Masters of Mayhem

Listen, let me tell you something: I knew Nick Leeson. Oh, OK, not personally. But as a reporter, I covered Leeson, the young trader who single-handedly broke the bank at Barings in 1995. And you know what? This kid Jérôme Kerviel, the 31-year-old who managed to lose $7.2 billion (that's with a B) at Paris investment bank Société Générale in just a few weeks, he's ... he's ... so much like Leeson that it's scary.

For those who don't recall, Leeson was 27 years old, living in Singapore, and trading futures contracts based on the Nikkei stock index and Japanese government bonds when he got into trouble in the mid-'90s. He was anything but one of the investment banking "Masters of the Universe" made famous by Tom Wolfe in the 1980s. He was a relatively ordinary young professional on an obscure trading desk, who bet the wrong way on the Nikkei's direction; then he doubled down, trying to recoup the firm's money, and lost again. At one point in early 1995, he had half the open interest on the Nikkei futures, along with 85% of the Japanese bond contract that he traded. Those were staggeringly large positions. But those to whom he reported, who made more money and had more responsibility at the bank — his "superiors," in other words — had nary a clue, because young Nick had for a time devised a way to hide his trades from them. More than $1 billion in the hole, and with no hope of digging his way out, he skipped off to a Malaysia beach resort with his wife to sip umbrella drinks for a few days before their world caved in. A week later Britain's oldest merchant bank, which had helped finance the Napoleonic wars and the Louisiana Purchase, was done. Leeson was sentenced to 6 1/2 years — though he served just 4 1/2 — in a Singapore prison for fraud.

Kerviel was no superstar either. He had graduated from what's described as an élite school in Lyons with a degree in "trading" (OK, fellow history majors, once but only once: Hah! Hah! Hah!). But at SocGen, a bank that had made a name for itself trading derivatives — the ever more exotic instruments now available to investors worldwide — he worked in what his colleagues sniffily called "the mine": a trading desk that made uncomplicated up-or-down bets on the direction of Europe's largest stock markets. Kerviel made about $145,000 a year.

By the big-swinging standards of Wall Street, Kerviel's salary amounted to chump change. And the fact that he wasn't eligible for dizzyingly huge bonuses is so alien to the average Wall Street trader that they're still trying to digest it. One, a college friend of mine who didn't study "trading" but English literature, and is now a multimillionaire, e-mailed me: "What is that, a French thing?"

Maybe so, but the basics of grand, bone-jarring deceit cut across cultures — and decades. Like young Nick, Kerviel also devised a way to hide his trades from asleep-at-the-switch "superiors." And like Leeson, he disappeared for a few days, apparently holed up in a Paris apartment, just before the roof fell in. The comparisons are more than cursory. One of the lessons of Leeson (supposedly burned into the brain of trading desks everywhere) was to separate what banks call "the back office," where trades are processed and recorded, from the trading desks. Leeson had run the back office while also trading, which made it easy — for a while — for him to hide phony trades. Kerviel didn't run SocGen's back office, but had come from what the bank calls its "middle office," which among other things is supposed to monitor traders and their positions for excessive risk. That experience seems to have made it relatively easy to mask trades that went deeply underwater. Again, unsettling shades of Nick.

Among the more laughable aspects of the SocGen debacle is that, in its wake, the bank's top management has been sending out signals that it was the relatively mundane nature of Kerviel's work in "the mine" that led to the lax controls. The implication is that everything is just dandy on SocGen trading desks for vastly more complicated derivatives — including those based on worthless subprime mortgages, which are now crucifying bank balance sheets and roiling equity markets all over the world. Have no fear, folks: management is watching those like a hawk.

Please! At least at venerable old Barings no one tried to make such claims after Leeson blew the place up. One of the scariest things about the current global credit meltdown is that we still don't know the depth and breadth of the losses. Indeed, banks don't even know how to value a lot of the paper on their books these days. What we, and they, do know is that ordinary young traders can see their positions go south and are liable to panic and mess up in ways that keep pushing the decimal point over to the right — without their "superiors" knowing about it until it's way too late. Nick Leeson taught us that in the '90s, and now, in just the same way, so has Jérôme Kerviel. And if that makes you nervous in this, the age of financial exotica, it should.