French bank nobbled by rogue trader

Nick Leeson? Small-time. A single trader at Societe Generale has just managed to defraud the bank of a massive €5bn...

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Last Updated: 31 Aug 2010

The big news this morning is that one unnamed Paris-based trader has just landed the French bank with a bill of €4.9bn, after making huge losses betting on the European equity markets. That’s more than four times the amount that Nick Leeson managed to rack up in 1995, in the process of bringing down Barings Bank. SocGen said in a statement that the trader had taken ‘massive fraudulent directional positions…beyond his limited authority’ resulting in a fraud that was ‘exceptional in its size and nature’. You can almost see their eyes watering.

It’s a humiliating admission for SocGen, not only because of the size of the fraud but also because of the way it was perpetrated. The trader concerned wasn’t one of its fancy dan rocket scientists working on some complicated product that nobody outside the Square Mile would have a hope of understanding. He wasn’t even anything to do with sub-prime mortgages. He was what the bank calls a ‘plain vanilla futures’ trader in its equity derivatives division, which means that his job was to bet (relatively small amounts) on whether European stock indices like the FTSE 100 would go up or down.

What’s more, the reason he was able to get away with it for as long as he did – and thus run up such massive losses – was because he used to work in SocGen’s middle office, processing trades. Since he knew all the tricks, he managed to hide his losses ‘through a scheme of elaborate fictitious transactions’. And he was obviously a lot better at this than he was at his day job – to lose this much money in the current market, he must have had more than €20bn on the go. It seems absolutely incredible that nobody else noticed.

To add insult to injury, it’s come on the very week that SocGen has been forced into a €2bn write-down related to the recent credit market woes. So the consequences will be savage: the bank has been forced into a €5.5bn emergency share issue, as it looks to plug the gaping holes in its balance sheet, and has slashed its annual profit forecast to about €700m (that’s more than 80% down on last year). Heads are also rolling: believe it or not, the trader concerned is getting the boot (and probably a spell at Monsieur President’s pleasure), as have his managers and probably his managers’ managers. The bank’s chairman Daniel Bouton even offered to resign, but the board turned it down.

And it’s not just SocGen that’s been affected. The bank discovered the fraud over the weekend and then spent Monday frantically trying to extricate itself from the trader’s positions – which goes a long way to explaining the massive market turbulence this week.

More details will presumably emerge over the coming days – in the meantime all we can do is sit back and wait for the film version. Someone get Ewan McGregor’s agent on the phone...

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