... He (Original rogue trader Mr Leeson) said: "What shocked me was the size. I never for one moment thought it would get to this degree of magnitude, this degree of loss."
4.15pm GMT update
Société Générale uncovers £3.7bn fraud by rogue trader
- guardian.co.uk,
- Thursday January 24 2008
A rogue trader has cost French bank Société Générale €4.9bn (£3.7bn) in the biggest fraud in financial history.
News of the fraud, which will virtually wipe out 2007 profits at France's second-largest bank, sent shockwaves through European markets, already battered by the escalating credit crisis.
SocGen also revealed that it is being forced to make further write-downs of €2bn relating to the credit crisis and said it would have to raise €5.5bn in fresh capital to strengthen its balance sheet.
The bank gave few details about the trader, who has already been dubbed "the French Nick Leeson".
Leeson was the rogue trader who brought down Barings Bank in 1995, with losses of £800m. But the SocGen fraud is more than four times that figure.
By late afternoon SocGen had filed a formal complaint with the public prosecutor in Nanterre, on the outskirts of Paris, on three main charges: fraudulent falsification of banking records, use of such records and computer fraud.
The bank insisted that it had taken this measure to "contain the impact of the loss".
While the bank refused to name him, it is now known that he is 31-year-old Jerome Kerviel, who it worked in the bank's Delta One products team in Paris. SocGen's Delta One business includes programme trading, exchange traded funds (ETFs), swaps, index and quantitative trading.
Kerviel joined the bank in the summer of 2000.
SocGen, founded in 1864 and one of France's most prestigious companies, said the Paris-based trader had confessed to his actions, which involved "massive" fraudulent positions in 2007 and 2008, beyond his "limited authority". The trader has been responsible for "plain vanilla futures hedging on European equity market indices", the bank said.
It discovered the fraud last weekend and decided to close the positions as soon as possible. Their size, and the very unfavourable market conditions in which it was forced to unravel the trades, led to the €4.9bn hit.
"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," the bank said.
A "thorough analysis" of all positions in his department has been undertaken, which has confirmed the "isolated and exceptional nature of this fraud".
The trader has confessed to the fraud, SocGen said, and is in the process of being dismissed, as are his managers.
SocGen said chairman and chief executive Daniel Bouton had offered his resignation but this was rejected. The board reaffirmed its confidence in him and in the top management and said it has asked Bouton to "lead the group back on track for profitable growth".
Bouton said he and his deputy Philippe Citerne will both give up their salary until June 30 in the light of the losses.
Speaking at a hastily called press conference in Paris this morning, Bouton said the rogue trader was acting alone and does not appear to have gained personally from the unauthorised trading. He added: "I don't know the person and his motives are totally irrational."
SocGen executives refused to account for why the trader had been allowed to leave the building - and possibly flee the country - without yet being interviewed by police.
The French prime minister, François Fillon, speaking from the World Economic Forum in Davos, attempted to reassure markets, saying that while the SocGen situation was serious, it was not tied to the current turbulence.
The Bank of France has set up an inquiry and the French government was following the situation with "very, very great attention," Fillon told reporters.
"Société Générale has had to deal with a very major case of fraud. It is a serious case but at the same time it has nothing to do with the situation on the financial markets," he said.
"I note that (SocGen) has taken very significant measures to tackle this situation. I note that the Bank of France indicated that it wasn't worried about the solidity of this banking establishment. I am happy about that."Trading in the bank's shares was briefly suspended on the Paris market this morning. When dealing resumed, they fell just over 4% to €75.87, taking their loss since the start of the year to more than 20%.
News of the fraud and credit crunch write-downs sent shockwaves through the banking sector this morning. Rival French bank BNP Paribas rushed to reassure the market, saying it does not expect any exceptional losses in its 2007 accounts that would justify a profit warning.
"The process of closing the 2007 accounts of BNP Paribas is continuing in a satisfactory manner," it said in a statement. "It has not revealed any loss of item that would justify any particular warning to the market."
