Rogue Trader--- 7 billon los

[Jamster]

Jan. 24 (Bloomberg) -- Societe Generale SA said unauthorized bets on stock index futures by an unidentified employee caused a 4.9 billion-euro ($7.2 billion) trading loss, the largest in banking history.

 

France's second-largest bank by market value plans to raise 5.5 billion euros from investors after the trading loss and subprime-related writedowns depleted capital, the Paris-based company said today. The Bank of France, the country's banking regulator, said it's investigating the situation.

 

The trading shortfall exceeds the $6.6 billion Amaranth Advisors LLC lost in 2006, and is more than four times the $1.4 billion of losses by Nick Leeson that brought down Barings Plc in 1995. An offer by Chairman Daniel Bouton to resign after the trades were discovered this past weekend was refused by Societe Generale's board, the bank said.

 

``At first this seemed like a joke,'' said Nicolas Rutsaert, an analyst covering European banks at Dexia SA in Brussels. Societe Generale ``was a leader in derivatives and was considered one of the best risk managers in the world.''

 

Societe Generale fell 5.09 euros, or 6.4 percent, to 73.99 euros by 2:44 p.m. in Paris trading, bringing declines this year to 25 percent and valuing the bank at 34.5 billion euros.

 

Fake Trades

 

The trading loss from European stock index futures wipes out almost two years of pretax profit at Societe Generale's investment-banking unit, run by Jean-Pierre Mustier. The company is suing the trader, who had a salary and bonus of less than 100,000 euros a year and worked at the bank since 2000.

 

Four to five people will be fired as a result of the loss, Mustier told reporters at a press conference in Paris. Luc Francois, the head of equity markets, is among those who will lose his job, said spokesman Hugues Le Bret.

 

``The transactions that were built on the fraud were simple, positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques,'' Bouton, 67, said in a letter posted on the bank's Web site.

 

His approach was to balance each real trade with a fictitious one, and his ``intimate and perverse'' knowledge of the bank's controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. He rolled over his real trades before they reached maturity.

 

`In the Money'

 

By the end of December, he was ``massively in the money,'' said Philippe Collas, the head of asset management at the bank. Since the beginning of the year his trades became unprofitable.

 

The trades first came to management's attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank's limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn't exist.

 

The employee, who moved to the trading floor from the back office in 2006, helped with the investigations throughout the weekend, said Mustier. He said he doesn't know where the trader is now.

 

``He is in his thirties, very quiet and a loner,'' said Yves Messarovitch, an external spokesman for Societe Generale. ``He had made his dream of becoming a trader come true.''

 

The trader didn't enrich himself from the fraudulent trades, which began in early 2007, and his motivations are unclear, Bouton said at the press conference.

 

He ``breached five levels of controls,'' Christian Noyer, the governor of the Bank of France, said at a press conference today. He described the trader as ``a computer genius'' and said he had been told he was ``on the run.''

 

Societe Generale joins a list of at least five financial firms since the start of the 1990s to suffer losses from unauthorized trades, including Kidder Peabody, Barings, and Allied Irish Banks Plc.

 

Capital Increase

 

French President Nicolas Sarkozy wouldn't comment on the investigation beyond calling it ``fraud,'' said spokesman David Martinon. Foreign Minister Bernard Kouchner said in an interview at the World Economic Forum in Davos, Switzerland, that he is ``concerned'' about the case.

 

The bank said it will post a profit of between 600 million euros and 800 million euros for 2007 and pay a dividend equal to 45 percent of its earnings. ``Most of the sectors, in France and abroad, continue to produce good, and sometimes excellent results,'' Bouton said.

 

The company said it plans to raise capital by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley. Following the transaction, the bank's Tier 1 ratio, a measure of solvency, will rise to about 8 percent from 6.7 percent at the end of 2007.

 

Takeover Target

 

Bouton, asked whether the affair made Societe Generale a more likely takeover or merger target, said ``we are not looking for this. Our goal is to have the bank working as well as possible after this incredible accident.''

 

Bouton said he wasn't seeking capital from sovereign funds, which have invested in banks including Citigroup Inc., Merrill Lynch and Co. and UBS AG in the past two months.

 

``It's a disaster,'' said Guy De Blonay, who helps manage about $41 billion at New Star Asset Management Group Plc in London. Still ``an acquirer could be tempted. You have got a superb franchise here at an attractive price.'' De Blonay said he had bought shares in the bank today.

 

Societe Generale, founded in 1864, has 120,000 employees in 77 countries and 22 million retail-banking clients, according to information on its Web site.

