January 24, 2008
Jerome Kerviel named in €5bn bank trading fraud
Jerome Kerviel has been named as the Societe Generale rogue trader who allegedly lost the bank €4.9bn in a huge scandal
The bank refused to give any information today on Jerome Kerviel. Colleagues said that he was not at his desk and did not know when he would return
Patrick Hosking , Banking and Finance Editor, and Charles Bremner and Adam Sage, Paris
The announcement from SocGen
The French bank Société Générale stunned financial markets today by revealing that it had been the victim of a near-€5 billion (£3.7 billion) rogue trading fraud, one of the world's largest and four times the size of the cover-up by Nick Leeson, the man who sank Barings.
The bank declined to identify the trader, but he has been named as Jérôme Kerviel, a 31-year-old options trader.
"He is not here and we do not know when he will be back," said a colleague who answered his line at the bank's trading room in La Défense, the business district west of Paris.
Contacted directly by The Times, three of Mr Kerviel's SocGen colleagues said that they were "not authorised to discuss" their friend and directed inquiries to the bank.
The trader was described by a bank source as "not a star". His total salary and bonuses amounted to less than €100,000, Daniel Bouton, the SocGen chairman, said.
Mr Kerviel joined SocGen after earning a masters degree in finance at a business school at Lyons in 2000.
The Paris prosecutor’s office has opened a preliminary criminal investigation into the presumed case of fraud at Société Générale after a complaint by a shareholder.
France's second-largest bank said today that it had lost €4.9 billion as a result of the rogue trades by a Paris-based trader who concealed his positions through "a scheme of elaborate fictitious transactions".
SocGen was forced today into an emergency €5.5 billion capital-raising to shore up its ravaged balance sheet.
It said that it was in the process of dismissing the trader, who had "confessed to the fraud".
Mr Bouton said today that "four or five" of his managers and supervisors had resigned and a legal investigation was taking place.
Mr Bouton's offer to resign was rejected by the board.
He apologised to shareholders and said: “This was a lone man who built a concealed enterprise within the company, using the tools of Société Générale, and who had the intelligence to escape all control procedures."
The fraud appears to be one of the biggest in history, dwarfing the £827 million lost by Mr Leeson, whose rogue trading led to the collapse of Barings in 1995.
The trader had been with the bank for about six years and was a relatively junior employee.
According to Mr Bouton, he was paid less than €100,000, including bonus, a small wage for anyone in investment banking.
"He was trading relatively small positions," Mr Bouton said. "He was at the lower end of the scale."
SocGen said that the rogue trades — effectively huge bets on European stock markets going up — were placed in 2007 and 2008 but hidden from managers.
They were first discovered on Friday evening after a "fishy" trade made in December was investigated.
The bank took the first three days of this week desperately attempting to unwind the positions in what proved to be hostile conditions as markets plunged.
If they had gone up, the positions might have made gains for the bank, Mr Bouton said.
As it was, they turned into "gigantic and colossal" losses.
Analysts said that SocGen's unwinding of the massive rogue positions on Monday would have contributed to the violent slump in share prices and may, therefore, have played a part in the surprise decision by the US Federal Reserve to cut American interest rates.
"There's a very strong link between the equity futures market and the cash equities market," one equity strategist at a big bank said. "It may have influenced Fed thinking."
The trader managed to conceal his positions through his knowledge of the administrative side of the bank, the "middle office", where he worked for three years until 2005.
The bank said: "Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."
SocGen described the fraud today as "exceptional in its size and nature".
The bank said that its full-year net profit would drop between €600 million and €800 million from €5.22 billion a year earlier because of the fraud and other losses in US sub-prime mortgages and monoline insurers.
The bank also announced further writedowns of €2.05 billion relating to the global credit crunch.
Traders in rival banks expressed astonishment that a rogue trader could conceal such huge losses without anyone suspecting anything.
Ion-Marc Valahu, the head of trading at Amas Bank in Switzerland, said: “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 without anybody finding out.”
Carlos Garcia, a Fortis analyst, said: "The most serious thing is that this puts into doubt the risk management systems at some banks. You can’t suddenly announce from one day to the next a hit of $7 billion.
"In the light of this, what we’ve done is to downgrade banks that are very linked to trading income or whose capital base is weak.”
Shares in the bank were initially suspended this morning and fell by 5.5 per cent to €74.75 when trading was resumed in the late morning as credit rating agencies moved to downgrade the bank.
Fitch, the ratings agency, cut SocGen's rating one notch to AA-. The fraud raised questions about the effectiveness of the bank’s systems and created a reputational risk for the bank, it said.
The Banque de France said that there would be an inquiry by the Banking Commission.
In Davos, Dick Fuld, the chairman of Lehman Brothers, described the fraud as "everyone’s worst nightmare”.
For President Sarkozy, it signals further difficulties as he struggles to pull a lacklustre French economy towards higher growth.
Amid the sub-prime crisis, Mr Sarkozy and his ministers had been at pains to emphasise the solidity of the French banking system as they sought to shore up national confidence.
"This is a serious business," François Fillon, the Prime Minister, said, adding that the fraud was "very important".
François Hollande, the leader of the oppostion Socialist Party, sought to make political capital out of the crisis by calling on the Government to reinforce banking controls.
"There is a very worrying lack of internal control mechanisms that needs to be rectified by a tightening of the rules," he said.
Mr Hollande said that the turmoil at Société Générale made it less likely that France would reach the Government's target of 2 per cent growth this year.
"We need to know what risks French banks took in the American financial and property sectors," he said.