Societe Generale CEO Daniel Bouton at a press conference in La Defense, Paris, on January 24.

After a rogue trader cost the French bank $7.1 billion, many are left to wonder about the lucrative but risky equity-derivatives business
How could this possibly have happened? That was the question being asked in financial circles worldwide on January 24, after France’s SociŽtŽ GŽnŽrale (SOGN.PA), one of Europe’s biggest banks and a global superstar in the booming derivatives-trading business, disclosed a staggering $7.1 billion loss from rogue trading by a single employee.
According to Businessweek.com, the simple answer is this: One of the biggest frauds in financial-services history apparently was carried out by a 31-year-old trader in SociŽtŽ GŽnŽrale’s Paris headquarters, whom multiple news sources have identified as Jerome Kerviel.
The trader “had taken massive fraudulent directional positions“--bets on future movements of European stock indexes--without his supervisors’ knowledge, the bank said. Because he had previously worked in the trading unit’s back office, he had “in-depth knowledge of the control procedures“ and evaded them by creating fictitious transactions to conceal his activity.
The fraud was discovered January 20, a Sunday, which meant SociŽtŽ GŽnŽrale had to start unwinding the positions January 21 just as global equity markets were tanking on fears of a US recession.
While those facts seem fairly straightforward, a host of troubling questions still need to be answered: How could SocGen, which ironically was just named Equity Derivatives House of the Year by the financial risk-management magazine Risk, have failed to detect unauthorized trading that it acknowledges took place over a period of several months?
SocGen’s equities-derivatives business, the biggest at any institution in the world, has posted double-digit growth the past eight years and until now has been hugely profitable. Fitch estimates the business generated about $1.7 billion in profits during 2006, or about 20 percent of the bank’s net earnings. Backed by elaborate algorithmic models, trading instruments with exotic names such as Himalaya and Altiplano have generated an average 40 percent return on equity for the bank, more than twice the rate for its retail banking business.
Yet SocGen’s derivatives operation is relatively small, with fewer than 2,500 employees including about 300 traders and roughly 750 middle- and back-office employees, according to a 2006 investors’ presentation by the bank. The rogue trader apparently spent several years in a back-office job before realizing a long-held dream of moving to trading.
Maintaining strict separation between inherently risky trading activities and careful back-office controls is a key tenet of banking regulation, says Axel Pierron, a Paris-based consultant with Celent, a financial-services advisory group specializing in information technology.
But, Pierron says, “In derivatives trading, there’s not as strong a separation between trading and back office as in other parts of the bank.“ Letting employees move from the back office to the trading floor is uncommon but generally not prohibited by banking regulations or banks’ own rules, Pierron and other banking specialists say.
Some risk-management experts contend that such a scandal was inevitable, given the global boom in trading exotic securities. “This stuff happens more than people may like to admit,“ says Chris Whalen, director of consulting group Institutional Risk Analytics. Banks increasingly are moving away from traditional banking into riskier trading activities, he says. SocGen’s problem was “a rogue business model, it’s not a rogue trader.“

Some people complain that good corporate citizenship is merely another form of self-interest.

How wonderful to think that you can make money and save the planet at the same time. “Doing well by doing good“ has become a popular business mantra: the phrase conjures up a Panglossian best-of-all-possible-worlds, the idea that firms can be successful by acting in the broader interests of society as a whole even while they satisfy the narrow interests of shareholders.
The noble sentiment will no doubt echo around the Swiss Alps next week as chief executives hobnob with political leaders at the World Economic Forum in Davos, reported AP.
For these are high times for what is clunkingly called corporate social responsibility (CSR). No longer is it enough for annual reports to have a philanthropic paragraph about the charity committee; now companies put out long tracts full of claims about their fair trading and carbon neutralizing.
One huge push for CSR has come from climate change: “sustainability“ is its most dynamic branch. Another has been the internet, which helps activists scrutinize corporate behavior around the globe. But the biggest force is the presumption that a modern business needs to be, or at least appear to be, “good“ to hang on to customers and recruit clever young people. Thus for most managers the only real question about CSR is how to do it.
Begin with business, where the picture is mixed. Much good corporate citizenship is a smug form of public relations. Public Relations is part of business. A bad name has seldom been more expensive, especially when there is a war for talent and customers can look at your supply chain in Vietnam on YouTube.
Public companies, remember, are creations of the state. In return for the privilege of limited liability, society has always demanded vaguely good behavior from them. The cost of this implicit social franchise, whether shareholders like it or not, has risen. Companies as varied as Nike in clothing, GlaxoSmithKline in pharmaceuticals and Wal-Mart in retailing have had to change their ways quickly to avoid consumer or regulatory backlashes.
And it is not just a question of fending off disaster. CSR has got more focused: there are fewer opera houses, more productive partnerships with NGOs. Greenery, in particular, has paid off for some companies’ shareholders. Toyota stole a march on other carmakers by appearing greener. European power companies which helped set up the continent’s carbon-trading system did extremely well out of it.
Some people complain that this sort of “good corporate citizenship“ is merely another form of self-interest. Correct--and good. They should be happy that this category has grown. The difficulties with CSR come when companies get it out of proportion.
An inconvenient truth for advocates of CSR is that the connection between good corporate behavior and good financial performance is fuzzy at best. The latest academic research suggests that a positive link exists, but that it is a weak one. Of course, it’s not clear which way the causality runs--whether profitable companies feel rich enough to splash out on CSR, or CSR brings profits.
Either way, there is no evidence to suggest that CSR is destroying shareholder value. But nor is it obviously the most productive way for managers to spend their energies. Caution is especially called for at a time when the CSR bandwagon is on a roll.
If companies need to be vigilant about the limits of CSR, the same applies even more to society as a whole. A dangerous myth is gaining ground: that unadorned capitalism fails to serve the public interest. Profits are not good, goes the logic of much CSR; hence the attraction of turning companies into instruments of social policy. In fact, the opposite is true.
The main contribution of companies to society comes precisely from those profits (and the products, services, salaries and ideas that competitive capitalism creates). If the business of business stops being business, we all lose.
The apparent triumph of CSR should prompt humility, not hubris. There is money to be made in doing good. But firms are not there to solve the world’s political problems. It is the job of governments to govern; don’t let them wiggle out of it.

