French bank Société Générale (SocGen) yesterday announced what appear to be the greatest losses ever due to speculation by a rogue trader.
A grim-faced Daniel Bouton, the chairman and chief executive of France's second largest bank, said a single futures trader, Jérôme Kerviel, had accumulated €4.9 billion in losses over the past year.
"The transactions that were built on the fraud were simple positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques," Mr Bouton said in a letter published on SocGen's website. The bank reported a further €2 billion in losses, mainly due to exposure in the US subprime market.
The 31-year-old rogue trader was involved in futures hedging on European equity market indices. He used in-depth knowledge of monitoring procedures acquired in an earlier job to hide his positions.
Mr Kerviel appears to have built up his losses over a very short period. He closed his position in December at a small profit, said Jean-Pierre Mustier, head of the investment bank, before starting trading again early in January.
No one at SocGen has explained how one man could lose close to one year's profits without it being noticed.
Mr Bouton said the employee did not act for personal gain and admitted his guilt. He has been dismissed and the bank has initiated legal proceedings against him. His supervisors are also leaving the group. Mr Bouton said he did not know where the employee is.
The fraud was first discovered last Friday in a routine check, followed by a two-day investigation. At the time Mr Kerviel had built up losses of about €1.5 billion, but as SocGen attempted to unwind his positions on Monday, falling stock markets around the world quickly multiplied the losses.
A crisis committee comprising Mr Bouton, the governor of the Banque de France, Christian Noyer, and the head of the financial markets authority, decided to keep it secret until yesterday.
Mr Bouton said he had offered to resign over the affair, but this had been rejected by SocGen's board on January 23th.
In Davos, where he is attending the World Economic Forum, France prime minister François Fillon said the fraud "is a serious affair but has nothing to do with the instability of world financial markets" this week.
The French minister of finance, Christine Lagarde, expressed the astonishment of the French political class and business community.
"I have asked the banking commission to . . . tell me very quickly how can it be that despite monitoring by the banking commission, none of the misappropriation by this dishonest employee was detected."
Despite the news yesterday the CAC 40 (French bourse) rose by 6 per cent.