[DEBATE] : Société Générale uncovers €5bn fraud

[Riaz K Tayob]

Société Générale uncovers €5bn fraud

By Martin Arnold in London and Peter Thal Larsen in Davos

Published: January 24 2008 07:19 | Last updated: January 24 2008 08:38

Société Générale said on Thursday it had discovered almost €5bn ($7.3bn) 
of losses caused by a rogue trader dealing in European stock futures, 
which had forced the French bank into an emergency €5.5bn share issue.

Daniel Bouton, SG’s long-standing chief executive and chairman, has seen 
his offer to resign turned down by the board after unveiling the 
colossal losses – including €2.05bn of writedowns on its structured 
credit activities.

The announcement is a massive blow for fragile investor confidence in 
the banking sector, which is already reeling from multi-billion dollar 
write-downs at many of the biggest investment banks on Wall Street and 
the City of London.

It also raises serious questions about banks’ risk-management procedures 
and their ability to control their own trading positions. One analyst 
said: "This news will cast a dark cloud over the already troubled 
European banking sector."

SG said the “exceptional fraud” by the unnamed trader resulted from the 
purchase of positions in “vanilla” futures on European stock market 
indices that “were well beyond the low limits” the person had been given.

The rogue trader – likely to trigger comparison’s with the UK’s Nick 
Leeson, who caused the collapse of Barings Bank in 1995 – had “deep 
knowledge” of risk-control procedures from his time at the bank’s 
middle-office activities, which SG said had allowed him to disguise his 
positions.

The bank said it had no more exposure to the trader’s positions, which 
were identified and analysed on January 19 and 20 – just before stock 
markets crashed unexpectedly around the world on January 21.

The losses are a heavy setback for SG, which had previously told 
investors that it had “very limited exposure” to the turmoil in debt 
markets caused by the crisis in US subprime mortgages.

They could trigger fresh speculation about a possible takeover of 
SocGen, which was already a perennial candidate for consolidation in the 
European banking sector.

SG said it expected to make a profit of €600m-€800m for 2007 – a 
fraction of its earnings the previous year.

The French bank’s plan to raise €5.5bn – to be underwritten by JP Morgan 
and Morgan Stanley – contrasts with the trend for US banks to raise 
capital from sovereign wealth funds in the Middle East or Asia.

SG said it would take €1.1bn of writedowns on its exposure to the US 
residential real estate market, €550m of losses linked to US bond 
insurers, and €400m on other unspecified risks.

It had already reported €375m of writedowns linked to the credit market 
turmoil in the third quarter.

Shares in SG were suspended in Paris. The stock, which closed on 
Wednesday at €79.08, has lost 41 per cent of its value over the past year.

Copyright The Financial Times Limited 2008