The Crazy World of Superstar Economics
- By John Gapper
- Feb. 01 2008 00:00
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Crazy, right? That is what Kerviel's former bosses, most of whom are either out of a job already or soon will be, think. Rather than sticking to his assigned role as a lowly arbitrage trader, Kerviel tried to become a star. "I think that he is completely mad," said one banker.
Well, not completely. Actually, there is a good argument that Kerviel acted in a financially rational manner, although he broke both his contract -- and allegedly -- the law.
The basic principle of superstar economics, which applies to both entertainment and investment banking, is that a few people take most of the rewards. If you can establish yourself as a top talent -- either on screen or on a trading floor -- you gain status and get rich.
The imperative for traders and film actors is therefore to draw attention to themselves and persuade those with capital to take a chance on them. If they fail, they will be no worse off than they are already (and perhaps better). If they succeed, they get a chance to become a star and earn far more.
In fact, the incentives are so distorted by the star system that people are often driven to take extreme risks -- or to act madly -- in pursuit of stardom. Reality television programs rely on the fact that a surprising number of people will eagerly make fools of themselves in order to become national celebrities.
When Kerviel was given a routine job by Societe General executing arbitrage trades, it was only natural for him to look across the trading floor to the stars trading complex over-the-counter derivatives and structured products and to wish he were one of them. He toiled obscurely for $148,000 a year while they got 10 or 20 times that sum.
He knew he was unlikely to get a shot at stardom. He had already been promoted from the bank's back office, and the arbitrage desk was as far as he was likely to go. So, he told prosecutors, he tried to prove himself by taking unhedged bets on futures markets and hiding his trades.
Consider the rewards and risks of this strategy. On the upside, Kerviel was hoping to triple his bonus from 2006 to 2007 and might well have turned himself into a star by continuing, as Nick Leeson did at Barings Bank in 1994, to shift from low-risk arbitrage to fraudulent risk-taking.
On the downside, there was a high risk that he would get caught, as Leeson was in 1995 -- although far too late. Even then, he would become a celebrity and his employers would get most of the blame for not catching him. Kerviel has already acquired Facebook fan clubs, name recognition and many sympathizers in France.
In short, although his behavior was bizarre and risky, it had a certain crazy logic. That is why rogue traders keep on popping up at banks from Barings to Sumitomo and Allied Irish. No matter how carefully institutions try to guard against them, traders have big incentives to risk everything on stardom.
I suppose that performers become so used to doing anything to grab the limelight that they find it difficult to stop even when they ought to tone down the eccentricity, as Britney Spears is proving. Rogue traders have a better record of self-control. Leeson became famous, went to jail and now runs an Irish football club.
Let that be a lesson to you, Mr. Kerviel.
John Gapper is a columnist for the Financial Times, where this comment appeared.