Rogue Trader Dips French Bank in Hot Water
SmartProInvesting.com, January 24, 2008
In what looks like a replay of the Barings Bank saga, top French bank Societe Generale has been hit by a huge trading fraud that is costing it some 5 billion Euros. A 31-year-old trader with the bank had accumulated heavy positions in equities derivatives, creating huge exposures for the bank and using extensive fictitious hedging to conceal the damage he was inflicting.
Jérôme Kerviel, the trader believed to be behind the trauma of the bank, is thought to have taken advantage of his exposure to the back office operations of the bank before becoming a trader. He understood the systems from both ends and is believed to have engaged that knowledge to deftly escape detection, even as he accumulated such staggering positions. He is believed to have also used other employees accounts and passwords. While his losses had accumulated to some €1.5bn, the bank's immediate effort to unwind the positions, just as the markets tumbled this week, cascaded the losses to the estimated €5bn.
Societe Generale is moving quickly to contain the damage, apparently to avoid the fate the befell Barings Bank. The latter, then a leading UK bank, failed
to survive a similar onslaught from another young trader, Nick Leeson who visited a trading loss of $1.4bn on it in 1995. Societe Generale is raising €5bn in emergency rights issue to cushion the loss of capital. JPMorgan and Morgan Stanley are underwriting the offer. Obviously in a further bid to shore up confidence, Christian Noyer, governor of France's central bank - Banque de France - has expressed that he is not worried, believing that the damage can be quickly repaired and the bank would emerge stronger.
This episode, just as the Barings case, shows how easy it could be to beat the internal control system of even a major organisation - hence the need for sustained vigilance. It also shows how quickly the tide could change, which is why investors must always seek to achieve a diversified investment position that could protect, should anything suddenly
happen to a particular investment.
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