From the March 2008 issue of Treasury & Risk magazine

The Blame Game

It has been a time for scapegoats. First, it was the 31-year-old trader at Societe Generale who, given the bank's position, seems to have single-handedly lost $7 billion without anyone at the bank noticing. At Bristol Myers Squibb, it was Edward Dwyer, Bristol's longtime treasurer, who----along with several mid-level managers--took the fall for the company's $275 million loss on trading of mortgage-backed auction rate securities.

First, let me be clear: Both these men must assume substantial responsibility for the losses their companies have suffered. This is absolutely the case with Jerome Kerviel, who violated trading rules the bank had established. In both cases, however, there is a bigger question to be put to senior management: "Who knew and when did they know it?"--to misquote the late Sen. Howard Baker during the Watergate hearings.

Dwyer was aiming to squeeze out extra yield; he's not alone in that pursuit. His was a case of excess--and there should be a real concern when treasurers start seeing themselves as traders rather than cash managers. But didn't someone other than Dwyer sign off on the investment policy and risk tolerance the company would accept? And until the company was losing money on these higher-yield investments, Dwyer must have been making money. Did anyone ask then how he was doing it? In the Wall Street Journal on Feb. 7, Bristol's CEO was quoted as saying, "Had I been smart enough to ask about that in detail in the fourth quarter, I'm not sure we would have avoided the loss completely, but maybe we would have minimized it." Isn't he being paid multi-millions to be smart enough? Apparently, neither he nor the CFO was aware of what Bristol's treasurer was doing with the company's cash.

In the case of Soc Gen, there may be criminal liability as well as fiduciary in question. While Kerviel alleges that his bosses knew as early as April 2007, there is e-mail evidence that they certainly knew in November when the Eurex contacted them about large after-hours trades by Kerviel. Senior management failed to get back to the exchange for weeks and, then after a second warning, essentially dismissed the exchange's concerns. Had Soc Gen acted then, the bank might have escaped without losses and may have even netted gains.

Why would Soc Gen senior executives not take action on unauthorized trading? Was it perhaps, because Kerviel looked to be making money?

As the Bristol CEO put it, "I'm a big believer in accountability." Kerviel deserves to hang but not by himself, and Dwyer should not bear the full responsibility for his blunder either. Unfortunately, it all sounds like another CEO who didn't have a clue about what was going on in his company--Ken Lay.

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