Jan 26, 2008 Full impact of SG scandal revealed after six days of mounting horror French bank ploughs through records to find one trader at the heart of the matter DAVOS - MR JEAN-PIERRE Mustier, Societe Generale's (SG's) head of investment banking, was on his way home on the evening of Jan 18 when he received the call that would throw the French bank into turmoil. One of the bank's traders had flagged a potential problem in its trading books, according to the Financial Times (FT). As Mr Mustier headed to SG's offices in the La Defense business district on the outskirts of Paris, he had no concept of the scale of the crisis that was about to unfold. Six sleepless nights later, SG would tell the world it had become the victim of a rogue trader who, apparently alone, had blown a 4.9 billion euro (S$10.2 billion) hole in the bank's books. Working through trading records that Friday night, executives began to realise the scale of the bank's problems, FT reported. Finally, they narrowed the discrepancies to positions managed by Mr Jerome Kerviel, a 31-year-old trader on the bank's Delta One trading desk. RELATED LINKS How the rogue trade was unravelled Mr Kerviel was an arbitrageur, responsible for exploiting tiny price differences in the prices of futures contracts based on European futures indexes. The strategy required Mr Kerviel to hedge his portfolio - matching long positions in futures contracts with corresponding short positions. With mounting horror, executives realised that he had been doing nothing of the sort, the paper reported. Mr Kerviel had been faking his hedging contracts, SG said, in effect taking a massive punt that European stock markets would rise. He had joined SG in 2000, working in the bank's back office. But after several years, he was moved to the trading desk - a beneficiary of an effort by the bank to promote promising back-office employees. After summoning Mr Kerviel to the office last Saturday afternoon, Mr Mustier locked him in a meeting room and interrogated him throughout the night. Slowly the magnitude of the affair became clear. The bank said that, using accounts and passwords belonging to other employees, Mr Kerviel logged into SG's systems and approved his fictitious trades. His knowledge of control systems - a legacy of his years in the back office - allowed him to keep his activities hidden. According to the bank, Mr Kerviel had first experimented with his fraudulent strategy last year. But he closed the position at the end of the year, realising a small profit. Early this year, however, the bank said he started again, and his bets quickly went south. By last Sunday night, SG executives had realised that Mr Kerviel had taken positions worth several billion euros in three leading European indexes. At that point, the bank was sitting on a 1.5 billion euro loss. Mr Kerviel's motivation is unclear, though Mr Mustier does not believe he was doing it for profit. Indeed, the trader - who could not be reached for comment - seemed confused about what he was doing. 'He understood he was taking huge positions, but I don't think he understood the impact,' Mr Mustier said. 'He kept telling me during the night that he had discovered a new trading technique which was performing very well.' By that Sunday night, the pressure on SG was mounting high. The bank had been due on that following Monday to announce two billion euros worth of write-downs on its fixed-income positions. But, with the approval of its board of directors, the French central bank, and the market authorities' executives decided to delay the announcement in order to close out the positions. 'We had no choice,' Mr Mustier told FT. 'For the sake of our shareholders, we cannot speculate with such a large position.' On that Monday morning, SG began to unload Mr Kerviel's huge futures contracts. But the markets were moving against the bank. Investors in Asia and Europe were offloading equities. As SG attempted to sell, its losses mounted. By Wednesday evening, when it finally closed Mr Keviel's positions, the loss had risen to 4.9 billion euros. Mr Daniel Bouton, SG's canny and long-serving chief executive, decided to look at ways of raising capital. After consulting with JPMorgan Chase and Morgan Stanley, Mr Bouton toyed with the idea of seeking fresh capital from a sovereign wealth investor, FT reported. But ultimately, it was decided that the best route was to launch a rights issue to raise 5.5 billion euros. On Thursday morning, SG announced the shocking news: One employee had put the future of one of France's largest banks at risk.
Jan 26, 2008 Markets ask if Fed was duped into rate cut LONDON - THE United States Federal Reserve had no idea of Societe Generale's (SG's) fire sale of stock futures after the discovery of a rogue trader at the French bank when it made its emergency interest rate cut, the Financial Times (FT) has reported. The paper said the question being asked now by some in the markets is: Was the Fed duped into a clumsy and panicked move by the clean-up operation for Mr Jerome Kerviel's mammoth losses for the French bank? There are many who are prepared to believe that, without SG's huge derivatives sales, the mood in the stock markets would not have been half as bleak, the paper said. 'It is now clear that the Fed was panicked into a 75 basis point rate cut by the actions of a rogue trader and the bank's unwinding of his positions,' one London-based hedge fund manager told FT. 'The action also clearly suggests that their French and European Central Bank counterparts did not tell them what had happened at SG.' Meanwhile, the Fed said on Thursday that it was unaware of a scandal involving the rogue trader when it decided on an emergency interest rate cut this week. 'Their panicky rate cut was not to insure the smooth functioning of the markets, but rather, to guarantee prices,' Reuters quoted Mr Barry Ritholtz, a market analyst at Ritholtz Research & Analytics, as saying. Others point to circumstantial evidence to show that a market rout was well under way and being fuelled by entirely different means. SG has said it began unwinding those bets on Monday. This is thought to have amounted to about 10 per cent of the volume on Monday, or about 25 billion euros (S$52.3 billion). Stock markets in Asia and then Europe certainly suffered, but Asia was already down heavily before SG began jettisoning those trades, which included no Asian exposures. SG itself does not believe it contributed to the market falls. 'It's not possible that our covering operations contributed to the market's fall,' Mr Philippe Collas, the head of asset management at the bank, told Bloomberg. The real fear, some in the market believe, was over a potential collapse of the little-understood bond insurance, or monoline, sector. 'The idea that all this was caused by one trader's mistake is very convenient, but there are worse things out there,' said a senior European investment banker. SG selling into a falling market probably made things worse - for the market as well as for SG.