Societe Generale Hit by €5 Billion Trading Fraud

By Patrick Hosking
The New Statesman
London, England
January 24, 2008

The French bank disclosed today that a rogue trader had defrauded it of almost €5 billion, prompting it to seek emergency funding

The French bank Société Générale stunned financial markets today by revealing that it had been the victim of one of the largest frauds by a rogue trader — losing four times as much as Nick Leeson, the man who sank Barings.

The second-biggest French bank said that it had lost €4.9 billion (£3.7 billion) as a result of the rogue trades by a Paris-based trader who concealed his positions through "a scheme of elaborate fictitious transactions".

SocGen was forced today into an emergency €5.5 billion capital-raising to shore up its ravaged balance sheet.  It said that it was in the process of dismissing the unnamed trader, who had "confessed to the fraud".

Daniel Bouton, SocGen's chairman said today that "four or five" of his managers and supervisors had resigned and a legal investigation was now taking place.

An offer from Mr Bouton to resign was rejected by the board.

Mr Bouton apologised to shareholders and said, “This was a lone man who built a concealed enterprise within the company, using the tools of Societe Generale, and who had the intelligence to escape all control procedures."

The fraud appears to be one of the biggest in history, dwarfing the £827 million lost by Mr Leeson, whose rogue trading led to the collapse of Barings in 1995.

The trader had been with the bank for about six years and was a relatively junior employee. According to Mr Bouton, he was paid less than €100,000 including bonus, a small wage for anyone in investment banking.

"He was trading relatively small positions," said Mr Bouton. "He was at the lower end of the scale."

SocGen said the rogue trades - effectively huge bets on European stock markets going up - were placed in 2007 and 2008 but hidden from managers. They were first discovered on Friday evening after a "fishy" trade made in December was investigated.

The bank took the first three days of this week desperately attempting to unwind the positions in what proved to be hostile conditions as markets plunged. If they had gone up, the positions might have made gains for the bank, Mr Bouton said.

As it was, they turned into "gigantic and collossal" losses.

Analysts said SocGen's unwinding of the massive rogue positions on Monday would have contributed to the violent slump in share prices and may therefore have played a part in the shock decision by the US Federal Reserve to slash American interest rates.

"There's a very strong link between the equity futures market and the cash equities market," said one equity strategist at a major bank. "It may have influenced Fed thinking."

The trader managed to conceal his positions through his knowledge of the administrative side of the bank, "the middle office", where he worked for three years until 2005.

The bank said: "Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."

SocGen described the fraud today as "exceptional in its size and nature".

The bank said that its full-year net profit would drop between €600 million and €800 million from €5.22 billion a year earlier because of the fraud and other losses in US sub-prime mortgages and monoline insurers.

The bank also announced further writedowns of €2.05 billion relating to the global credit crunch.

Traders in rival banks expressed astonishment that a rogue trader could conceal such huge losses without anyone suspecting anything.

Ion-Marc Valahu, the head of trading at Amas Bank in Switzerland, said: “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.”

Carlos Garcia, a Fortis analyst, said: "The most serious thing is that this puts into doubt the risk management systems at some banks. You can’t suddenly announce from one day to the next a hit of $7 billion.

"In the light of this, what we’ve done is to downgrade banks that are very linked to trading income or whose capital base is weak.”

Shares in the bank were initially suspended this morning and fell by 5.5 per cent to €74.75 when trading was resumed in the late morning as credit rating agencies moved to downgrade the bank.

Fitch, the ratings agency, cut SocGen's rating one notch to AA-. The fraud raised questions about the effectiveness of the bank’s systems and created reputational risk for the bank, it said.

The Banque de France said there would be an inquiry by the Banking Commission. The French Economy Minister Christine Lagarde was expected to make a statement later today.

In Davos, Lehman Brothers chairman Dick Fuld described the fraud as "everyone’s worst nightmare”

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