Fraud costs bank $7 bn in France

Fraud costs bank $7 bn in France
25 Jan 2008, 0233 hrs IST,AGENCIES

PARIS: France's central bank and government scrambled to shore up confidence in the banking system after Societe Generale, the country's second-biggest bank, said on Thursday it had been the victim of a massive and "exceptional” fraud by a junior rogue trader resulting in losses of 4.9 billion euros (over $7 billion).

Anxious to rebuild its shattered capital, the bank announced an immediate capital increase of 5.5 billion euros, already underwritten by rival banks.

SocGen, one of France's oldest banks and a world leader in free-wheeling modern financial derivatives, said the losses came to light at the weekend and blamed a backroom trader, who it said had tried to cover up bad bets on the stock market.

Bank sources named the trader as Jerome Kerviel, who is in his thirties and who joined the investment bank division in 2000, moving from the middle office which checked deals to the front office or trading desk in 2005. He earned less than 100,000 euros a year, added the sources. "It was an extremely sophisticated fraud in the way it was concealed," said Societe Generale chairman Daniel Bouton, who offered to resign but has been asked to stay on. Shares in the bank fell more than 6% to 74 euros. "It's a serious case, but at the same time it has nothing to do with the situation on the financial markets," said Prime Minister Francois Fillon, speaking in Davos, Switzerland.

If fraud is proved, the loss will be the biggest caused by a single trader, dwarfing the $1.4 billion loss by trader Nick Leeson that brought down British bank Barings in the 1990s.

Like Leeson before him, the trader apparently benefited from knowledge of the bank's control systems. SocGen said he had used a "scheme of elaborate fictitious transactions" to try to cover up his mistakes, but did not accuse him of profiting personally from his actions. "He was not one of our stars," said a senior board member who declined to be named. The announcement sent a shiver through the world banking industry, which is suffering a credit crunch as high-risk US mortgage borrowers default on their loans.