Paris: A massive fraud by a junior rogue trader has punched a $7 billion hole in the finances of French bank Societe Generale, leaving its credibility in tatters and forcing it to get emergency cash.
France's central bank and government scrambled to shore up confidence in the banking system after Societe Generale, France's second-biggest bank, said on Thursday it had been the victim of massive and "exceptional" fraud resulting in losses of 4.9 billion euros.
Anxious to rebuild its shattered capital, the bank announced a capital increase of 5.5 billion euros, instead of beating a path to cash-rich sovereign wealth funds, as some US banks have done during the recent credit slump.
It said the increase had already been underwritten by rival banks. SocGen, one of France's oldest banks and a world leader in free-wheeling modern financial derivatives, said the losses came to light at the weekend and blamed a young backroom trader whom it said had tried to cover up bad bets on the stock market.
"It was an extremely sophisticated fraud in the way it was concealed," said Societe Generale Chairman Daniel Bouton, who offered to resign but has been asked to stay on. Shares in the bank fell more than 6 percent to 74 euros. "It is a serious case, but at the same time it has nothing to do with the situation on the financial markets," said Prime Minister Francois Fillon, speaking in Davos, Switzerland.
The Bank of France announced an inquiry by the Banking Commission. Governor Christian Noyer said SocGen had been able to overcome the crisis because it was "very solid". If fraud is proved, the loss will be the biggest caused by a single trader, dwarfing the $1.4 billion loss by trader Nick Leeson that brought down British bank Barings in the 1990s.
SocGen declined to name the trader, but said he had been suspended pending dismissal after confessing to his actions. It described him as a man in his thirties who had worked for SocGen since 2002 and earned less than 100,000 euros a year.
He now faces legal action from Societe Generale, which is in turn already being sued by a group of 100 angry shareholders. The bank accused the trader of taking "massive fraudulent" positions in 2007 and 2008 on European equity market indexes, meaning he was gambling on broad movements in share prices.
When the bank discovered the concealed trades on January 19 and 20, it decided to close the positions in the market as quickly as possible, but this coincided with a sharp market sell-off, and the bank's losses on the deals spiralled to 4.9 billion euros.
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