- Title: VARIOUS: SocGen reels from record 7 billion U.S. dollar rogue trader fraud
- Date: 25th January 2008
- Summary: (FLASH 1125GMT) PARIS, FRANCE (JANUARY 24, 2008) (REUTERS) EXTERIOR OF SOCIETE GENERALE HEADQUARTERS IN PARIS SOCIETE GENERALE SIGN VARIOUS OF PLAZA IN FRONT OF SOCIETE GENERALE HEADQUARTERS
- Embargoed: 9th February 2008 12:00
- Keywords:
- Topics: Economic News
- Reuters ID: LVA7LMRAXJ0KPO7GB764YQUL5X6I
- Story Text: The biggest rogue trader scandal in history hit Societe Generale on Thursday (January 24) as the French bank accused a junior employee of a fraud costing 7 billion U.S. dollars.
France's central bank and government scrambled to shore up confidence in the banking system after "SocGen", France's second-biggest bank, said it had been the victim of massive and "exceptional" fraud.
Its trading losses spiralled to 4.9 billion euros (7.1 billion U.S.
dollars) as the bank tried to close out the rogue positions in Monday's sliding market.
The country's top banker dubbed the trader "a genius of fraud". SocGen declined to give a name, but three sources at the bank named him as Jerome Kerviel, 31, a trader on the bank's award-winning equity derivatives desk earning less than 100,000 euros (146,500 U.S. dollars) a year. Kerviel could not be reached for comment.
The problem only came to light at the end of last week, and Kerviel himself met bank executives face-to-face at the weekend as they tried to unravel the web of deceit that cut through all the company's supposedly sophisticated safety mechanisms.
Kerviel joined SocGen in 2002 and was trading in one of the most basic financial instruments in the complex world of derivatives -- futures contracts on European equity indices.
It appears that Kerviel bet massively and mistakenly on a rise of European equity indices.
One banking insider estimated that the losses were worth "just" one billion euros at the weekend, but these rapidly snowballed when SocGen moved to purge their books on Monday and Tuesday as European stockmarkets plunged.
As a junior staffer, there were strict limits on the positions he could take, but he knew how to bypass these controls thanks to five years spent at the back and middle office of the bank at the start of his career.
"He managed to conceal these positions through a scheme of elaborate fictitious transactions," SocGen said in a statement.
But colleagues were mystified by his motivation.
Officials said there was no indication he was trying to steal money from the company, or was working with anyone else.
"His motivations are totally incomprehensible. It does not seem that he would have profited directly from this gigantic fraud," Bouton said.
Kerviel was last seen at SocGen on Sunday (January 20). He has since gone into hiding and is being pursued by both police and the press.
A headshot of him cut from a trading website showed an earnest-looking young man, glaring at the camera with a hard frown and pursed lips.
He had an account on the facebook.com social website. At the start of the afternoon, when his identity was revealed, he had 11 friends listed. That number dropped to 4 just hours later.
"On Saturday we discovered an irregularity of a hidden position, completely hidden, which had been out of our account books, but nonetheless it was within our frame of market activities," said Daniel Bouton, chairman of France's second-biggest listed bank, at a news conference in Paris.
Bouton offered to resign but was asked to stay on by the board. He expressed regret over the discovery, but insisted the bank was not to blame.
"We are very sorry that this happened. This is a totally one shot, exceptional loss coming from a fraud that has been undetected because of the extreme sophistication of the instruments that were used to hide the big position this trader has built out of the books of Societe Generale. It is not a trading fault, it is not a risk management fault. It's a purely operational fraud that has created this situation," said Bouton.
Societe Generale, France's second biggest listed bank, announced plans to raise 5.5 billion euros through a capital increase to shore up its balance sheet, also reeling from a crisis in global credit markets.
"The good news being that the Societe Generale group will nevertheless in this environment post a net profit of 700 around minus or plus 100 million euros after tax on 2007 having fully marked down our U.S.
portfolio and having taken this terrible fraud that has created this situation," Bouton added.
Nonetheless, the announcement sent a shiver through the world banking industry, with many people expressing disbelief at the magnitude of the alleged fraud.
"What's shocking is that it's been engineered by one single person. There are a lot of procedures in place in this bank and its services.
So for just one person to slip through those procedures - I don't understand how that can happen. There must be some gaps in those procedures. When you see the amount of money, it really is a lot," said Romain, an employee at Societe Generale's headquarters.
If fraud is proved, the loss will be the biggest caused by a rogue trader, ahead of the 2.6 billion U.S. dollar hit to Sumitomo Corp caused by copper trader Yasuo Hamanaka and the 1.4 billion U.S. dollar loss caused to Barings by Nick Leeson, both in the 1990s.
It also eclipses a 6 billion U.S. dollar loss racked up by hedge fund Amaranth trader Brian Hunter and his team ahead of its collapse in 2006.
Shares in SocGen, which has a market capitalisation of about 36 billion euros, fell more than 4 percent to 75.81 euros, but did not prevent a broader rally in European share prices.
The pan-European FTSEurofirst 300 index closed 5.4 percent higher at 1,330.42.
Barclays Wealth strategist Henk Potts described the overall market reaction to the alleged fraud as "pretty relaxed."
"I think they're taking the view that this is clearly a problem at a single financial institution rather than the industry. We know it's been a torrid time on financial markets over the course of the last few trading sessions, but we're actually bouncing back quite nicely today, with financials leading the charge, so while we've got a specific single problem at one bank, the overall financial sector of the market looking much healthier today,"
Potts said.
French Prime Minister Francois Fillon described the case as "serious", but said it was not tied to the turbulence in the financial markets.
Speaking to reporters at the annual meeting of the World Economic Forum in Davos, Fillon said the government was following the situation with "very, very great attention".
"Societe Generale had to face a very important fraud, it's a serious case, but at the same time it's a case that has nothing to do with the situation of the financial markets. I note that the Societe Generale, despite this fraud, has positive results, I note that they've taken important measures to face this situation, I note that the Bank of France has indicated there are no worries to have on the solidity of this banking institution, I'm proud of that and I think that the French government is closely watching this situation," he said.
The Bank of France said it had been informed of the fraud immediately, and would set up an inquiry.
French police announced a criminal probe. - Copyright Holder: REUTERS
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