Societe Generale mess a reminder of trading perils

Feb. 4, 2008
The unfolding Jerome Kerviel drama says much about cap-and-trade remedies for climate change.

The unfolding Jerome Kerviel drama says much about cap-and-trade remedies for climate change. Kerviel is the French trader of stock indexes alleged to have lost the venerable Societe Generale $7.2 billion through unauthorized transactions. The bank thinks the 31-year-old Kerviel masked his shenanigans by hacking into its computers. The unraveling of his illicit trade position, disclosed Jan. 24, may have aggravated global financial turmoil. This is not the first time bonkers trading and unvigilant accounting have rocked institutions that seemed to have their affairs under control. The names Metallgesellschaft, Barings Bank, and Enron leap to mind.

Kerviel’s misadventure thus serves as a reminder, not a revelation, of regrettable truths: Where a lot of fast money can be made from the buying and selling of something, someone always tests boundaries of prudence if not law. And it’s in the nature of boundary-testers to find ways around whatever controls may be in place.

To acknowledge the hazards of an economically essential activity is not to condemn trading as a practice. The hazards, though, are good reasons to be wary of trading as a tool of governance.

As governments hurl themselves toward regulation of greenhouse-gas emissions, a choice emerges between the direct taxation of carbon and the state-sponsored trading of emission allowances. Under the latter option, which the European Union has implemented for carbon dioxide, governments assign companies emission caps calibrated to national targets. Companies able to cut emissions to below permitted levels sell corresponding allowances, or credits, to above-cap emitters.

A market thus develops in tradable emission credits, a market that grows as governments lower the emission limits.

Cap-and-trade systems camouflage the inescapable costs of cutting emissions of carbon dioxide and other greenhouse gases. Direct taxation of carbon, by contrast, makes those costs clear. It encourages the prospective cost-bearers to wonder how much sacrifice they would need to make before they might realistically hope to influence global average temperature. It thus raises questions about the wisdom of governmental responses to climate change.

Because of the political expediency, governments naturally favor cap-and-trade. Can anyone guess which alternative traders, especially the rogues, might prefer?

(Online Jan. 25, 2008; author’s e-mail: [email protected])