Bank: Rogue trader blew $7 billion

By MSN Money staff with wire reports

We've seen this movie before: A rogue trader gets in over his head and loses billions for a big European bank.

This time the bank is France's Societe Generale (FR:GLE, news, msgs), and the loss is an astonishing $7.16 billion.

The rogue, according to reports, is 31-year-old Jerome Kerviel, a futures trader, computer whiz and "loner" whose scheme was uncovered only as many of the world's stock markets posted huge losses in recent days.

SocGen said the trader used his in-depth knowledge of the bank's internal control procedures to cause a fraud "exceptional in size and nature." The bank is seeking to have him prosecuted.

The trader managed to conceal losses "through a scheme of elaborate fictitious transactions," the bank said. The fraud is forcing Societe Generale to seek $8 billion in new capital, the bank acknowledged.

In trading today in Paris, shares of the bank fell 4.1% to 75.81 euros.

SocGen, like many big banks, had big losses to deal with even before discovering the trader's losses. SocGen announced earlier that it would write down $2.9 billion in subprime-related securities.

European markets fell Wednesday as rumors about SocGen's write-downs circulated among traders. Some traders had worried that the losses would be as high as $40 billion.

CEO offers to resign

"For something like that to happen at any firm has to represent a massive breakdown" in internal procedures, Nasdaq Chairman Robert Greifeld said on CNBC this morning.

Other observers said the fraud highlighted banks' vulnerability.

• Video: More on Societe Generale's fraud

"Banks, despite the implementation of sophisticated risk-management solutions, are still under the threat that an employee with a good understanding of the risk-management processes can get 'round them to hide his losses," Axel Pierron, a senior analyst at research firm Celent, told Bloomberg News.

Christian Noyer, governor of the Bank of France, described Kerviel "a computer genius," and called the incident "an extremely serious fraud."

The trader was responsible for basic futures hedging on European equity market indexes, the company said. That means he made bets on how the markets would perform at a future date.

The trader had been betting that markets would fall but then changed his position at the start of this year to bet they would rise, Kinner Lakhani, an analyst at ABN Amro in London who specializes in Societe Generale shares, told the Associated Press.

Societe Generale CEO Daniel Bouton offered to resign over the weekend, but the bank's board refused to accept his resignation. However, Bouton and his deputy, Philippe Citerne, are giving up their salaries through June, Reuters reported this morning.

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Jean-Pierre Mustier, head of SocGen's investment banking division, said he didn't believe Kerviel made any money on the fraud. "Sometimes people don't know the size of what they are getting into," he told The Associated Press. Kerviel, who moved from a back-office job to the trading floor in 2006, was "very quiet and a loner," Yves Messarovitch, a spokesman for Societe Generale, said.

SocGen said that Kerviel likely acted alone but that to five people will be fired as a result of the losses.

Bank's bad timing

The bank said that it first detected the loss -- one of the biggest in history -- on Jan. 19, when a compliance officer found an abnormal trade.

The bank worked over the weekend to determine the size of the loss and waited until Monday to unwind its trades -- while U.S. markets were closed for Martin Luther King Jr. Day and when global markets were collapsing on worries about the U.S. economy.

"Detecting the fraud over the weekend was problematic because world stock markets on Monday and Tuesday fell hugely around the world," Janine Dow, senior director at Fitch Ratings financial institution group in Paris, told the AP. "When the positions had to be unwound, the bank did that in a terrible market of falling equities."

And although some Wall Streeters speculated that the Fed's emergency rate cut Tuesday was sparked by the SocGen incident, Miller Tabak's Tony Crescenzi said such a Fed move would be unlikely.

This "did not pose systemic risk; it wasn't in the things that have spooked people recently," said Crescenzi, the firm's chief bond-market strategist. "This was plain-vanilla losses, trading on equities. There is very little on the equity-derivatives side that can cause systemic risk."

Worse than Barings' losses

SocGen's fraud topped the $1.4 billion in losses racked up in 1995 by trader Nick Leeson; those losses caused the British bank Barings to declare bankruptcy. Leeson was convicted of fraud and was sentenced to six and a half years in jail.