French finance minister Christine Lagarde last night expressed the astonishment of the French political class and business community as news that a single rogue trader had lost €4.9 billion at Société Générale (SocGen), a pillar of French finance and one of Europe's most profitable banks, writes Lara Marlowein Paris
"I have asked the banking commission to . . . tell me very quickly how can it be that despite monitoring by the banking commission, none of the misappropriation by this dishonest employee was detected. I have also asked the banking commission and its president, who is also the governor of the Banque de France, to propose to me additional means of supervision, operational measures, to prevent this type of situation arising again," he said.
The simple yet sophisticated fraud was being blamed on a Paris-based 31-year-old trader, Jérôme Kerviel. In effect, Mr Kerviel bet billions of euro on future movements in European stock markets and created fictitious hedging positions to cover his tracks. SocGen quickly unwound the equity derivative positions he had amassed, estimated to have totalled €50-€70 billion.
A small crisis team worked round the clock. "We have just lived through the five most difficult days of our lives," said a source close to chairman and chief executive Daniel Bouton.
Both Mr Bouton and Jean-Pierre Mustier, head of the investment bank, tendered their resignation, but had their offer rejected by the board.
Rival banking executives questioned how Mr Kerviel was able to build up such a large position without attracting attention.
They said the mismatch should have been clear from the bank's cashflows, while his fake hedging should have been noticed by desks responsible for borrowing shares to cover short positions.
However, Mr Kerviel appears to have built up his losses over a very short period. He closed his position in December at a small profit, Mr Mustier said, before starting trading again early in January. SocGen executives were first alerted to the fraud late on Friday after a tip from another trader. At the time, Mr Kerviel had built up losses of about €1.5 billion. But as SocGen attempted to unwind his positions on Monday, falling stock markets around the world quickly multiplied the losses.
The final figure puts other similar frauds in the shade. In 1995, Nick Leeson broke Barings Bank which crashed with losses of close to £827 million, largely attributed to futures contract speculation and fudged financial records by Mr Leeson.
Another rogue trader, John Rusnak, was sentenced in 2003 to seven and a half years in prison after he admitted hiding $691 million in trading losses while working at Allfirst Financial, a subsidiary of Allied Irish Banks.
Despite €6.9 billion in overall losses, SocGen expects to report net profits of some € 700 million for 2007. The bank made € 5.2 billion in profits in 2006. SocGen will raise €5.5 billion through an emergency rights issueto ensure that its capital reserves remain strong. The price of the issue will be formally set after SocGen reports its results for 2007.
Although it discovered the problem at the weekend, SocGen waited until it could unwind the trades before revealing their extent. The scandal shocked the French establishment, which closed ranks to support the bank.
About 100 shareholders of French, Dutch and Belgian nationality filed a lawsuit with the Paris prosecutor for "fraud, abuse of confidence, forgery and possession". In Davos, where he is attending the World Economic Forum, French prime minister Francois Fillon said the SocGen fraud "is a serious affair but has nothing to do with the instability of world financial markets" this week. - (Additional reporting: Financial Times service)
