City Eye: One minute you're a star, the next you're a rogue

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The Independent Online

Douglas Hurd once remarked that France was a well-governed country. I have a feeling that we are about to discover just how well governed it truly is, as events unfold around the black hole at Société Générale.

Mr Hurd was foreign secretary at the time, the early1990s, and there was a certain wistfulness to his tone. The Conservative government was shipping water amid heavy criticism, and libertarian democrat though Mr Hurd is, it is easy to imagine he envied the rigid, somewhat authoritarian control that the French government used to have over industry, the civil service and the press. That dirigiste model is based on where the chaps managed to come in the classement at the elite school of political administration that produces France's top politicians, industrialists and bureaucrats.

Back in the summer, in this column, I wondered aloud at the huge amount of money being poured into the markets by the European Central Bank under the direction of Jean-Claude Trichet, a leading member of the French establishment. Could it be the case, I asked, that there was something nasty hidden in the cupboard of the one of the French banks?

Of course, the Bank of England took the opposite course of action – offered no support to the inter-bank market – and ended up with Northern Rock. Now the French, despite the efforts of the ECB, have SocGen.

But you have to walk away from such suggestions, don't you? First of all, conspiracy theorists always forget that no one's ever quite organised enough to be in charge. And second, what a conspiracy it would be: senior French bankers call their friends in government, who have a discreet dinner with compatriots well placed in European institutions, and favours get called in. Absurd. It couldn't happen.

Now, please, forgive what seems a plug – I really wouldn't insult readers' intelligence – but the conspiracy is the only part of a novel I have just published that hasn't come demonstrably true. Meltdown came out two weeks ago and draws on over two decades of experience as a financial reporter and editor to describe exactly how just such a catastrophe could happen.

What's eerie is the way the real-world story seems to have followed the events described in the book: a single, young, Paris-based trader loses billions. The activity is hidden because of internal politics – connections with the IT and back-office departments – and possibly outside collusion. Once the story breaks, the media latches on to the individual and he becomes a rogue trader who gets the blame for the extreme turbulence of the markets. Sound familiar?

Stories of financial meltdown are thought improbable and far-fetched – until they actually happen. And the reason they do is the human beings at their desks and the way they relate to the financial data, not the data itself.

Turning a blind eye to the huge numbers involved is easy. Barings did it with Nick Leeson, who lost a relatively modest £860m. It is all a game to the traders after a while – just a game of spoof with a few added zeros.

Concealment is easy too. You cover a position by giving everyone partial information, and you play the internal audit system. The number crunchers in Leeson's case believed the losses in his infamous 8888888 suspense account would be offset by soon-to-be reported trading gains.

And the final human factor is the star system. Senior management doesn't question the top traders in the way it checks lowly employees' expense accounts. There's a desire to believe in the stars because it's easier that way. Until they get it wrong; then they become rogue traders.

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