SocGen Missed Kerviel's $73B Stock Bet
The French bank admits that its internal controls failed to catch the rogue trader's $73 billion in bets on European indexes
Societe Generale confirmed on Sunday that Jerome Kerviel, a junior trader at the French bank, had evaded its controls to bet €50 billion ($73.5 billion) -- more than the bank's market worth -- on European markets. It admitted that it spent three days last week trying to offset those bets just as European markets were crashing.
Kerviel handed himself over to police on Saturday and officials say he is cooperating with the investigation. Jean-Michel Aldebert of the financial section of the Paris prosecutors office said that he was providing "interesting" information. Kerviel is expected to appear before a judge later on Monday.
The young trader has enlisted the help of one of France's leading barristers, Christian Charriere-Bournazel, who is president of the French bar, to help with his defence. Charriere-Bournazel insists his client had just been doing a trader's job by taking on risk and has accused the bank of setting him up for a public "lynching" by letting him carry all the blame for the €4.9 billion in losses it announced last Thursday. Kerviel had been "thrown to the wolves," Charriere-Bournazel told the Associated Press on Sunday: "He didn't steal anything, take anything, he didn't take any profit for himself." Charriere-Bournazel claims that pointing the finger at Kerviel "allows the considerable losses that the bank made on subprimes to be hidden."
The bank said Sunday that the 31-year-old junior trader had ploughed €30 billion into the Eurostoxx index, and bet another €18 billion on the DAX in Germany and €2 billion on the FTSE in London, far in excess of SocGen's market capitalization of €35.9 billion. Once the market failed to turn in his favor, he covered his tracks by entering fictitious offsetting trades into the banks computer system.
The similarities to Nick Leeson, the rogue trader who brought down the United Kingdom's Barings Bank in 1995, are startling. Both were trained by their own banks to detect fraud and then used those skills to work around those controls.
According to SPIEGEL, in early January Kerviel allegedly bought 140,000 so-called DAX Futures, which are traded on the German-Swiss Eurex stock market. By mid-January, Kerviel is said to have made losses worth €2 billion. This was spotted by the German division of brokerage business Newedge, which handles SocGen's Eurex business. SPIEGEL reports that the bank's directors received the first warning signals about the fraud from Germany.
The bank is facing growing criticism for the way it reacted after it discovered the fraud last weekend. SocGen delayed making the fraud public while it rushed to unwind Kerviel's losing bets at the beginning of European trading last Monday, Jan. 21. The bank then spent three days selling or offsetting these bets just when the markets were plummeting following the drop in the US markets the previous Friday, thus incurring even higher losses. The bank insists it unwound the positions in "a controlled fashion," but there has been criticism that the sell-off caused already jittery markets to fall further and may have even contributed to the US Federal Reserve's decision to slash interest rates.
French Prime Minister Francois Fillon has openly expressed his frustration with SocGen's management for not giving him more warning that problems were brewing at the bank. Finance Minister Christine Lagarde is to submit a report to the prime minister on the affair by this coming Friday.
On Monday, Lagarde insisted that SocGen is not under pressure to merge despite the €4.9 billion losses it has incurred. The Finance Ministry is thought to be rallying around the bank in a bid to stave off any takeover bid by a foreign rival. This follows a warning from Henri Guaino, a top advisor to President Nicolas Sarkozy, that the government would likely intervene if raiders made a move. "The state will not stand idly by if any predator attempts to take advantage of the situation," he told RTL radio on Sunday.
European Central Bank President Jean-Claude Trichet has said that the fraud scandal should lead to better internal risk controls in banks. "The lesson we need to draw from it ... (is the) absolute necessity to really reinforce internal controls and risk controls of all establishments," Trichet told France's LCI television last Friday.
The fraud has alarmed other major banks in Europe. Deutsche Bank boss Josef Ackermann is reported to have ordered an immediate inspection of the bank's internal security systems after hearing about the French scandal.
Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine
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