Soc Gen had bene warned about Kerviel
SocGen Had Been Warned About Kerviel
Jérôme Kerviel's activities had raised red flags within Société Générale months before the trader was charged. The French bank may not survive the blow
by Carol Matlack
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Shares in Société Générale (SOGN.PA) swooned nearly 4% in Paris trading on Jan. 28, to €71 ($104.35), as speculation mounted over a possible breakup of the battered French bank, while the Paris prosecutor cited evidence that SocGen had received multiple warnings about unauthorized transactions by rogue trader Jérôme Kerviel that ultimately cost the bank $7.1 billion (BusinessWeek.com, 1/24/08).
Prosecutor Jean-Claude Marin, who announced the filing of attempted-fraud charges against Kerviel, told reporters the derivatives exchange Eurex had alerted SocGen last November about questionable trades by Kerviel. Separately, several of the bank's internal control units also had flagged some of his trades in recent months, Marin said. But in each instance, he said, Kerviel was able to produce "fake documents" making it appear that the trades were hedged and therefore not risky.
Marin said Kerviel had admitted falsifying documents and hacking into the bank's computer system to cover up unauthorized trades he began making in 2005, when he first moved from SocGen's back office to the trading floor. His motivation, the prosecutor said, was to "seem like an exceptional trader," and he had been expecting a bonus of almost $450,000—far above his base salary of about $147,000—based on profitable trades he made in 2007, before he began running up huge losses in recent weeks. Kerviel also told investigators that other traders routinely made unauthorized trades, Marin said.
INSUFFICIENT INTERNAL CONTROLS
In its most detailed public explanation of the scandal to date, SocGen acknowledged on Jan. 27 that the trading positions taken by Kerviel had reached more than $73 billion, far exceeding the bank's roughly $50 billion market capitalization, by the time the bank learned of the problem over the weekend of Jan. 19-20. The bank said Kerviel took advantage of his knowledge of the bank's internal control systems, gained during his five years in back-office jobs.
The bank's explanation, however, didn't mention the warning flags raised earlier. According to prosecutor Marin, SocGen's middle office, accounting department, and risk department had raised questions about Kerviel's trades in recent months, as had Eurex, the derivatives exchange operated jointly by Deutsche Börse (DB1GN.DE) and the SWX Swiss Exchange stock markets.
The fact that even a relatively junior trader could wreak such mayhem has spurred urgent calls for banks to toughen their internal controls. "Every bank in this area will be overhauling their compliance arrangements, their IT security…all of the nuts and bolts stuff," says Howard Davies, the dean of the London School of Economics who formerly headed Britain's Financial Services Authority. Some relatively simple measures might have prevented the debacle, Davies says, such as changing computer passwords more frequently or requiring traders to take two-week vacations during which other employees handle their trading portfolios.
THE END OF SOCGEN?
Now, the stain on SocGen's reputation is so great some industry watchers think it can't survive as an independent bank. "SocGen may have been terminally wounded by the [$7.1 billion] loss, and its investment banking/equity derivative franchise may be irreparably damaged," says Jean-Pierre Lambert, a London-based analyst with Keefe, Bruyette & Woods (KBW). Until now, SocGen has been the leading global player in the highly profitable business of equity-derivatives trading.
With the French government eager to keep the country's No. 2 bank in French hands, a possible solution would be to break up SocGen, dividing its holdings between its crosstown rivals BNP Paribas (BNPP.PA) and Crédit Agricole. BNP has long coveted SocGen's network of bank branches.
Other European banks such as Italy's Unicredito (CRDI.MI) have in the past eyed SocGen as a possible takeover target. But most potential acquirers have been weakened by the U.S. subprime crisis and other problems, making a non-French bid less likely, analysts say.
It's no surprise that other banks have coveted SocGen. Founded in 1864 by decree of Napoleon III, it grew into a global colossus with 120,000 employees. But now one of its most fleet-footed businesses, derivatives trading, could be the Achilles' heel that hobbles it.
Matlack is BusinessWeek's Paris bureau chief.
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