French bank: Rogue trader could have lost more

It remains unclear whether Kerviel was acting out of malevolence, ambition or some other reason. Three union officials representing Societe Generale employees said managers at the bank who briefed them about the fraud told them Kerviel was having “family problems.”

Employed by Societe General since 2000, Kerviel worked his way up from a supporting role in an office that monitors trades to a job on the more glamorous futures desk where he invested the bank’s own money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.

Thierry Mavic, mayor of the western French town of Pont-L’Abbe where Kerviel grew up, described him as “someone with his head on his shoulders, thoughtful, a young man with no issues,” in an interview with RTL.

Kerviel both shocked and impressed banking executives with the complexity and scale of his trades. Using his knowledge of Societe Generale’s control systems, gleaned in his former monitoring role, he escaped detection. Most of his positions went unnoticed by colleagues and superiors as Kerviel covered his tracks.

Kerviel’s deception recalls the massive fraud carried out by Nick Leeson, who in 1995 bankrupted British bank Barings. Barings collapsed after Leeson, the bank’s Singapore general manager of futures trading, lost 860 million pounds — then worth $1.38 billion — on Asian futures markets. The company had been in business for more than 230 years.

Though Societe Generale’s loss is greater than Barings’, Bouton insisted that the bank is still financially sound and said he was convinced of the continuing confidence of clients “and the bank’s ability to bounce back.”

The case has raised serious questions sector-wide about risk management.

“In a bull market often the risk management does not cope with the significant growth in volumes, volatility, complexity of instruments,” said Kinner Lakhani, an analyst at ABN Amro. “Pretty much every Wall Street management is definitely looking at this issue and trying to strengthen to make sure these things don’t happen again.

The company said it expects to post a net profit of 600 million euros to 800 million euros ($874 million to $1.16 billion) for all of 2007 — even after the fraud and another 2.05 billion euros ($2.99 billion) lost in the subprime mortgage crisis that has also roiled markets.

As a result, the bank said it would be forced to raise 5.5 billion euros ($8.02 billion) in new capital.

Founded in 1864 after a decree signed by Napoleon III, Societe Generale is now present in 77 countries and employs 120,000 people.

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