French Bank Gives Details on Rogue Trader's Methods

Societe Generale said Sunday that a trader who evaded all its controls to bet $73.5 billion -- more than the French bank's market worth -- on European markets hacked computers and "combined several fraudulent methods" to cover his tracks, causing billions in losses.

The bank says the trader, Jerome Kerviel, did not appear to have profited personally from the transactions and seemingly worked alone -- a version reiterated Sunday by Jean-Pierre

Jerome Kerviel, Societe Generale bank trader accused of fraud.
Jerome Kerviel, Societe Generale bank trader accused of fraud.

Mustier, chief executive of the bank's corporate and investment banking arm.

But, in a conference call with reporters, Mustier added: "I cannot guarantee to you 100 percent that there was no complicity."

Officials said Kerviel was cooperating with police, who held him for a second day of questioning Sunday, seeking answers to what, if confirmed, would be the biggest-ever trading fraud by a single person.

The questioning was "going very well and the investigation led by the specialists of the financial police is extremely fruitful," said Jean-Michel Aldebert, head of the financial section of the Paris prosecutor's office.

Kerviel was giving "very interesting" explanations, Aldebert added. "From what he told me, he was fine psychologically." He refused to say whether Kerviel might face preliminary charges.

Kerviel, 31, has not been seen in public since the bank's bombshell revelation Thursday that his unauthorized trades resulted in 4.9 billion euros ($7.1 billion) in losses.

Even before his massive alleged fraud came to light, Kerviel had apparently triggered occasional alarms at Societe Generale -- France's second-largest bank -- with his trading, but not to a degree that led managers to investigate further.

"Our controls basically identified from time to time problems with this trader's portfolio," Mustier said.

But Kerviel explained away the red flags as trading mistakes, Mustier added.

"The trade was canceled, there was no specific follow-up to do," he said. "From our understanding today, the number of mistakes was not higher than (for) any other trader, so from our understanding that was not a reason to ring a bell."

In a five-page statement Sunday, the bank said Kerviel used its money to build massive positions in futures contracts tied to the performance of baskets of stocks traded on exchanges in London, Paris, Frankfurt and other European markets.

Since those bets greatly exceeded the amount of capital he was allowed to put at risk, Kerviel entered fictitious and offsetting trades in Societe Generale's computer system that appeared to minimize the odds of big losses, the bank said. The trades were purposely chosen to avoid detection because they did not require cash contributions and were not subject to margin calls, which would require putting up more money if the fictitious bet soured, it said.

The bank said he plowed 30 billion euros ($44.1 billion) into the Eurostoxx index, another 18 billion euros ($26.5 billion) on the DAX in Germany and 2 billion euros ($2.9 billion) on the FTSE in London. The combined value of those positions, 50 billion euros ($73.5 billion), is far more than the bank's market capitalization of 35.9 billion euros ($52.6 billion), and close to the annual GDP of countries such as Slovakia, Qatar or Libya.

Societe Generale took three days last week to sell or offset with hedges his contracts, which amounted to bets on whether market indexes would rise or fall. But the bank sought Sunday to counter suggestions that its sell-off had caused already falling markets to plummet further than they otherwise might have done. The bank said it unwound Kerviel's positions in "a controlled fashion."

"Our impact on the market was quite minimal," Mustier said.

Stealing Access Codes, Falsifying Documents

Societe Generale said Kerviel misappropriated other people's computer access codes, falsified documents and employed other methods to cover his tracks -- helped by his previous years of experience when he worked in other offices at the bank that monitor traders. Acquaintances described Kerviel as reserved and considerate, a young man who once taught children judo and held the door for elderly neighbors.

Kerviel's downfall started in the days before Friday, Jan. 18, when Societe Generale tightened lending restrictions on one of its customers, an unnamed large bank. He had apparently used that bank's name for one or more of his fictitious trades, and it led to what Societe Generale described as having "additional controls" put in place.

Kerviel's superiors in Societe Generale's equity trading division reviewed an e-mail that day from the large bank supposedly confirming trades he had booked. But they were suspicious about where the e-mail came from and launched an emergency investigation.

A day later, Kerviel was called to Societe Generale to explain. In the meantime, bank investigators confirmed that the large bank did not know about the trades.

After first not providing a clear explanation, Kerviel eventually confirmed that he had entered fictitious trades, the bank said. It then took a bank team throughout the night and into Sunday, Jan. 20, to identify all the exposure. Societe Generale's chief executive, Daniel Bouton, notified the governor of the Bank of France that day, and a decision was made to unwind the trades as quickly and as quietly as possible.

A complicating factor was that the bank was finishing work that Sunday on details of a separate announcement about the size of the multi-billion-dollar charge it would take for bad bets on mortgage-related investments in the United States. News of that misstep was delayed.

Societe Generale traders began unwinding Kerviel's losing bets at the beginning of European trading on Monday, just as Asian markets were in a free-fall and European shares were poised to plummet after a big drop in U.S. markets on the previous Friday. It took until Wednesday to finally close the books on Kerviel's adventures, the bank said.

Some experts have suggested Societe Generale may have exacerbated the fall and indirectly led to the U.S. Federal Reserve's subsequent decision to cut rates.

But in its explanatory note released on Sunday, the bank defended itself by saying the trades represented no more than 8.1 percent of the volume in futures trading each day on the Eurostoxx, DAX and FTSE.

Mustier said Kerviel's motivations were still unclear. "We don't know, we don't understand" what drove him to do it, he said.

"This event is a massive shock for us," he said.

The bank said Kerviel built up two portfolios of investments -- but that one of them consisted of "fictional operations," leaving the bank hugely exposed.

"In order to ensure that these fictitious operations were not immediately identified, the trader used his years of experience in processing and controlling market operations to successively circumvent all the controls which allow the bank to check the characteristics of the operations carried out by its traders," the bank's statement said.

"He had a very good understanding of all of Societe Generale's processing and control procedures."

It was the bank's most detailed explanation yet of the debacle that has further rattled the banking industry, already reeling from the subprime mortgage crisis in the United States. Some observers have said the crisis could also leave the bank vulnerable to a takeover.

An aide to French President Nicolas Sarkozy suggested the state could step in to prevent any possible hostile bids.

"I think the state will not stand idly by if any predator attempts to take advantage of the situation," Henri Guaino told RTL radio on Sunday.

The situation has prompted calls for tighter regulation -- 13 years after trader Nick Leeson, whose illegal speculation bankrupted British bank Barings, first highlighted the potential risks from rogue traders operating without proper oversight.