In The Days

• Source: ABC News
• Author: Zoe Magee
• News Date: 1/24/08

Root of All Evil

“For the love of money is the root of all evi:…..”
—1 Timothy 6:10a

A lone “rogue trader” masterminded one of the world’s largest banking frauds and cost the giant French bank Societe Generale a breathtaking $7.15 billion.

The trader, identified by the Financial Times as Jerome Kerviel, has admitted the fraud, Societe Generale’s Chairman Daniel Bouton said. Bouton called Kerviel’s motives “irrational,” saying the suspect did not make any money from his financial manipulations.

Societe Generale’s massive losses were announced by Bouton in a letter to the bank’s customers.

“Societe Generale Group has uncovered a fraud, exceptional in its size and nature,” the bank said in a statement.

“The individual in question has been dismissed and legal action will be taken against him,” Bouton wrote without identifying the suspect.

It was also announced that the managers and executive managers responsible for the trader will all be removed from their positions. Bouton himself offered his resignation, but this was refused.

The Financial Times described Kerviel as a Frenchman in his 30s who joined SocGen in 2000. Bank executives told The Associated Press his salary was around $145,000.

Jean Pierre Mustier, chief executive of the corporate and investment banking at Societe Generale, emphasized he did not believe the young trader had accomplices.

“I’m convinced he acted alone,” Mustier said.

According to SocGen, the bank discovered this weekend that one of its traders “had taken massive fraudulent directional positions in 2007 and 2008″ and he was able to conceal these through his “in depth knowledge of control procedures.”

The trader was responsible for basic futures hedging on European equity market indexes, the company said. That means he made bets on how the markets would perform at a future date.

Until last year, the trader had been betting that markets would fall, but then changed his position at the start of this year to bet they would rise, said Kinner Lakhani, an analyst at ABN Amro in London who specializes in Societe Generale shares, citing the bank’s management.

The bank’s explanation of how it was flummoxed by the young trader has baffled some in the industry.

“I am sorry, but I have a hard time buying the fact that a trader was able to set up a ‘secret trade’ of 4.9 billion euros [$7.15 billion dollars] without anybody finding out,” Ion-Marc Valhi at Amas Bank told the BBC.

It is one of the biggest frauds in banking history and believed to be the largest by a single person. It is almost five times the amount lost by Barings Bank trader Nick Leeson, who famously brought down the entire bank in 1995 after concealing losses that amounted to $1.4 billion.

“When these things come out, they always surprise you. People wonder why there were no controls in place to prevent this sort of thing from happening in the first place,” Ruth Lea, an expert from the Center for Policy Studies, a London think tank, told ABC News.

Leeson has consistently warned that the measures put in place to protect against fraud on this scale are inadequate.

“You’re still looking at a situation where the systems and controls aren’t good enough. The people in place to look after those systems and controls simply aren’t good enough either,” Leeson told BBC News 24.

“I think rogue trading is probably a daily occurrence among the financial markets. The thing that really shocked me was the size of it,” Leeson said.

Trading on Societe Generale’s stock was suspended, but unlike Barings Bank, SocGen seems capable of weathering this storm.

Despite an additional loss of $3.2 billion due to the U.S. subprime mortgage drawdowns, which were also announced today (meaning the bank’s total losses for 2007 will exceed $10 billion), Bouton remains convinced of his bank’s ability to bounce back.

“And what is extraordinary is that the Societe Generale group is so solid, our work is so good, that despite this exceptional fraud, we cleared at the end of 2007 a positive result of several hundreds of millions of euros,” he told reporters.

The bank also has the support of the French government. France’s Prime Minster Francois Fillon, speaking at the World Economic Forum in Davos, guaranteed the bank’s future.

“I’m pointing out that the Banque de France said there is no need to be worried about the solidity of this banking institution. I am happy about this, and the French government is following this situation very very closely,” Fillon said.

The Associated Press contributed to this report