SocGen, France's second biggest bank, said on Thursday that it had been the victim of a massive and "exceptional" fraud by a junior trader resulting in losses of 4.9 billion euros, and announced a large capital increase.
SocGen said the trader, responsible for futures hedging on European equity market indexes, had taken massive fraudulent positions in 2007 and 2008 beyond his authority.
The bank said it had decided to close the positions as quickly as practicable after they were discovered on the weekend of Jan 19 and 20.
This has brought under the microscope the massive declines in European shares on Monday, Jan. 21, when over $350 billion was wiped off the value of top British, German and French shares -- an amount equal to the combined gross domestic product of Hungary and Greece.
The FTSEurofirst 300, a pan-European stock market benchmark, fell nearly 6 percent on that day, its biggest one-day fall since the attacks of Sept. 11, 2001.
And the U.S. Federal Reserve served up a surprise three-quarter point interest rate cut on Tuesday, a move that managed to limit declines in U.S. stocks when they resumed trading after Monday's Martin Luther King Day holiday.
"The huge amount of futures selling could be one reason why markets fell off a cliff on Monday, and maybe that was an ingredient in forcing the Fed to bring forward a part of its interest rate cuts," said Andrew Bell, European strategist at Rensburg Sheppard.
A Fed source later told CNBC that the central bank had not known about the SocGen fraud when it made its rate decision on Monday.
The stock slide on Monday has contributed to making January the worst month in more than five years on European bourses, and European shares have lost 12 percent so far this month, compared to a 3 percent gain at this time last year.