News.com.au: Rogue trader makes history with $8bn fraud
From correspondents in Paris
January 25, 2008 04:17am
Article from: Agence France-PresseFont
THEY were just ordinary, "plain vanilla" deals, but they put one of Europe's biggest banks on course for a near meltdown that analysts say could make Societe Generale a takeover target.
Jerome Kerviel, a 31-year-old, was named today as the rogue trader which Societe Generale has accused of carrying out a €4.9 billion ($8.2 billion) fraud by covering up failed deals on share futures.
After Nick Leeson's single-handed crippling of Barings in 1995 and a series of other multi-billion dollar cover-ups since, the case has again put the spotlight on the derivatives industry and the checks and balances used to keep it under control.
"One trader, responsible for plain vanilla futures hedging on European equity market indices, had taken massive fraudulent directional positions in 2007 and 2008 beyond his limited authority" was how Societe Generale explained the massive damage inflicted.
As vanilla is the basic flavour for ice-cream, so a "plain vanilla option" is the industry jargon for its most basic futures purchase.
It gives the dealer the right to buy or sell a share or another product at a fixed price and at a set time or for a certain period. More complicated deals are called "exotic options".
Derivatives in shares, bonds and commodities - which spread the risk of losses - have mushroomed since the 1980s and now represent the bulk of international financial market transactions.
The whole industry is now wondering how Societe Generale failed to spot the massive failed trades. The bank says it has fired several executives in charge of surveillance.
Arnaud Riverain, head of share research for Arkeon Finance in Paris, said the Leeson scandal and others since, such as at Sumitomo Corp, had pressed the banks to improve their checks and controls.
"It seems impossible that such a thing could happen again, especially for such enormous sums."
Mr Riverain said the events at Societe Generale were a "catastrophe" that could not be carried out alone.
"If a dealer acts for a client, at least three people are involved - to give the order, transmit it and carry it out," he said.
Even if the man was acting in the bank's name, he still needed to act through its middle office services, the expert said.
"He is just a link in the chain. And this chain has precise rules."
Mr Riverain said Societe Generale was fortunate to have earned enough profits in recent years to cover its clients against losses, but it now faces a major public relations operation to save its reputation.
"They cannot just blame it on an isolated error. The idea that a sole trader could bring a bank of this size to its knees would have a disastrous effect.
"They cannot admit either that the whole of their alert procedure is a catastrophe. They will have to precisely explain what went wrong."
About 100 Societe Generale shareholders from France, Belgium and the Netherlands said they have already started legal action.
Paris lawyer Frederik-Karel Canoy said he expected other small shareholders to join the class action.
The Raymond James brokerage said in a note this was probably the biggest trading fraud to hit any financial institution and that "banks' credibility in risk management is now seriously damaged".
Swiss bank UBS said there was now a risk to the credibility of derivatives "that will be under pressure in the future".
It said that "speculative interest in this weakened bank may return in the future".
"If its stock market capitalisation continues to fall, Societe Generale could become the target of one of its competitors," said French brokerage Aurel.
Societe Generale shares closed 4.14 per cent lower overnight at €75.81.
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