By Jason Simpkins
Associate Editor
Societe Generale SA (OTC: SCGLY), France's second largest bank by market value, said yesterday (Thursday) that it incurred a $7.2 billion trade loss from an "exceptional fraud" perpetrated by a rogue trader.
It was the biggest trading loss ever incurred by a bank, Bloomberg News reported.
The trader, Jerome Kerviel, "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority," the bank alleged. "Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."
The fraud revelation deals still another blow to already-fragile investor confidence, as banks and brokerages have already endured a gauntlet of multi-billion-dollar write-downs brought on by the collapse of mortgage-backed assets.
"The news will cast a dark cloud over the already troubled European banking sector," an unnamed analyst told the Financial Times.
SocGen is one of many financial institutions already reeling from its exposure to risky credit markets. In its 2007 earnings report, it said it would take $1.6 billion [1.1 billion euros] in write-downs as a result of its exposure to the U.S. residential real estate market. It will also absorb $800 million in losses related to U.S. bond insurers, and a loss of $583 million on other unspecified credit market risks. The bank had previously reported $546 million in write-downs linked to credit-market turmoil in the third quarter.
To cope with its losses, SocGen will attempt to raise $8 billion (5.5 billion euros) by selling shares in a rights offering. The offering - which will be jointly underwritten by JP Morgan Chase & Co. (JPM) and Morgan Stanley (MS) - diverges from the current strategy employed by U.S. banks, which are attempting to raise capital through sovereign wealth funds.
The bank expects 2007 profit to be between $875 million and $1.2 billion or (600 million to 800 million euros). SocGen earned $7.5 billion in 2006.
In a letter to clients, Daniel Bouton, 57, the company's chief executive and chairman, described Kerviel as "an imprudent employee in the corporate and investment banking division" who possessed an "intimate and perverse" knowledge of the bank's controls - which allowed him to avoid detection.
He also said the trader's supervisors would be fired and that controls "have been revised and reinforced to avoid any reoccurrence of further similar risks." Bouton offered to resign, but the company's board of directors rejected his offer.
Societe Generale has ranked first and second in client surveys of equity derivative firms over the past five years, according to Risk Magazine. In 2007, it received the award for "Equity Derivatives House of the Year" from The Banker, a monthly magazine based in London.
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Societe Generale has ranked first and second in client surveys of equity derivative firms over the past five years, according to Risk Magazine. In 2007, it received the award for "Equity Derivatives House of the Year" from The Banker, a monthly magazine based in London. The scandal also comes just four months after Credit Agricole SA said an unauthorized proprietary trade at its New York-based investment-banking unit cost it nearly $370 million. The company's version of events has been met with skepticism. "I am sorry, but I have a hard time buying the fact that a trader was able to set up a 'secret trade' of [$7.2 billion] without anybody finding out," Ion-Marc Valahu, head of trading at Amas Bank in Switzerland, told Reuters. |
The Biggest Banking Losses
France's Societe Generale has now taken over the Top Spot for the biggest-ever trading losses posted by a global bank.
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News and Related Story Links:
- Associated Press:
Societe Generale Uncovers Massive Fraud
- Financial Times:
SocGen's €5bn rogue trader named
- International Herald Tribune:
Société Générale loses $7 billion in trading fraud
- Nick Leeson: In 1995, Leeson was a trader in Singapore who lost $1.8 billion, bringing down venerable British bank, Barings PLC. He was sentenced to six and a half years in prison.
- Joseph Jett: In 1994, Kidder Peabody had to adjust its first-quarter earnings to reflect $210 million in false profit from bond trader Jett. Jett was forced to forfeit $8.2 million in bonuses, was fined $200,000, and barred from any future association with financial trading. General Electric Co. (GE) sold Kidder Peabody to Paine Webber the following year.
- Yasuo Hamanaka (a.k.a. Mr. Copper): In 1998, Sumitomo Corp. revealed a $2.6 billion loss, which it blamed on Hamanaka, formerly the company's chief copper trader. He was sentenced to eight years in prison.
- John Rusnak: In 2002, Allied Irish Banks PLC (AIB) discovered that Rusnak at Allfirst Financial Inc. had hidden $691 million in losses for more than five years. Rusnak could have faced as many as 30 years in prison but was sentenced to seven and a half years. Allfirst was subsequently bought by M&T Bank Corp. (MTB).
Rogue Trader Hall of Shame
Jerome Kerviel isn't alone in his alleged act of fraudulence. Here are a few more rogue traders infamous for losing sizable sums for their employers: