explain
  6. Is it possible to prevent such incidents? Why or Why not

Sample of Solution

  1. If it were January 1, 2008, – that is, before Kerviel’s trades became known – and you were the CEO of Societe Generale, how would you feel about the robustness of your firm’s business model and risk management practices?

Being the CEO of Societe Generale, I won’t feel much confident about the robustness of the firm’s risk managing executions. Although the firm had a stringent business model which dignified its competitive position in the market, certain internal control peculiarities put the sustainability of this business model at risk. Moreover, with derivatives as the true engine of Societe Generale’s success, firm’s dependence on derivative position became intricate. Enhanced dependence coupled with the risk-taking attitude of the firm’s investment division and flawed oversight mechanisms set foundations of such huge losses. Furthermore, it can be considered that the firm failed to implement or limit the activities of trades that went beyond their scope. Essentially, encouraging risky positions on the derivatives that too beyond limits of risk exposure, resulted in such incident. Societe Generale became a leader in the derivatives market with its integration of IT in evaluating trading positions and designing complex derivative instruments. But this increased pressure of leading position, encouraged the firm to bring lucrative returns which eventually led to increased risk-taking. Moreover, with such measures, the business model of maximizing return while retaining the risk exposure limit was also compromised.

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  1. Apply the fraud triangle to and discuss the elements found in the Kerviel affair

Fraud triangle has three premises which ensures or alludes an individual to commit fraudulent activities, including Pressure, Opportunity and Rationalization. Kerviel has been exposed to all the elements of risk triangle. For Instance, when he joined as a trader, he found himself left out as traders were mostly hired directly from the graduate colleges and Kerviel didn’t attend one. So, Kerviel felt he needed to prove himself in the team of traders, this exposed Kerviel to a pressure of bringing returns that were beyond normal. Eventually Kerviel involved in high risk trading positions which increased the risk exposure of firm as whole, beyond its scope. Furthermore, risk-taking attitude of the firm in securing high gains also provided an encouraging cushion to Kerviel, which aggravated his urge and ability to take additional risks. Considering himself as a Cash Machine, Kerviel was under significant pressure to maintain his status which was not justified at the first place due to his out of scope trading activities. Eventually, the trust of immediate supervisor and record of bringing returns for the firm, provided opportunity to Kerviel to take risks beyond reasonable amount.

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  1. Is it possible to prevent such incidents? Why or Why not

It’s certainly possible to limit such activities but that would come with additional rigidity in firm’s structure and eventually the procedures. Effective controls can be put in place at the traders’ levels in which they must be limited to activities within their also validated by their immediate supervisors. Consequently, when all the trading activities are documented and unusual positions are only approved after scrutiny by supervisors would effectively reduce the possibility of such incidents but it would also limit the responsiveness of traders to the changing market conditions or arbitrage opportunities. Furthermore, the inclusion of ethics training and encouraging whistleblowing can also limit such activities. Rather than just making the traders aware of risk exposure limits and other regulatory measures, they must be monitored closely through small teams. But again there would be a tradeoff between the flexibility for traders while making quick positions versus their close scrutiny and transactions validation.

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