The rogue trader who cost SocGen €5bn

Date: Friday, January 25, 2008
Author: FT Reporters

A lone rogue trader was on Thursday night being blamed for the biggest fraud in investment banking history after Société Générale, one of the pillars of French finance, revealed his actions had cost it €4.9bn (£3.6bn) and forced it into an emergency €5.5bn cash call on shareholders.

Jérôme Kerviel, a 31-year-old Paris-based trader working on the bank’s European equities derivatives desk, was already being portrayed by the governor of the Banque de France on Thursday as a “genius of fraud”.

The whereabouts of Mr Kerviel, who had been interrogated by SocGen chiefs over the weekend, were unknown, although his lawyer on Thursday night dismissed rumours he had fled and told the French press he was available if needed by the authorities.  

Mr Kerviel risked billions of euros on equity derivatives – in effect betting on future movements in European stock markets – and created elaborate fictitious hedging positions to cover his tracks in a covert scheme.

SocGen, the world’s leading equity derivative trading house – it claims to have invented the instruments – quickly unwound the positions he had amassed, estimated at €40bn-€50bn. SocGen’s fire sale contributed to the heavy stock market falls on Monday that provoked the US Federal Reserve’s dramatic interest rate cut the following day. The Fed was informed of the SocGen problem on Wednesday by the Banque de France. 

SocGen denied that its operations had caused the market fall because it kept them to about 10 per cent of trading volumes. Analysts pointed out that markets began to fall before the sell-off.

The fraud also overshadowed SocGen’s announcement on Thursday of a €2bn hit from the US mortgage crisis, in addition to the €375m of writedowns taken in the third quarter. SocGen shares fell 4.14 per cent, ending down €3.27 at €75.81. Both Daniel Bouton, executive chairman, and Jean-Pierre Mustier, head of the investment bank, tendered their resignations but had their offers rejected by the board. Nonetheless their future with the bank is in doubt. Although it discovered the problem at the weekend, SocGen waited until it could unwind the trades before revealing it.

The scandal – incorporating a fraud significantly bigger than the $1.4bn deception that brought down Barings Bank in 1995 – has shocked the French establishment, which moved quickly to avert a crisis of confidence.

Christian Noyer, governor of the Banque de France, said: “I am not worried about confidence. The proof is that Société Générale, even with such an unprecedented fraud – that was conducted with a sophistication also without precedence – can be repaired in three days and emerge stronger than before [due to the capital increase].”   

Mr Kerviel appears to have built up his losses over a short period using accounts and passwords belonging to colleagues. SocGen was first alerted to the fraud late last Friday, following a tip from another trader. At the time, Mr Kerviel had built up losses of about €1.5bn, which spiralled as the positions were unwound in a falling market.

Mr Mustier said he believed Mr Kerviel acted alone and did not profit personally, although his motive was unknown. The trader and up to six people above him have been sacked. SocGen is understood to have filed a complaint with police.

SocGen will raise €5.5bn through an emergency rights issue, underwritten by JPMorgan and Morgan Stanley, that will leave its Tier One capital ratio higher than before at 8 per cent. The price of the issue will be formally set after SocGen reports its results for 2007 next month.

But the crisis has revived speculation that SocGen will become a takeover target.

Reporting by Peggy Hollinger, Peter Thal Larsen, Chris Hughes, Stanley Pignal, Martin Arnold, Adam Jones, Pan Kwan Yuk, Gillian Tett, Lina Saigol and Krishna Guha