French Bank Societe Generale Unveils $7 Fraud

[Detomah]

French bank Societe Generale says it has uncovered "massive" fraud by a Paris-based trader which resulted in a loss of 4.9bn euros ($7.1bn; £3.7bn).
The bank said the fraud was based on simple transactions, but concealed by "sophisticated and varied techniques".

It also announced fresh losses of 2.05bn euros related to the sub-prime mortgage crisis in the US.

The losses are four times greater than those made by Nick Leeson, the rogue trader who brought down Barings Bank.

Leeson was sentenced to six-and-a-half years in jail.

'A daily occurrence'

Speaking to the BBC, Leeson said he was not shocked that the latest fraud had taken place - only its scale.

"Rogue trading is probably a daily occurrence within the financial markets," he said.

"What shocked me was the size. I never for one moment believed it would get to this degree of magnitude, this degree of loss."

Societe Generale's shares, which were suspended in the morning, lost 3.6% when they resumed trading.

'Alone'

According to Financial Times newspaper's Alphaville website, the trader's name is Jerome Kerviel, a 31-year-old trader who worked in the bank's Delta One products team in Paris.

Societe Generale declined to comment on the report.

But the bank did confirm that the trader was a Frenchman in his 30s who joined the bank in 2000 and earned a salary and bonus of less than 100,000 euros.

He was responsible for betting on the markets' future performance, bank executives said.

"I'm convinced he acted alone," said Jean-Pierre Mustier, chief executive of the corporate and investment banking division, who interviewed the trader after the fraud was uncovered.

Societe Generale said the trader had taken what it called "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority".

Executives said the trader may not have sought personal gain from the fraudulent deals.

The fraud is an extraordinary echo of the rogue trader, Nick Leeson, who caused the collapse of Barings Bank in 1995, says BBC business correspondent Nils Blythe.

But the losses uncovered by Barings bosses totalled just £860m - about a quarter of the amount lost by Societe Generale.

'Secret trade'

The bank, one of France's largest, will need to seek 5.5bn euros in new capital to offset the losses.

But it said it would still make a profit of 600m to 800m euros for 2007, despite the blow to its balance sheet.

The bank said the trader responsible for the fraud had "in-depth knowledge of the control procedures resulting from this former employment in the middle-office".

"The transactions which involved the fraud were simple - taking a position on shares rising - but hidden using extremely sophisticated and varied techniques," chief executive Daniel Bouton said in a letter to the bank's customers.

The bank said that the trader had confessed to the fraud and was being dismissed. His managers were to leave the bank as well.

"I am sorry but I have a hard time buying the fact that a trader was able to set up a 'secret trade' of 4.9 billion without anybody finding out," said Ion-Marc Valhi at Amas Bank.

Frederic Hamm, fund manager at Agilis Gestion, believes that the fraud "impacts the reputation of the bank".

Mr Bouton offered his resignation but it was rejected by the board, the bank said.

Richard Fuld, the chairman of Lehman Brothers, told BBC News in Davos that "nothing stuns me, nothing really surprises me these days."

'Unprecedented event'

The bank's losses have seriously dented its profits for 2007.

The company will announce its full year results on February 21, and it said that it expects its 2007 net income to be in the range of 600m-800m euros.

Shares in Societe Generale have fallen by nearly 50% in the past six months.

Societe Generale is also going to raise 5.5bn euros through a capital increase "to strengthen its capital base".

Meanwhile, another French bank, BNP Paribas, said that "it has not revealed any loss of item that would justify any particular warning to the market".

Gilles Glicenstein, BNP Paribas Investment Partners chief executive, suggested that "there is still some information missing to understand what happened" at Societe Generale.

"Because the scale of the fraud is so large, there must be a complex explanation... For Societe Generale, it's an unprecedented event," he added.

Mr Glicenstein also said it was not good news for banks in general, as "it can create doubt".

"In other periods, this type of news was hidden, but today, there is a tendency to reveal everything and maybe it's by revealing everything that confidence can return," he said.

French Prime Minister Francois Fillon said that Societe Generale "has taken serious measures to cope with the situation".

"I note too that the Bank of France has indicated that there is no reason to have any worries about the health of this bank and I am happy with that," he added.

BBC NEWS | Business | Rogue trader to cost SocGen $7bn

Note: Ouch, that's gotta hurt and no doubt it will have some kind of knock on effect with financial markets at some point too.