Other Peoples' Money Problem. In 2008, France's Société Générale SA said that a 31-year-old trader named Jérôme Kerviel had cost the bank €4.9 billion (equivalent to $7.2 billion) by making huge unauthorized trades. Société Générale's loss dwarfed the $1.3 billion Nick Leeson cost Britain's Barings Bank in 1995, and forced Société Générale to seek a capital infusion of as much as €5.5 billion ($8 billion). Société Générale's loss was only one of many huge write offs tied to a general breakdown in risk controls at gigantic international financial institutions. In 2007-08, giant financial institutions around the world lost billions of dollars on complex financial instruments tied to subprime mortgages and various poorly designed trading strategies. Such losses had important and far-reaching economic ramifications. For example, Société Générale's frantic efforts to unwind Kerviel's unauthorized trades over a 72-hour period rattled global financial markets, and spurred dramatic moves by the Federal Reserve Board's Ben Bernanke to cut U.S. interest rates and head off a deep economic recession.
A. Explain this Société Générale bank episode as a manifestation of the "other peoples' money" problem.
B. How could it have been avoided?

Question

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The Answer of Other Peoples' Money Problem. In 2008, France's Société Générale SA said that a 31-year-old trader named Jérôme Kerviel had cost the bank €4.9 billion (equivalent to $7.2 billion) by making huge unauthorized trades. Société Générale's loss dwarfed the $1.3 billion Nick Leeson cost Britain's Barings Bank in 1995, and forced Société Générale to seek a capital infusion of as much as €5.5 billion ($8 billion). Société Générale's loss was only one of many huge write offs tied to a general breakdown in risk controls at gigantic international financial institutions. In 2007-08, giant financial institutions around the world lost billions of dollars on complex financial instruments tied to subprime mortgages and various poorly designed trading strategies. Such losses had important and far-reaching economic ramifications. For example, Société Générale's frantic efforts to unwind Kerviel's unauthorized trades over a 72-hour period rattled global financial markets, and spurred dramatic moves by the Federal Reserve Board's Ben Bernanke to cut U.S. interest rates and head off a deep economic recession.
A. Explain this Société Générale bank episode as a manifestation of the "other peoples' money" problem.
B. How could it have been avoided?