J. Kerviel / S.G. view
Société Générale’s (S.G.) Damage Control
After Alleged Fraud, French Bank Strives To Save Reputation
By DAVID GAUTHIER-VILLARSJanuary 26, 2008PARIS —
For 72 hours this past week, top executives at Société Générale scrambled to save their company. Now, after a massive fraud that the French bank said cost it €4.9 billion ($7.2 billion), management faces another tough task: saving the firm’s reputation.In a telephone interview yesterday, Jean-Pierre Mustier, the head of Société Générale’s investment-banking arm, said supervisors of the 31-year-old employee allegedly responsible for fraudulent trading missed several opportunities to stop him.• Tough Task: After uncovering a massive fraud, Société Générale’s management faces another tough task: saving the firm’s reputation.• Missed Opportunities: The company credits swift intervention with allowing it to limit losses. But a senior executive says the French bank missed several opportunities to stop the alleged illicit actions of a junior trader.The trader caught the attention of back-office supervisors several times in recent months with unusual positions, Mr. Mustier said. “In some cases, he would tell them that it was a mistake,” he said. “He would convince them, for example, by canceling the positions.”Mr. Mustier said initial evidence of repeated lack of supervisory oversight is emerging in an internal investigation that Société Générale started after top executives learned of the alleged irregularities on Jan. 18.In disclosing the world’s biggest-ever trading loss Thursday, Société Générale blamed fraudulent trades by Jérôme Kerviel, a junior trader on the bank’s futures-trading desk in Paris. According to people familiar with the matter, the bank’s total exposure had reached €50 billion by Jan 18.The bank said it was dismissing four to five people.Paris prosecutors have launched a preliminary criminal investigation into Mr. Kerviel’s actions, though no charges have been pressed. Shareholders also have launched a complaint with Paris prosecutors.Mr. Kerviel’s lawyer couldn’t be reached for comment yesterday. An associate attorney said on Thursday that the trader was ready to answer to French justice.In his interview Friday, Mr. Mustier said that after discovering the problem, Société Générale on Monday introduced new control systems to the back office of the bank’s trading desk. Nonetheless, if Société Générale’s internal inquiry finds a serious breakdown in supervisory control, it would add to pressure on the bank’s embattled top executives. “They were strong, independent and a bit cocky, and now this whole fiasco has made the bank and its management vulnerable,” said Bruno Berry, an equity-fund manager at Morley Asset Management in London, who owns Société Générale stock.Mr. Mustier said he first learned of problems in the bank’s futures-trading unit at 10 p.m. on Jan. 18. Philippe Citerne, co-chief executive of Société Générale, said he was warned at about the same time.The two executives said it took them two days to grasp the scope of the problem and map out a strategy to unwind the estimated €50 billion exposure they said was built up by Mr. Kerviel.According to accounts from Mr. Mustier and other Société Générale executives, Mr. Kerviel managed to circumvent the bank’s high-priced and complex security system to make trades over the past several months.Bank executives said Mr. Kerviel’s alleged subterfuge was fairly straightforward. He was making large bets that European stock indexes, such as the CAC in Paris and the DAX in Frankfurt, would rise, they said. But the markets began working against him earlier this year, and the trader began racking up huge losses. Mr. Kerviel, according to bank executives, covered up those losses by recording fictitious trades that went in the opposite direction.Bank executives said Mr. Kerviel was acting alone. Some in the financial world have expressed skepticism of that assertion, considering the layers of controls that banks have in place in order to keep tabs on their traders’ activities; experts question how a trader was able to gain intimate knowledge of settlement procedures and schedules, for example. Banks are supposed keep those operations completely separate as a safety mechanism.Bank executives said Mr. Kerviel was deeply knowledgeable of procedures because he had worked in the bank’s so-called back office for several years. Moreover, the trader had kept up friendships in that section of the bank, possibly allowing him to keep up with the latest security feature, they said. Mr. Mustier said Mr. Kerviel may have used the login and password of some colleagues to enter some transactions into the computer.Société Générale executives say that Mr. Kerviel knew when checks were conducted. To prevent the bank’s supervisors from uncovering the fictitious positions, he would erase them right before the checks and rebuild new ones immediately after, to ensure that his real positions were properly offset and concealed.Mr. Kerviel further would offset real positions that triggered real margin calls with fictitious positions, such as bets on forwards, that didn’t trigger margin calls, Mr. Mustier said.The real positions were significantly beyond Mr. Kerviel’s authorized limit — the trader’s annual target was to earn between €10 million and €15 million for the bank — but well within Société Générale’s overall daily volume of transactions. Since the real and fake transactions balanced each other out, “we could not see anything,” said Mr. Mustier.After studying the trading irregularities all weekend with Mr. Mustier, Mr. Citerne took the lead in a three-day selling marathon to unwind the massive positions allegedly created by Mr. Kurvier, according to the bank’s investment-banking chief.Société Générale’s market capitalization is currently about €34 billion — a figure far less than the losses it was facing.By keeping knowledge of the problem only to a tight circle of insiders, Mr. Citerne was able to act fast. This secrecy, however, has raised questions over how many people actually knew what was going on at Société Générale while its securities were trading. Société Générale Chairman Daniel Bouton said Thursday that although he has a duty to disclose information to shareholders, he acted in the interest of the bank.