Trust, but verify
That was a Ronald Reagan signature line, from the Russian proverb (“doveryai, no proveryai”). I found it interesting to learn that Reagan learned how to say it in Russian so he could repeat it to Mikhail Gorbachev, the leader of the old Evil Empire, whenever they met. That amused Gorby to no end.
“You repeat this phrase every time we meet.”
It reminds me of something I heard a small businessman say about the keys to success for sole proprietors. At the end of a short list of things to do, he emphasized his final point, “…and keep your eye on the register!” The way he said it, and the fact that this is the only part of his message I remember, seems to emphasize that everything before that final bit was not that important if you did not keep an eye on the money.
The message he wanted us to hear was, “…nobody will safeguard your economic interests as well as you.”
One employee with his hands in the till can rob a business blind. And, if that employee runs the books as well, it can go way beyond theft and take one to financial ruin and serious legal issues.
I remember a case involving a very successful family run business that hired a comptroller that they came to trust too much. There was a production manager who ran one side of the business and the comptroller handled all the money issues. The family, survivors of the founder of the business, let these two men run everything and just collected their profits in the form of regular checks.
Their world went to shit one morning when they got a call from the office saying that there was something strange going on. The Internal Revenue Service wanted to know why the company had not paid payroll taxes in years, and why they had ignored their repeated written demands for payment and an explanation.
The business manager was responsible for making those payments, and he also was the only employee trusted with a key to the company’s post office box – the same box where the IRS had been mailing their demands.
I can’t remember how much the guy actually stole from the company, but when you added in what the IRS said was owed, and all of the fines and interest charges, the company found itself more than $5 million in the hole.
One guy, working alone, brought a company to financial ruin. He was not the first, nor will he be the last. And, apparently, when it comes to the record for the dollar amount stolen, he is not even on the list of “also rans“.
French prosecutors on Sunday ordered trader Jerome Kerviel to be held in police custody for another 24 hours as a probe continued into multi-billion-dollar losses at the Societe Generale bank.
Kerviel, 31, turned himself in to police on Saturday, two days after Societe Generale — one of Europe’s biggest banks — revealed it had lost a staggering 4.9 billion euros (7.15 billion dollars) at the hands of a rogue trader.
Say that number out loud and then try to see that much cash piled up in one place. Here’s a visual aid to help you, click to get a good view of a million dollars in twenty dollar bills.
Imagine a stack one thousand times as large and that’s a billion. It takes a little work to wrap your mind around that picture, doesn’t it?
Now, imagine a stack 7,150 times as large as the one in the picture. Then imagine Jerome Kerviel with a can of gasoline and a book of matches.
The 7.15 billion figure is just what Jerome lost. According to the most recent reports, he had $73 billion in real money on the line when he got caught.
Le Societe General claims that Jerome was some kind of mad computer genius who was able to hack through three levels of security to pull this off, all by his lonesome. Through his lawyer Jerome is claiming that Le Societe is blaming him in order to cover up losses that the bank took without his help. There are more shoes to drop before this story is done.
As you consider the case of Jerome Kerviel baisez le chien*, you might want to wonder, “what happened to all that money?” Jerome was playing with real money – who foots the bill? Do you think le Societe General just writes a check to cover Jerome’s fuck up?
More importantly, what happened to the $73 billion in trades that Jerome had on the felt when somebody at Le Societe unraveled what was going on? What role did the unwinding of those trades have on the hundreds of billions that disappeared from the markets last week?
There is more to this story.
You have to wonder how someone like Kerviel was able to make all of these moves without someone stopping him, or at least catching him before he had a king’s ransom laid out on the craps table of the hedge fund world. He was in a position where his job was to make investment decisions based on his analysis and read of the markets, but there has to be some administrative oversight Trust is important, but somebody should have been verifying the transactions in Kerviel’s accounts.
* screwing the pooch