The market was all over the place on the second day of this year’s World Economic Forum in Davos, Switzerland, and the CNBC porter cabin that we called home simply exploded when news broke that one trader at French banking group Société Générale had managed to lose €5 billion. One business leader who will remain anonymous summed up the mood of most delegates when he used a number of four letter words to voice his despair at the damage the case would do to the financial services industry.
Tomorrow the bank’s special committee of three non-executive directors will unveil a long-awaited report into how one 31-year-old trader was able to build up €50 billion in long positions and then fake hedges to give the impression the huge bets he was taking were low-risk. It is likely the report will portray a culture where returns in investment banking were more important than risk controls, and those making the cash were lionized as masters of the universe.
As Jerome Kerviel was arrested and the world’s media descended on a small police station in Paris, the big question was: Did he act alone? Everyone wanted to know if someone within the bank had assisted him. But what has become clear in the months since the scandal broke is that while Kerviel’s rogue trades where uniquely fraudulent, the entire industry was searching for returns at the expense of proper risk control.
Société Générale booked the loss on the fourth quarter of 2007 but actually returned to a profit in the first quarter of this year. Compare that with the huge subprime losses made at the likes of UBS , Citigroup and Merrill Lynch in the first three months of the year, and the French banking group appears to have been rather conservative in its management of risk.
The authors of tomorrow’s report will be under pressure to reassure investors in the bank that this could never happen again. At the same time, they can't be so critical as to throw the group back into a turmoil that had many thinking it could lose its independence. I think a takeover of the bank now looks like a long shot, with both Credit Agricole and BNP Paribas shying away from talk of a bid. Moreover, Nicolas Sarkozy’s government has made it very clear that a non-French takeover would be unwelcome.
What is very clear is that the rest of the industry will watch the findings of tomorrow’s report and think something along the lines of, "It could have been us." Meanwhile, others raising huge amounts of cash to shore up balance sheets could be forgiven for secretly longing for problems as relatively minor as Société Générale’s.