SocGen uncovers €5bn fraud by Finance News Bulletin

Published: 15/04/08

Société Générale said on Thursday it had exposed €7bn of losses from a rogue trader in European store futures and big US subprime mortgage writedowns, forcing the French store into an emergency €55bn share issueDaniel Bouton, the long-standing leader executive and chairman of SG, offered to leave, but this was rejected by the board after reviewing the colossal wounded – including €205bn of writedowns on contact to US mortgages and bond insurers

The announcement is a huge blow for fragile investor confidence in the banking sector, which is already reeling from multi-billion buck writedowns at many of the biggest investment banks on partition Street and the City of LondonIt also raises serious questions about banks’ risk-management events and their ability to manage their own trading positions One analyst said: "This news will cast a dim cloud over the already troubled European banking division"SG said the “exceptional fraud” by its unnamed rogue trader resulted from the purchase of huge extended positions in “vanilla futures hedging on European evenhandedness market indices” that were “beyond his limited authority”

The rogue trader – likely to activate comparisons with the UK’s cut Leeson, who caused the collapse of Barings store in 1995 – had “deep knowledge” of risk-control procedures from his time at the bank’s middle-office behavior, which SG said had allowed him to hide his positionsThe bank said it had no more exposure to the scoundrel trader’s positions which were recognized and analysed on January 19 and 20 and then unwound just as stock markets crashed unexpectedly around the world on January 21“The choice was made to relax this position this position was taken because it was impossible for the bank to maintain,” supposed Mr BoutonIt refused to give any personal particulars of the man, who it said had confessed and been suspended awaiting a dismissal process

Mr Bouton said the trader had switched from short positions in 2007 to extended positions at the start of this year intended for reasons we did not understand”The losses are a heavy setback for SG, which had before told investors that it had “very limited contact to the turmoil in money owing markets caused by the crisis in US subprime mortgagesThey could activate fresh speculation about a possible takeover of SG, which was already a perennial candidate for consolidation in the European banking division Mr Bouton said it would announce a strategic review next month

SG supposed it would take €11bn of writedowns on its contact to the US residential real estate market, €550m of losses linked to US tie insurers, and €400m on other unspecified praise market risks It had already reported €375m of writedowns linked to the praise market turmoil in the third quarterThe bank said it predictable to make a profit of €600m-€800m for 2007 – a part of its €5

2bn earnings the previous year Its corporate and asset banking unit would make a defeat of €23bnIts plan to lift €5

5bn – to be underwritten by JP Morgan and Morgan Stanley – contrasts with the tendency for US banks to raise capital from ruler wealth funds in the Middle East or Asia Mr Bouton said French and foreign investors had already contacted him to express interest in taking part in the share issueThe SG boss supposed the rogue trader’s loss had been overstated by difficult market conditions this week But he defended the bank’s risk-management processes

“All our models of stress-testing work completely well,” he saidJean-Pierre Mustier, head of investment banking who had been seen as a possible successor to Mr Bouton, said the position busy by the rogue dealer was only expected to generate €20m of revenue a year “The specific pattern of his dealings was that they used fake transactions rolled on a enduring basis,” said Mr MustierSG said the €5

5bn assets increase would increase its tier one ratio – a measure of capital adequacy second-hand by regulators to monitor hardness of banks – to 8 per cent after its intended acquisition of Rosbank in Russia2008 US Insurance Regulatory Agenda: Will the Upcoming Elections Quell the force for Reform TowerGroup1/14/2008$1750Plimsoll Portfolio Analysis - Debt compilation Agencies (UK) Plimsoll Publishing Ltd1/10/2008$750Plimsoll Portfolio Analysis - Independent monetary Advisors (UK) Plimsoll Publishing Ltd

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