In an effort to allay fears over its figures, the bank said it would publish its preliminary results for 2007 next week.
Roger Steare, professor of organisational ethics at Cass Business School in London said the SocGen scandal was further evidence of a "systemic deficit in ethical values" in the banking industry.
He said: "This latest rogue trader scandal is yet more evidence that while rules-based regulation and controls work for kids in the playground, it won't stop adults doing the wrong thing.
"The banking industry used to have a reputation for honesty, trust and prudence. This latest scandal, on top of the massive losses in credit markets, and the ongoing incidence of mis-selling to retail customers, indicates that there is a systemic deficit in ethical values within the banking industry."
SocGen said chairman and chief executive Daniel Bouton had offered his resignation but this was rejected. The board reaffirmed its confidence in him and in the top management and said it has asked Bouton to "lead the group back on track for profitable growth".
Bouton said he and his deputy Philippe Citerne will both give up their salary until June 30 in the light of the losses.
Speaking at a hastily-called press conference in Paris this morning, Bouton said the rogue trader was acting alone and does not appear to have gained personally from the unauthorised trading. He added: "I don't know the person and his motives are totally irrational."
SocGen executives refused to account for why the trader had been allowed to leave the building - and possibly flee the country - without yet being interviewed by police.
The French prime minister, François Fillon, speaking from the World Economic Forum in Davos, attempted to reassure markets, saying that while the SocGen situation was serious, it was not tied to the current turbulence.
The Bank of France has set up an inquiry and the French government was following the situation with "very, very great attention," Fillon told reporters.
"Société Générale has had to deal with a very major case of fraud. It is a serious case but at the same time it has nothing to do with the situation on the financial markets," he said.
"I note that (SocGen) has taken very significant measures to tackle this situation. I note that the Bank of France indicated that it wasn't worried about the solidity of this banking establishment. I am happy about that," he added.
Trading in the bank's shares was briefly suspended on the Paris market this morning. When dealing resumed, they fell just over 4% to €75.87, taking their loss since the start of the year to more than 20%.
News of the fraud and credit crunch write-downs sent shockwaves through the banking sector this morning. Rival French bank BNP Paribas rushed to reassure the market, saying it does not expect any exceptional losses in its 2007 accounts that would justify a profit warning.
"The process of closing the 2007 accounts of BNP Paribas is continuing in a satisfactory manner," it said in a statement. "It has not revealed any loss of item that would justify any particular warning to the market."
In an effort to allay fears over its figures, the bank said it would publish its preliminary results for 2007 next week.
Roger Steare, professor of organisational ethics at Cass Business School in London said the SocGen scandal was further evidence of a "systemic deficit in ethical values" in the banking industry.
He said: "This latest rogue trader scandal is yet more evidence that while rules-based regulation and controls work for kids in the playground, it won't stop adults doing the wrong thing.
"The banking industry used to have a reputation for honesty, trust and prudence. This latest scandal, on top of the massive losses in credit markets, and the ongoing incidence of mis-selling to retail customers, indicates that there is a systemic deficit in ethical values within the banking industry."
Rogue trader: bank admits losing billions
Thursday, 24 January 2008
The second biggest bank in France today admitted it had lost 4.9 billion euros (£3.7bn) at the hands of a rogue trader in one of the biggest banking frauds in history.
Societe Generale claimed it had been the victim of an elaborate deception by an "irrational" trader, reportedly 31-year-old Frenchman Jerome Kerviel, based in the group's Paris office.
The bank, which has not confirmed the trader's identity, said he racked up hefty losses after gambling away billions of pounds on the direction of stock markets in a series of secret transactions.
The near-five billion euro fraud dwarfs the losses involved in the infamous "rogue trader" case in 1995, when Nick Leeson caused the collapse of Barings bank after costing the group around £800 million.
The scale of the loss suffered by Societe Generale appears to have been exaggerated by the extreme volatility seen in financial markets in recent weeks.
Market experts have also suggested the bank's efforts to unravel the trades could have been behind some of the unusually dramatic turbulence seen this week.
Societe Generale described its losses as "colossal", but said the fraud would not bring the bank to its knees.
The group discovered late last week that one of its traders had set up unauthorised and hidden trading positions last year and early this year.
The trader used his knowledge of the group's back office and security systems, gained while in a previous position, according to the bank.
Societe Generale said the trader had confessed to the "exceptional fraud" and was in the process of being dismissed, along with four or five managers.
However, the group said it had rejected chairman and chief executive Daniel Bouton's offer of resignation.
According to the Financial Times, Mr Kerviel was a junior on Societe Generale's futures desk, having joined the bank in 2000.
He reportedly worked for the group's back office function before being promoted two years ago to Societe Generale's Delta One trading desk.
It is understood that Societe Generale is unsure of the trader's current whereabouts and that he has yet to be formerly fired despite confessing to the fraud over the weekend.
Societe Generale said its loss - combined with £1.53 billion in relation to losses and write-downs linked to the US sub-prime mortgage market - will force it into a 5.5 billion euros (£4.1 billion) capital raising to boost its balance sheet.
But Societe Generale stressed it would still make net income for 2007 of between 600 million and 800 million euros (£448m to £597m) despite the fraud.
Societe Generale boss Mr Bouton said he believed the trader was acting alone.
He said: "I don't know the person and his motives are totally irrational.
"It doesn't seem that he was able to benefit from these colossal trades and directly he did not, that is for sure, although investigations will have to be carried out."
The group confirmed that four or five of the trader's managers had resigned after the discovery at the weekend.
Societe Generale said it was just "bad luck" that the fraud was discovered amid this week's market turbulence.
The unauthorised trades may even have returned gains if it had not been for the market losses, according to the group.
Mr Bouton said: "This is just bad luck, it's Murphy's Law. We discovered it at the same time as the markets plummeted.
"US markets went up last night and we were really unlucky, but we had to settle these positions as fast as we could and we did so during the three-day market crisis."
Mr Bouton dismissed similarities between the fall of Barings and its own fraud case.
"The future of the bank's activities has not been affected and as a result there's no macro-economic impact," he said.
The group also claimed that its compliance procedures were not at fault, adding that it had increased its back office workforce by 50% to around 2,000 staff last year.
But original rogue trader Mr Leeson said, speaking on BBC News 24, that he was surprised the banking system was still vulnerable to these scandals.
He said: "What shocked me was the size. I never for one moment thought it would get to this degree of magnitude, this degree of loss."
Investment banking audit expert Sandy Kumar, a partner at accounting giant Grant Thornton, also raised questions over the internal checks in place, which should pick up on any unauthorised trades on a daily basis.
He said: "Most banks have cases where traders have been naughty, but in the majority of cases it is managed internally and kept quiet. It is the sheer scale of this which is unusual."
"It suggested that the independent checks just weren't picking up on the trades," added Mr Kumar.
The Bank of France said there would be an inquiry by the Banking Commission, but declined to comment further.
The case comes less than six months after fellow French bank Credit Agricole unearthed unauthorised trading at its New York subsidiary, which cost the group 250 million euros (£187 million).
Societe Generale was founded more than 140 years ago and is France's second largest bank by market value behind BNP Paribas.
It has a London office employing more than 2,000 staff.
Only this month, the bank was named Equity Derivatives House of the Year by Risk magazine.
Martin Slaney, head of derivatives at GFT Global Markets, said it was "staggering" that 4.9 billion euros worth of losses could be concealed.
"I've certainly never seen anything like this scandal before.
"The market is suspicious that such big trades could be hidden and potentially that there is something more sinister at play."
Shares in Societe Generale dived 6% today on news of the fraud and sub-prime write-downs.
The stock has been under pressure in recent months and analysts are reported to believe that the fraud revelation may weaken its position further making the bank a potential takeover target.
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