Market shock as SocGen hit by $7bn fraud
Paris, January 24, 2008
French bank Societe Generale said fraud by a single trader had caused it a 4.9 billion euro ($7.1 billion) loss and that it would seek emergency funds as a result, shocking battered markets.
If fraud is proved, the loss will be the biggest caused by a rogue trader, ahead of the $2.6 billion hit to Sumitomo Corp caused by copper trader Yasuo Hamanaka and the $1.4 billion loss caused to Barings by Nick Leeson, both in the 1990s.
It also eclipses a $6 billion loss racked up by hedge fund Amaranth trader Brian Hunter and his team ahead of its collapse in 2006.
SocGen, France's second-biggest listed bank, announced plans to raise 5.5 billion euros through a capital increase to shore up its balance sheet, also reeling from a crisis in global credit markets. It unveiled a further writedown of 2.05 billion euros related to the global credit crunch on Thursday.
The announcement sent a shiver through the world banking industry, which is suffering a credit crunch as high-risk mortgage borrowers default on their loans.
Lehman Brothers CEO and chairman Richard Fuld called it "everyone's worst nightmare" in a comment from the World Economic Forum in Davos, Switzerland.
"The most serious thing is that this puts into doubt the risk management systems at some banks," said Fortis analyst Carlos Garcia. "You can't suddenly announce this 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."
SocGen said it was in the process of dismissing the Paris-based trader, who it did not name, and added that the trader's managers would leave the company. Chairman Daniel Bouton later said he did not know where the trader was.
A source at SocGen said the trader was "not one of its stars" and was relatively young. SocGen said the trader had been handling futures contracts on European stock market indices, betting on broad share market movements.
It added that its board had rejected an offer by chairman and chief executive Daniel Bouton to resign.
SocGen shares were suspended.
The Bank of France announced an inquiry by the Banking Commission and said no further comment was necessary after Societe Generale took steps to strengthen its balance sheet.
French Economy Minister Christine Lagarde will make a statement during the day on the issue, her office said.
It was not immediately clear what role French police were taking in the investigation. The French prosecutor's office was not available for comment.
Analysts said the episode would have a major impact on the reputation of SocGen, which was founded in 1864 and is one of France's most prestigious blue-chip companies.
UBS said in a research note that the fraud would impact the credibility of its derivatives business, which has been one of its fastest-growing units and has a world-leading reputation.
Shares in rival BNP rose. The fraud could rekindle BNP's ambitions to take control of SocGen, analysts said.
The losses also echo a similar blow on a much smaller scale last year to France's biggest retail bank, Credit Agricole, which in September announced a 250 million euro charge related to an unauthorised trading position.
SocGen said it expected a 2007 net profit of between 600 and 800 million euros -- well below its 2006 profit figure.
SocGen shares closed down 4.15 percent at 79.08 euros on Wednesday. The stock has fallen around 20 percent since the start of 2008. - Reuters