Bankruptcy

French Bank Loses 7 Billion...because of one "rouge" trader!

By J. Michael McBride

A low level employee of Societe Generale somehow engineered trades over several years that evaded all of the bank's internal controls and ultimately lost the bank 7 billion dollars, according to news reports today. The bank, which also just wrote off about 3 billion dollars due to the "global credit crunch" is now searching for additional capital.

"The bank took the first three days of this week desperately attempting to unwind the positions in what proved to be hostile conditions as markets plunged.

If they had gone up, the positions might have made gains for the bank, Mr Bouton said.

As it was, they turned into "gigantic and colossal" losses.

Analysts said that SocGen's unwinding of the massive rogue positions on Monday would have contributed to the violent slump in share prices and may, therefore, have played a part in the surprise decision by the US Federal Reserve to cut American interest rates.

'There's a very strong link between the equity futures market and the cash equities market,' one equity strategist at a big bank said. 'It may have influenced Fed thinking.'

...

Ion-Marc Valahu, the head of trading at Amas Bank in Switzerland, said: “I am sorry but I have a hard time buying the fact that a trader was able to set up a ’secret trade’ of €4.9 billion without anybody finding out.”

Carlos Garcia, a Fortis analyst, said: "The most serious thing is that this puts into doubt the risk management systems at some banks. You can’t suddenly announce from one day to the next a hit of $7 billion.

"In the light of this, what we’ve done is to downgrade banks that are very linked to trading income or whose capital base is weak.”

Shares in the bank were initially suspended this morning and fell by 5.5 per cent to €74.75 when trading was resumed in the late morning as credit rating agencies moved to downgrade the bank."

Here is a link: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3242996.ece

Here is a link to another article giving more details on the massive losses and a possible tie to the falling markets world wide as well as to the emergency rate cut by the Federal Reserve: http://www.thisislondon.co.uk/news/article-23433966-details/Rogue+trader+loses+£3.7+BILLION+-+and+'causes+global+market+crash'/article.do

Michael

Full post as published by Texas Lawyer Blog on January 24, 2008 (boomark / email).