It's all in the bonus

What was the motivation of Jerôme Kerviel, a lowly and unremarkable trader at Société Générale, to pull off the largest financial fraud in history? The media mostly discounted the money motive. In the words of French prosecutor Jean-Claude Marin, he wanted to "appear an exceptional trader, someone who could unerringly anticipate market fluctuations" and did not seek personal enrichment. Daniel Bouton, the bank's head, called him a "swindler" and a "terrorist" but thought he "apparently did not personally benefit from this fraud".

Yet during his interrogation, Kerviel, whose annual salary was €48,000, said: "For the year 2007, I tried to negotiate a €600,000 bonus and [my boss] hinted that I should not expect more than €300,000." At his end-of-year evaluation the trader, who had speculated on Eurex, the German derivatives market, had declared only €55m in profits – out of the 1.4bn that he had theoretically made for the bank, after losing 1.5bn six months earlier, and before the bank's "discovery" of his illicit transactions and the liquidation of his positions resulted in a net loss of €4.9bn. A few weeks later Crédit Suisse revealed that many of its London traders had hidden losses amounting to over €2bn on complex financial products because they wanted to preserve their annual bonus (1).

In the world of finance the annual bonus (which constitutes the bulk of the remuneration of top-level staffers) is the yardstick of talent. It also establishes the pecking order. To quote Bertrand Jacquillat, finance professor at Sciences Po in Paris: "It is as if large banks had become gigantic hedge funds. The traditional role of banks is intermediation – they manage the funds given to them by third parties. Yet a look at the balance sheets of many institutions shows that the share of proprietary trading hedge-fund style has greatly increased (2). This is especially true of banks across the Atlantic where that share stands between 25% and 40% of the net result of large establishments." This is why financial institutions pamper their traders, bounty hunters for whom the end justifies the means. Recent developments reflect the system's dysfunctions: bonuses inflated along with the financial bubble. But when the bubble burst, bonuses were not recoverable. Those in a position to gamble with the bank's money – or, like Kerviel, to get around its internal controls – are likely to make risky bets to build financial pyramids (and their own legend). If they win, they hit the jackpot. If they lose, they can still win, provided their bets were substantial enough or that they were at the top of their hierarchy.