Kerviel's job was to hedge the bank's trading positions in European stocks by using stock index futures. He would make countervailing bets or trades on which way stocks would move as an insurance policy to protect the bank's portfolio. He has suppose to be a hedger not a speculator.
The New York Times quotes an official at the bank as saying, "Mr. Kerviel' s losses came from bets made on what they termed, 'plain vanilla products,' relatively simple futures contracts tied to major European stock indexes." He made bullish bets which were gradually unwound over the first three days of this week. "We have no explanation for why he took these positions, and we have no reason to believe he benefited from a financial point of view. We don't understand why he took such a massive position."
When investing or trading, the most difficult of all questions to answer are these: "when to get out with a profit? Or, with a loss?" There are no sure fire answers to those questions. You simply have to get out of the market and live with the decision. If you made money, be thrilled it was with a profit. It you realized a loss, be relieved it was not larger.
Mr. Kerviel did not intuitively know when to exit the market in order to limit his losses. He chose to be stubborn. As a result, he broke the law and will spend years in the Big House. The only plus is he will have plenty of time to write his memoirs and possibly watch them turned into movie. If, of course, you can consider that a plus in his favor.
With the US stock market off to its worst start in history for any New Year and the markets in Asia and Europe in nearly the same fix, being stubborn in 2008, will be a costly character flaw. It will be a year when investors and traders struggle daily to answer the most difficult of all questions and they will discover there are no easy answers.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)