How can 1 lone trader lose a bank $7.2 billion? Are banks so stupid they have no controls in place to guard against this kind of crap? Are there other banks/hedge funds in the same boat, ie ready to blow up?
In €uro terms, it ain't so bad, just €4.9-billion, LOL...
Massive fraud cripples French bank
Société Générale blames rogue trader for $7.2-billion loss
TORONTO and NEW YORK — At first glance, Jérôme Kerviel would seem to be the unlikeliest of rogue traders, an anomalous figure in the long and sordid history of banking cons. Yet if the allegations enveloping him prove true, one thing is certain: He is by far the biggest.
French banking giant Société Générale accused Mr. Kerviel yesterday of masterminding an elaborate fraud "of considerable scope" that led to $7.2-billion worth of trading losses - the costliest in history.
Amid the financial damage, which wiped out two years of profit at the country's No. 2 bank and dealt a severe blow to its credibility, observers were left to ponder a troubling question: How could a junior employee, with little trading experience and virtually no responsibility, single-handedly pull off such a feat?
"I can honestly say that the last few days have been very, very difficult," SocGen's chief executive, Daniel Bouton, said yesterday after offering an apology to clients and shareholders. "We announced today very bad news."
Mr. Bouton alleged Mr. Kerviel, 31, used his knowledge of the bank's back-office systems to avoid detection for months. He said the junior trader secretly built up a massive position in a series of futures contracts that essentially amounted to a bet on the direction of Europe's major stock indexes.
The bank uncovered the holdings last Saturday only when Mr. Kerviel made a rare mistake, prompting inquiries from the bank's compliance department.
Mr. Bouton said SocGen started unwinding the contracts Monday, just as markets around the world went into a tailspin because of fears about a recession in the United States.
The bank's losses were exacerbated because Mr. Kerviel had bet on the European markets rising. They fell roughly 7 per cent Monday.
According to some reports, Mr. Kerviel's various contracts totalled about $3-billion, but because of the market turmoil SocGen lost more than $7-billion by the time the positions were unwound.
By contrast, Nick Leeson lost $1.4-billion in 1995 at Britain's Barings Bank and Canadian Brian Hunter lost $6-billion in 2006 on gas futures at hedge fund Amaranth LLC.
Perhaps the most perplexing question, if the allegations prove true, is why Mr. Kerviel did it.
Mr. Bouton said there was no indication he profited from the trading or involved anyone else.
Mr. Kerviel even co-operated with officials last Sunday, guiding them through his holdings.
"His motivations are totally irrational," Mr. Bouton said. "It doesn't seem that he was able to benefit from this gigantic and colossal fraud."
The bank has filed a lawsuit and a complaint with French prosecutors who have launched an investigation. Mr. Kerviel and five senior managers have also been fired.
Mr. Kerviel had no comment yesterday, but his lawyer said he was not on the run and was available for questioning.
Mr. Kerviel joined the bank shortly after graduating from Management des Opérations de Marché, a business school in Lyon.
He started on the administrative side, processing transactions and developing computer systems to manage positions taken out by traders.
Around 2005, Mr. Kerviel graduated to the trading desk and joined the Delta One team. He was kept on a short leash, restricted to handling about 20 million euros annually and limited primarily to hedging positions taken out by more senior traders.
He earned less than $145,000 annually, modest by investment firm standards.
Some time in 2007, the bank alleges, Mr. Kerviel began amassing the futures contracts. At first he bet on the markets going down, but he changed course earlier this month. The bank alleges Mr. Kerviel used his knowledge of administrative operations to hide his trading.
He allegedly created fictitious accounts, moved money constantly and kept track of the bank's internal monitoring schedule. For months, he eluded SocGen's 2,000-member control staff and its recently bolstered computer systems.
"The talent he had was not the position itself but it was a talent to hide this position to all our sophisticated levels of control," said Mr. Bouton, who called his actions "perverse."
By late last year, Mr. Kerviel was actually in a money-making position. "In December things were going very well for him, then he panicked," said Philippe Collas, the head of asset management at SocGen.
"He gambled against the market, he started deliberately losing to try and hide it, to reduce the possibility he'd be caught. He made no money out of this, not a cent, this wasn't done to get rich. What was his motive? I don't know, maybe he wanted to prove himself. It's difficult to get money out of a bank; as soon as you try you will leave a trace."
Friends and union officials have told French news media that Mr. Kerviel was a "nice guy" who kept to himself and had family problems. But even they have few answers for what allegedly happened. One union official, Alain Treviglio, said he "might have lost his mind a bit."
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