Friday, January 25, 2008

Société Générale and the rogues' gallery

(FT Lex) Market turmoil, subprime losses, a trading scandal – Société Générale has it all. Can it survive? Financially, yes. The French bank has launched a fully underwritten €5.5bn rights issue, which will boost its Tier 1 capital to 8 per cent, a full percentage point above its own minimum target. Even a €5bn trading fraud and a €2bn subprime writedown are not expected to eradicate its 2007 profits entirely.

Rogues galleryNevertheless, SocGen faces an uphill struggle to put these twin losses behind it. While its subprime hit is smaller than some, the impression that SocGen has been a little slow in coming clean with the scale of its exposure does not help its case.

Still, this is a minor issue compared with the mind-boggling trading loss. According to the official version of events, a single, undistinguished trader ran rings round SocGen’s risk management system to take massive – and as it turns out, unhedged – positions in European equity futures. SocGen’s reputation for risk management is in tatters and its capital markets business could suffer as a result.

The next question is how well SocGen’s senior management – still in place and with board backing – handled the unfolding crisis. Unwinding trading positions into a falling market was bad luck rather than bad judgment.

Drawing a line under losses was the only responsible option. But the timing hardly bolsters confidence and the gap between the discovery of the problem at the weekend and yesterday’s disclosure has prompted concerns that SocGen was a cause, as well as a victim, of recent market weakness.

The survival of SocGen as an independent entity is now in doubt. Its business model is still intact but previous suitors may sniff blood. Two factors favour its long-term survival. One is that the French government is unlikely to favour a foreign buyer and BNP Paribas, the most likely domestic candidate, has too many clients in common with SocGen. The other is that the number of potential foreign suitors with sufficiently deep pockets has, in any case, dwindled as a result of the subprime crisis.

See also the FT's special Soc Gen page.

Rogue Watch (FT Alphaville)

Rarely has one relatively junior trader attracted so much attention — Nick Leeson may disagree - but the media on Friday appear to have done an unprecedented job of drawing up “rogue trader galleries” as well as exacavating every detail possible about SocGen’s rogue trader and $7.2bn man, Jerome Kerviel.

“Who are you Jerome Kerviel?”, asks Deal Journal, in a pithy rundown of known and unknown facts about the 31-year-old trader.

And not to be outdone (mon dieu), The New York Times Dealbook asks: Qui Est Jérôme Kerviel?, and notes that on Facebook, where Kerviel’s entry showed him with just eight friends, fan groups dedicated to our anti-hero (the largest has more than 400 members so far) are already popping up.

[Facebook update - while early on Thursday morning, there was only Jerome Kerviel listed on the site, they are now five. The real Kerviel is now down to just one friend, as his others presumably got tired of being hounded by the world’s media for titbits on the new financial celebrity.]
If you’re not “rogued out”, here’s a list that is guaranteed to revive memories of scandals past.

FT: Timeline, corporate fraud scandals

The Wall Street Journal: A random walk down Wall Street’s rogues gallery

Bad bets, big losses: a photo slide show

The Daily Telegraph:

The biggest rogue traders in history

The 20 biggest trading disasters

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