 

Rogue Traders

 

``Banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can get round them to hide his losses,'' said Axel Pierron, a senior analyst at Celent, an international financial research firm.

 

Societe Generale has ranked first or second during the past five years in client surveys of equity derivative firms, according to Risk Magazine. In 2007, it received the award for ``Equity Derivatives House of the Year'' from The Banker, a London-based monthly magazine.

 

Societe Generale's report of fraud comes four months after French competitor Credit Agricole SA said an unauthorized proprietary trade at its investment-banking unit in New York cost it 250 million euros.

 

In 1994, Kidder Peabody, then owned by General Electric Co., took a $210 million charge against first-quarter earnings to reflect what it said were false profits recorded by bond trader Joseph Jett. The allegations and unrelated bond losses led GE to sell most of Kidder to Paine Webber in 1995. UBS AG bought Paine Webber in 2000.

 

`Mr. Copper'

 

Sumitomo Corp. disclosed a $2.6 billion loss in 1996 on copper trades. The Japanese firm blamed unauthorized trades by its chief copper trader, Yasuo Hamanaka, who was known as ``Mr. Copper'' in the markets because of his aggressive trading. Hamanaka was sentenced to eight years in prison in 1998.

 

Allied Irish Banks Plc discovered in 2002 that John Rusnak, a trader at its Allfirst Financial Inc., had amassed and hidden $691 million of losses over more than five years before the company noticed any discrepancies. Rusnak was sentenced to 7 1/2 years in prison. Allied Irish sold the Baltimore-based unit to M&T Bank Corp.

 

Societe Generale said that it has already closed all the positions set up by the trader, who had used his experience working in the back office to hide his trades through fictitious transactions.

 

Societe Generale said it's taking 1.1 billion euros of writedowns linked to the U.S. residential real estate market, 550 million euros related to U.S. bond insurers, and 400 million euros on other unspecified risks.

 

In the third quarter, the bank reported 375 million euros of writedowns and trading losses linked to turmoil in financial markets. The world's biggest financial companies have announced more than $120 billion in writedowns and credit losses as the U.S. housing slump rattles debt markets

[me]

We got ourselves a new record holder.

[chubacka]

I want to know the mans reasons.

[me]

^he got greedy and messed up. Its not his fault if you ask me...its the banks fault. It seems they never learn from the past.

[chubacka]

not his fault?!

 

I am sure the bank would disagree!

 

Is having poor (kind of poor) security an invitation to defraud?

 

I know banks are not known for having ppl's best interests at heart but to play with that amount of their money....its unjustifiable.

 

And how on earth could they not notice missing 3 bilion?

[me]

He didn't defraud them; he wanted to make money for them. What if his gamble paid of? Wouldn’t the bank take the money and thank him for it.

He took risks and when he messed up he tried to cover his mess up.

 

It’s the banks fault for not having adequate security measures to prevent things like this from happening. It’s easy to pin all this down on one man. But the whole system failed.

[Som@li]

Addiction,this is another form of gambling!

Good story for anoher sequel of the movie, Rogue Trader,

[Sophist]

Jerome Kerviel (born January 11, 1977) worked in the bank’s Delta One products team in Paris, and was responsible for what appears to be the largest financial fraud of all time. Societe Generale’s Delta One business includes programme trading, ETFs, swaps, index and quantitative trading.

 

According to well-placed sources within the EQD structuring team (it is someone I know personally) this guy was not terribly stable in the head. Apparently he lost the money intentionally out of malevolence rather than greed. The astonishing thing about this is SocGen is one of the most sophisticated Ibs in the world (they are notoriously known for their almost perfect systems). How then such a seemingly junior could have caused such havoc without being noticed (futures contract are easy to spot if there any errors or fraudulent activities as the certificates are normally printed and given to head of operations)? The answer lies with Jerome’s intimate knowledge of middle office and back office operation within Socgen; before his promotion to the floor, Jerome was a middle office guy.

 

Anyhow, this is some royally messed up thing; luc Francoise just lost his job (co-head of Equity Derivatives at Socgen) a good friend of my MD whom we were hoping to make some money from! Oh well!.

 

 

Sophist

 

PS: Some say he is somewhat an escapegoat though I doubt that.

[Som@li]

Escapegoat, possible, I worked in a Bank, and all major transactions go thru many signatures!

[LANDER]

Your on to something^

 

Société Générale's excuse was that he held a previous post in the 'middle office' and that he knew most of the procedures to approve trades. Nevertheless, lot of people suspect that Management at many levels was in on this.