Saturday, January 26, 2008

Pressure grows for SocGen answers

(FT) The rogue trader scandal that is convulsing French bank Société Générale prompted demands from Europe’s top central banker on Friday for a major strengthening of banking controls. The call from Jean-Claude Trichet, European Central Bank president and former governor of the Banque de France, came as SocGen came under mounting criticism.

Concerns targeted both its failure to prevent the biggest ever loss caused by a rogue trader and over whether the way it unwound its positions inflated the €4.9bn ($7.2bn) loss by selling into a falling market.

A rival investment banking executive said Jérôme Kerviel, the equity derivatives trader at the heart of the affair, did not lose €4.9bn by trading futures on European share indices, as SocGen claims, but only €1.5bn – the deficit his trading had accumulated by the time he was caught.

“The board of SocGen lost the other €3.4bn,” said the rival banker. But the bank defended its actions, saying it could not risk keeping the positions open.

Jean-Pierre Mustier, head of corporate and investment banking at SocGen, gave more details of the methods Mr Kerviel used to evade the banks’ controls.

Mr Kerviel, a 31-year-old trader, bought futures in European share indices – effectively bets on the future direction of the stock market – in the UK, Germany and the Eurostoxx 50 worth an estimated €50bn, more than SocGen’s market value.

“Every two or three days, he was changing his position. He would input a transaction that would trigger a control in three days and before that happened he would replace it with a different one,” said Mr Mustier.

He said the rogue trader was managing hundreds of thousands of concealed trades and an equal number of falsified hedges to give the appearance that any loss was offset.

Meanwhile, accounting experts on Friday questioned whether the bank was right to take the loss in its 2007 accounts, as the positions had only been opened in 2008. Colette Neuville, a leading voice of French minority shareholder interests, demanded an explanation from Daniel Bouton, SocGen’s chairman and chief executive. The bank insists it has complied with international accounting rules.

François Fillon, French premier, voiced irritation that he was not told of SocGen’s problems until Wednesday.

At the World Economic Forum in Davos, Mr Trichet said: “It is an absolute necessity to significantly strengthen internal controls of risks in all institutions.”

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