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 Post subject: 1 man manages to defraud 7 billion dollars
PostPosted: Fri Jan 25, 2008 12:35 am 
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Link:http://www.latimes.com/business/la-fi-frenchscandal25jan25,1,2062871.story?track=rss

Quote:
LA Times

French bank loses $7.2 billion in fraud

Workers walk out of the headquarters of the French banking group Societe Generale in La Defense, outside Paris. Societe Generale uncovered $7.14 billion in fraud, one of history's biggest, by a single futures trader who orchestrated a series of bogus transactions that spiraled out of control amid roiling markets this week.
Societe Generale, the second-largest bank in France, is thrown into crisis after revealing that a rogue trader had made massive wrong-way bets on stock prices.

By Stanley Pignal, Martin Arnold and Peter Thal Larsen, Financial Times
6:50 PM PST, January 24, 2008

Societe Generale, the second-largest bank in France, was thrown into crisis today after revealing that a rogue trader had defrauded the company of 4.9 billion euros ($7.2 billion).

Jerome Kerviel, a 31-year-old Frenchman who joined Societe Generale in 2000 and worked on the Delta One trading desk on the bank's Paris trading floor, amassed massive positions in the European stock index futures markets that backfired.

The bank said that because of the actions of Kerviel and a 2.05-billion-euro write-down linked to sub-prime loans and bond insurers in the U.S., it would immediately seek to raise 5.5 billion euros to bolster its capital.

Daniel Bouton, Societe Generale's long-serving chief executive and chairman, offered to resign at an emergency board meeting Wednesday, but this was rejected by directors after reviewing the colossal losses.

The revelation of the fraud is a blow for fragile investor confidence in the banking sector, which is already reeling from multibillion-dollar write-downs at many of the biggest investment banks on Wall Street and in London.

It also raises serious questions about banks' risk-management procedures and their ability to control their own trading positions. One analyst said: "This news will cast a dark cloud over the already troubled European banking sector."

Even so, European stock markets surged today after Wall Street's big rally on Wednesday. The main French market index jumped 6%, although Societe Generale's shares fell 4.1%.

Societe Generale said the "exceptional fraud" resulted from the purchase of huge long positions -- bets on rising prices -- in "plain-vanilla futures hedging on European equity market indices" that were "beyond [Kerviel's] limited authority."

The trader -- likely to trigger comparisons with Nick Leeson, who caused the collapse of Barings Bank in 1995 -- had "deep knowledge" of risk-control procedures from his time at the bank's middle-office activities, which Societe Generale said had allowed him to conceal his positions.

The bank said it had no more exposure to the trader's positions, which were identified and analyzed Saturday and Sunday and then unwound just as stock markets crashed unexpectedly around the world on Monday.

"The decision was made to unwind this position because it was impossible for the bank to maintain," Bouton said.

The plunge in global stock prices helped push the U.S. Federal Reserve to slash its benchmark short-term interest rate to 3.5% from 4.25% early Tuesday morning, on concerns that markets' woes would further threaten the global economy.

Societe Generale said Kerviel had confessed to the fraud in interviews last weekend and been suspended pending a dismissal procedure. Bouton said the trader had switched from short positions -- bets on falling prices -- in 2007 to long positions at the start of this year "for reasons we did not understand."

Stock markets worldwide have plunged for much of this month on concerns about the health of the U.S. economy.

The losses are a serious setback for Societe Generale, which had previously told investors that it had "very limited exposure" to the turmoil in debt markets caused by the crisis in U.S. sub-prime mortgages.

They could trigger fresh speculation about a possible takeover of Societe Generale, a perennial candidate for consolidation in the European banking sector. Bouton said the bank would announce a strategic review next month.

In the U.S., Societe Generale owns Los Angeles-based TCW Group, a money-management firm with $153 billion in assets. A TCW spokesman said the company was "in no way directly or indirectly related to any of the losses announced today by Societe Generale."

Bouton said the rogue trader's loss had been exaggerated by difficult market conditions this week. But he defended the bank's risk-management processes. "All our models of stress-testing work perfectly well," he said.

Christian Noyer, governor of the Bank of France, the central bank, said: "The proof shows that a major bank, even confronted with an unprecedented fraud, conducted with a sophistication also without precedence, can be repaired in three days in a horrific market and this has finished up with a situation that is even stronger than before."

However, the losses raised eyebrows among other regulators around the world and provoked intense debate at the World Economic Forum in Davos, Switzerland.

Mary Schapiro, chief executive of Financial Industry Regulatory Authority, the U.S. regulatory body that oversees broker-dealers, said: "It is quite surprising that positions of that magnitude would not have been monitored much more closely in this era of enhanced risk management.

"One would hope that every time something like this comes to light, everyone redoubles their efforts at risk controls. There is always a possibility of a rogue trader at a bank, so risk controls have to contemplate that possibility -- that is why you have built-in controls."

Times staff writers contributed to this report.




[youtube]http://www.youtube.com/watch?v=coq22t_YuoI[/youtube]

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