Saving Société Générale (cont.)

Since then, Société Générale's net banking income has more than doubled, and it has delivered among the best returns to shareholders of any international bank. Bouton has done that by hiring the brightest and the best, and by building up a powerful trading and investment-banking operation that accounted for almost half the bank's profits in 2006. Among the pearls - at least before the scandal - was the bank's derivatives-trading operation, staffed by math whizzes from elite French schools. In other words, risk - precisely calibrated and calculated risk - has become one of the main engines that drives Société Générale's bottom line.

Jérôme Kerviel didn't slot into this world seamlessly. He, too, came from a modest background - his father was a metalworker, his mother a hairdresser but his finance degrees from universities in Nantes and Lyon didn't have the same academic heft as those of some of his peers from France's top schools. That sometimes rankled.

"I was much less respected than the others because of my university education and my personal and professional career," he told prosecutors. It's a line that has gotten a lot of attention in France, where his case is sometimes spun as a sort of class war: the little guy trying to prove that he was as good as or better than his intellectual superiors. It is also the one point on which Kerviel's team and Société Générale actually agree: Both say it's utterly wrong. "He doesn't have complexes. He was on the way up, not the way down," says Reille, the PR man, pointing to Kerviel's promotion from the trading room's middle office, where he was hired in 2000, to full-fledged trader in 2005. In 2006 he earned $150,000 in salary and bonus, far above the French average.

What was it that drove Kerviel to bet a French bank on the stock market? So far nobody has uncovered a gambling habit or any other clues that might cast light on his motivation. (Kerviel declined to be interviewed.) He certainly has portrayed himself to prosecutors as a diligent, even prescient, worker bee: In testimony to prosecutors, the transcripts of which leaked to the press, Kerviel said he began reading up on subprime troubles in March 2007 and got a strong sense that its risks were being underplayed.

Over the following four months he placed a succession of ever larger bets that stocks would take a hit. His hunch proved correct, and he made an eye-popping $2 billion trading profit for the bank by the end of 2007.

Officially he had no authorization to do any of that; indeed, he hid the $2 billion and declared a profit of only $85 million to the bank. As a junior trader on a desk called Delta One, his job was to conduct arbitrage trades - buying and selling the same securities at the same time on different markets to exploit tiny differences in price and thus earn a small but relatively risk-free profit. Unhedged positions were a no-no.

But from early in his career as a trader, he told prosecutors, he overstepped the rules. He earned $750,000 for the bank with his very first one-way bet, on German insurer Allianz in 2005, and while supervisors told him off- one former manager told prosecutors that Kerviel had been formally reprimanded- he didn't take them seriously. Indeed, that initial success gave him a taste for bigger risk.

One former Société Générale senior derivatives trader says new hires were often informally given a little leeway to see what they would do with it. If they made money, it was a sign they could go on to become successful traders. If not, they were quickly shunted aside. Still, the ex-trader says, "the rule was that you watched these guys carefully and made sure they didn't go too far."

But Kerviel continued unchecked and found elaborate ways to mask what he was doing. He explained in detail to prosecutors how he created a separate account of fictitious trades that mirrored his real profits and losses, making it appear as though his books were almost always balanced. In June 2007, as he waited for his subprime bet to come through, the Société Générale internal investigation shows that his trading account was more than $3 billion in the red. That set off a series of alarms in the bank's risk management system and even triggered alerts externally, on a derivatives exchange. Kerviel always seemed able to wriggle out of trouble, including by faking e-mails that confirmed fictitious positions.

Then it all went horribly wrong. This January, Kerviel decided the markets were heading for a rebound. He bet bigger than ever, buying stock index futures rather than selling them, even as the markets were tanking. For days he played cat and mouse with Société Générale's risk managers before they finally caught him on the evening of Jan. 18. The bets were so large they triggered capital ratio alerts. He faked more e-mails from counterparties confirming transactions, but the compliance officers checked with one of them, Deutsche Bank (DB), which denied any knowledge. The game was up.

On the afternoon of Jan. 21, as his trader was dumping Kerviel's positions, Bouton called Donald Moore, Morgan Stanley's (MS, Fortune 500) European chairman and an investment banker he knew well and had worked with during the 1999 three-way takeover battle. Moore at the time was in Shanghai, where it was the middle of the night, and didn't call back till Tuesday morning. Bouton sounded stressed, Moore says, but very alert. The two men talked through the options and quickly agreed on a rights issue as the best way to raise fresh capital. Moore spoke to Morgan Stanley CEO John Mack and then called Bouton back: Morgan Stanley on its own would be willing to guarantee as much as $10 billion because "there's a huge amount of respect and trust" for Bouton and Société Générale management, Moore says.

Bouton also put in a call to J.P. Morgan, another bank he had worked with closely; in the end, both houses of Morgan jointly guaranteed the rights issue. After a marathon overnight due-diligence session Bouton had his financing, and the bank was safe.

The world soon will know exactly how - and perhaps why - Kerviel took risks that nearly destroyed 144-year-old Société Générale. Prosecutors expect to conclude their investigation into what happened at the bank by summer's end, and Kerviel should go to trial next year. His popularity may wane as the process drags on- the public is fickle, after all- but his place in history is secure: His name, along with those of Barings rogue Nick Leeson and Kidder Peabody's Joe Jett, will without doubt surface next time a trading scandal erupts.

Less certain is Bouton's legacy. Despite the beating he has taken in the French press, Bouton is as confident as ever. The bank is doing "just fine," he told the French Parliament's finance committee this month. "There has been no loss of confidence with the hundreds of financial operators we work with."

And when the Kerviel affair becomes a case study, what lesson will it teach? The need to have impeccable investor, press, and government relations - not just a superb balance sheet.  

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