In the fall of 1752, a seasoned captain by the name of Henry Kent boarded the Dragon, a 310-ton merchant vessel, and set sail from the southern coast of England, bound for Bengal.
During his previous 14 years in the employ of the East India Co., both as a mate and a commander, Kent had amassed a remarkable record for punctuality: Despite the great distance of this trading route, and the perils of pirates, disease and weather, the sailor always returned to his home port on time.
But on this, his final trip, Kent veered into uncharted waters. Although he rounded the Cape of Good Hope in early 1753, squarely on schedule, he did not continue on to Bengal. Instead, he spent four months on the coast of Madagascar, cutting side-deals with the local population for his own benefit, helping to build a factory, bartering alcohol, and even buying slaves.
This sojourn caused him to miss the seasonal window for a return passage to England, conveniently enabling him to extend his extracurricular business pursuits (and no doubt imposing significant costs on his employer, the East India Co.).
Kent may prove to be among the first rogue traders of the global economy, a swashbuckling precursor to the likes of Nick Leeson, who sank the British bank Barings in 1995, and, more recently, Jérôme Kerviel, the 31-year-old Frenchman whose allegedly unauthorized trading cost Société Générale about $7.2 billion in losses this year. Like these latter-day renegades, Kent used the resources of a powerful and well-capitalized company to engage in improper trades; and, like them, he incurred considerable risk when he did so.
"The mortality rate was 60% on these ships, and people were dying like crazy," explains Emily Erikson, a professor at the University of Massachusetts who chronicled Kent's travels in a paper she co-wrote with Peter Bearman of Columbia University. "There had to be some sort of compensation, and that was engaging in this illicit activity."
Risk taking has been part of human culture since the prehistoric era, whether it be hunting big game or rolling a primitive form of dice known as knucklebones.
Yet rarely has the subject occupied such a central place in the collective consciousness. The U.S. economy is teetering on the brink of recession and threatening to pull other countries down along with it. Investors have lost faith in some of the world's most storied banks, whose reckless promotion of exotic derivatives products fuelled an ill-advised boom—and resultant collapse—in the subprime mortgage industry, leading to hundreds of billions of dollars worth of losses and the savaging of the credit and equities markets.
And then, of course, there are the alleged escapades of Kerviel, the rogue trader who improbably hoodwinked one of Europe's largest banks and, in the process, became an overnight poster boy for a global banking culture drunk on risk.
Kerviel came from modest means (his mother was a hairdresser; his father taught metalworking), and attended a middle-of-the-road university. The French banking system is known for its class-consciousness, and it rewarded Kerviel's unassuming pedigree with a correspondingly unassuming job: He was sequestered far from the limelight of the trading floor, performing administrative work.
Eventually, he was promoted to junior trader on the "Delta One" team and specialized in European stock index futures—the trading equivalent of giving kids plastic cutlery so they can't hurt themselves.
Kerviel was supposed to be looking for arbitrage opportunities—discrepancies between index futures and underlying cash prices that might yield a small profit. Instead, he began making a series of escalating bets on the direction of these markets, and used his knowledge of the back room to evade his superiors, creating fictitious offsetting trades. These offsets made it look as though he had removed himself from a position, when in fact he was accumulating a portfolio worth billions. It worked swimmingly until early this year, when the market suddenly turned, forcing him to backtrack in an even more audacious fashion. By the time the bank learned of his alleged duplicity and took action to unwind his trades, it was staring into the maw of a $7-billion loss. It was by far the most devastating account of rogue trading in history, and perhaps the most unusual.
