FinancialGuy Writes!

When Is A Fine Not A Fine?

Jerome Kerviel has just been convicted and sentenced in Paris. Mr Kerviel was the trader at the centre of the Societe Generale wobble in January 2008. This was the event that provided the first hints that things going wrong in the US might hit Europe. Of course, it was completely unrelated, but we didn’t know that at the time that it was not a tremor in a coming stock market crash, but just an isolated incident.

He has been fined as part of his sentence. The fine is a whopping 4.9 billion euros!! Is he meant to be bailing out Ireland, or paying a fine?

Don’t get me wrong, I think the risk and reward balance is very wrong for investment bankers and hedge fund managers. When they screw up – as we all do – they need to face more serious implications than they have been doing so far. And when they are caught deliberately doing wrong, they need to face punishment. But 4.9 billion euros? When will he pay that? With what? Its a little unrealistic isn’t it?

But luckily, he is only 33, so he still has the time to work it off…

But what message does it send to bankers, fund managers and traders? Remember, the world (and policy makers) are trying to find a way to reign in their excesses and bring greater risk management to the world economy.

His sentence includes some prison time, and lets be honest, we’d all rather avoid that. But that aside, the subliminal message is that fines will be so large that it is pointless to worry about them. If you are a relatively successful 20 or 30 something playing in the markets with other people’s money, will this make you more or less careful? Will you change habits at all?

Probably not.

If you win, you win big. Salaries, bonuses, options and expense accounts. Lovely. And if you lose, you lose it all. But you may lose it all to such a large extent that there is no hope of ever finding your way out again. So why worry? The amount is too big to comprehend, so why care?

What message is that?

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