If the current trend continues, the overall Chinese institutional and private investments in 2008 may well exceed $250 billion.

Chinese pundits continue to fret about the gloom and doom scenarios that an imminent United States economic recession might have in store for China’s surging economy, but some are beginning to see a silver lining in it too.
“If it was not for the subprime mortgage crisis China could not have dreamed of pumping money into top Wall Street financial institutions,“ legal expert Zhu Yiwei wrote in an opinion piece in the ’Southern Weekend’.
“But now that China has acquired a 10 percent stake in Morgan Stanley, there is hope that, through building a network of personal connections on Wall Street, we can work to reduce trade frictions between the two countries.“
Indeed China’s infusion of five billion US dollars into the financial titan Morgan Stanley in December to help rebuild its capital base has been portrayed by some experts as a successful inroad into the Wall Street fortress that should be used by Beijing to acquire more power to influence opinions in US political backrooms.
The investment in Morgan Stanley is the latest in a series of prominent deal-making abroad the country’s new $200 billion sovereign wealth fund--the China Investment Corporation (CIC)--has completed since its inception in May.
Both its creation and activities have created a buzz in global financial markets in anticipation that a sizeable sum of money would be channeled into global assets.
But the fund has also raised political hackles in some countries for fear that its masters may exploit the openness of developed countries to international capital to seek strategic dominance of key resources and infrastructure and further their national foreign-policy objectives.
China’s investment fund is only the latest newcomer among sovereign wealth institutions that have proliferated in recent years in countries that produce oil or have built up large currency reserves through surging exports. These funds control between 2 and 3 trillion US dollars currently, but experts predict that their assets would swell to more than $10 trillion within a decade.
Fears that such assets would be used to take over key domestic industries in the US and Europe have prompted officials from the Group of Seven leading nations to call for clear rules on sovereign wealth funds. The International Monetary Fund has also been called to help design codes of conduct for them.

With a tax on carbon emissions appearing to be inevitable, some of the world’s largest corporations will be asking their suppliers to report on their carbon emissions as part of future reduction efforts.
“Investors are demanding that companies know what their carbon emissions are and consumers want companies to be green,“ said Paul Dickinson, CEO of the Carbon Disclosure Project (CDP), an independent not-for-profit organization in Britain that is coordinating the effort.
“A global price for carbon is coming and we are helping companies to prepare to operate in a carbon-constrained world,“ Dickinson told Ipsnews.net.
Emissions from burning fossil fuels like coal, gas and oil are causing climate change, which is resulting in billions of dollars of damages and losses due to more intense storms, rising temperatures, increased flooding and so on. Many economists and policy experts recognize that unless emitters are forced to pay a high price for their carbon emissions, most will not change the way they operate.
In his new book “Plan B 3.0: Mobilizing to Save Civilization“, Lester Brown, president of the Earth Policy Institute, an environmental think tank in Washington, recommended a carbon tax scale-up of 20 dollars per ton each year between 2008 and 2020, stabilizing at 240 dollars per ton. The tax would be offset at every step with a reduction in income taxes to discourage fossil fuel use and encourage investment in renewable sources of energy.
But few companies know what their carbon emissions are because there has not been any compelling reason to measure them, Dickinson noted.
Each of the 11 corporations participating in the CDP’s Supply Chain Leadership Collaboration (SCLC) will ask up to 50 suppliers to complete a standardized information request being tested in the first quarter of 2008. CDP’s goal is to enlarge the SCLC and eventually involve tens of thousands of supply chain companies, and to help large firms and suppliers develop strategies to reduce their carbon footprints.
CDP is creating a single standardized approach to providing key climate change information throughout their supply chains. “This is phase one of a larger effort later to measure emissions from all suppliers,“ Dickinson said.
Participants in this first pilot project include Dell, Hewlett Packard, L’Oreal, PepsiCo, Cadbury Schweppes, NestlŽ, Procter & Gamble, Tesco, Imperial Tobacco, and Unilever.
The results of the pilot will refine the process in preparation for the roll out and will enable large companies to work towards managing their total carbon footprint, as the first step to reducing the total carbon footprint is to measure its size. Then both large companies and their suppliers can work together to develop strategies to reduce their emissions.