French bank: Rogue trader could have lost more

updated 11:56 a.m. ET Jan. 25, 2008

PARIS - The rogue futures trader who allegedly cost French bank Societe Generale $7.14 billion had been betting on an even larger scale — with tens of billions in fraudulent deals, the bank said Friday.

France’s No. 2 bank apologized to shareholders after discovering what appears to be the largest trading fraud in history to be carried out by a single person. The news Thursday rattled an already jittery banking sector at a time of global economic uncertainty.

A bank official said Friday that 31-year-old trader Jerome Kerviel’s positions had reached “several tens of billions of euros” — a staggering sum for a bank with a market capitalization of 35.9 billion euros ($52.6 billion). The official spoke on condition of anonymity in line with bank policy.

French presidential aide Raymond Soubie said on LCI television that the trader had been dealing with more than 50 billion euros ($73.31 billion) — a figure greater than annual gross domestic product for entire nations such as Morocco, Bangledesh, Vietnam and Slovakia, according to 2006 IMF figures.

The bank said Kerviel appears to have netted no personal financial gain from the alleged schemes.

Paris prosecutors were conducting a preliminary investigation that combines two legal complaints, judicial officials said: one by Societe Generale accusing the trader of fraud, another by small shareholders in the bank demanding to know how the fraud transpired.

Societe Generale’s shares, which have lost nearly half their value over the past six months, were suspended on the Paris bourse Thursday morning. When trading resumed, shares fell 4.13 percent to close at 75.81 euros ($111.16). Friday afternoon, shares were trading up 2.4 percent at 77.66 euros ($113.87).

How much is $7.09 billion? The $7.09 billion that French bank Societe Generale says it was swindled out of by a rogue trader ranks as one of the largest amounts ever lost through fraud. Here’s a look at what it could pay for: — 110 F-35 Joint Strike Fighter jets — 8 Queen Mary 2 luxury cruise liners — 1 week’s worth of U.S. oil imports — 2 Freedom Towers at Ground Zero — 17 million Apple iPhones — Nearly double Bolivia’s foreign debt — But only 4.75 percent of President Bush’s economic stimulus plan Source: Associated Press

On Friday, UBS downgraded the bank to neutral from buy. Deutsche Bank also downgraded the stock, to hold from buy.

However, Dresdner Kleinwort analysts Milan Gudka and Arturo De Frias said the bank’s announcement “provides us with greater visibility and comfort. Despite our concern as to the adequacy of internal controls, we keep a positive recommendation on the stock.”

Undetected by the bank’s multilayered security systems, Kerviel had for over a year been fraudulently using the company’s funds to bet on European stock markets, Societe Generale said.

The bank said it learned of the fraud last weekend. With money markets in turmoil, Societe Generale was forced to sell the contracts built up by the rogue trader just as stocks were plunging. It took three days to unload them.

During a visit to India, President Nicolas Sarkozy said the bank’s problem “is an internal fraud that had consequences on Societe Generale’s results but, as the governor of the Bank of France says, has not affected the solidity and reliability of the French financial system.”

Sarkozy said he will announce new proposals at a Tuesday dinner in London with other European leaders on how to boost transparency in the financial sector and encourage the “moral improvement of financial capitalism.”

With questions swirling over how an individual could rack up $7.14 billion in losses for a company, the Bank of France governor insisted Friday the sum had “nothing to do with the subprime crisis, with the difficulties of the financial market in general.”

On RTL radio, Christian Noyer said the vast loss was just “chance.”

“If there hadn’t been a collapse in the markets early in the week, the size of the loss would have been much smaller,” he said.

French Prime Minister Francois Fillon was among those who remained skeptical.

“It is difficult ... to imagine how one person alone could, in a relatively short period of time, cause such considerable losses,” Fillon said in Luxembourg.

He also said the French government should have been informed immediately, not of four days after the fraud was discovered.

Shareholders had many of the same questions.

“One should not be able to take positions worth 40 billion without being spotted by an audit or a sophisticated computer system, every one agrees on that,” said Didier Cornardeau, president of APPAC, a group representing small Societe General shareholders.

“We understand that there is an important disfunction in Societe General, and perhaps in other banks as well.”

Bank CEO Daniel Bouton took out newspaper ads Friday begging shareholders to accept his “apologies and deep regrets.”

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