French bank trader bet tens of billions
Updated: 2008-01-26 17:18
PARIS - A rogue trader who cost France's Societe Generale bank more than $7 billion by making bad stock market bets had been gambling on a much larger scale, officials said tens of billions of dollars of the bank's money.
 This internal security photo taken from French bank Societe Generale's Web site shows a man identified on the site as Jerome Kerviel. Societe Generale said Thursday Jan. 24, 2007 it has uncovered a 4.9 billion euro ($7.14 billion) fraud, one of history's biggest, by a single futures trader whose scheme of fictitious transactions was discovered as stock markets began to stumble in recent days. [Agencies] |
As the depth of the risk to the bank became clearer, small shareholders questioned controls at Societe Generale and other leading banks, and France's prime minister joined skeptics wondering whether a lone trader could have been fully responsible for such major damage.
The bank, France's second-largest, apologized to shareholders in full-page newspaper ads Friday after announcing the fraud, apparently the biggest ever carried out by one person. The news Thursday rattled a jittery banking sector.
French police searched the headquarters of the banking giant Friday night, bank spokeswoman Stephanie Carson-Parker said Saturday. She gave no other details.
French police also conducted a search Friday at the home of the trader, 31-year-old Jerome Kerviel, spending more than two hours at his suburban Paris apartment before leaving with two large black leather cases and one briefcase.
Prosecutors have already opened a preliminary investigation into the bank's accusation of fraud against Kerviel and into complaints by two small shareholders.
The fraud cost Societe Generale 4.9 billion euros, or more than $7 billion, but a bank official said Friday that Kerviel's positions had reached "several tens of billions of euros." The official spoke on condition of anonymity because of company policy on such matters.
French presidential aide Raymond Soubie said on LCI television that the trader had been dealing with more than 50 billion euros, or more than $73 billion. That figure easily outstrips the bank's market capitalization of 35.9 billion euros ($52.6 billion), and is close to the annual gross domestic product of entire nations such Slovakia, Qatar or Libya.
The debacle generated buzz at the World Economic Forum in Davos, Switzerland, with executives expressing shock that it could have happened to one of Europe's most respected financial institutions. The case also raised questions sector-wide about risk management.
"In a bull market, often the risk management does not cope with the significant growth in volumes, volatility, complexity of instruments," said Kinner Lakhani, an analyst at ABN Amro. "Pretty much every Wall Street management is definitely looking at this issue."
The damage might not have been as bad if it had happened in a less volatile time: The bank said it learned of the fraud last weekend. With stock markets in turmoil, Societe Generale was forced to sell the contracts built up by the rogue trader just as stocks were plunging. It took three days to unload them.
Societe Generale's unwinding of its massive positions over the next three days could even have contributed to the markets' fall, analysts said.
"Any dumping will drop the price," said Mark G. Castelino, associate professor for finance and economics at Rutgers Business School in New Jersey.
He stopped short, however, of saying that Kerviel's actions affected the U.S. Federal Reserve's subsequent decision to cut its benchmark interest rate by an extraordinary three-quarters of a percentage point.
The bank's CEO, Daniel Bouton defended its handling of the discovery in an interview in Saturday's Le Figaro, and said it wasn't at fault for Monday's drama on world markets. He also insisted it could weather the enormous loss.
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