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Rogue French trader taken into custody

A rogue trader who cost France's Societe Generale bank more than $7 billion by making bad stock market bets was taken into custody on Saturday for questioning, judicial officials said.
/ Source: The Associated Press

A rogue trader who cost France's Societe Generale bank more than $7 billion by making bad stock market bets was taken into custody on Saturday for questioning, judicial officials said.

Financial police in Paris were to question Jerome Kerviel as part of a probe into Societe Generale's announcement Thursday that the 31-year-old trader had put tens of billions of dollars at risk in one of history's biggest frauds, judicial officials said. They spoke on condition of anonymity because the investigation is ongoing.

Skeptics from Kerviel's neighbors to France's prime minister have questioned whether a single futures trader could have managed such large sums. Adding to the mystery, the bank said Kerviel may not have made any personal gain from his unauthorized trades.

The bank said it discovered the fraud last weekend and unwound the trader's losing bets starting Monday, when world markets tumbled. Some analysts have questioned whether Societe Generale exacerbated the fall and indirectly led to the U.S. Federal Reserve's subsequent decision to cut rates.

Judicial officials also confirmed police searched Kerviel's apartment in the Paris suburb of Neuilly-sur-Seine. They said police also went Friday night to the bank's headquarters, where they were provided with documents relating to the investigation, officials said.

Market turmoil
Paris prosecutors are conducting a preliminary investigation based on three complaints: one by the bank accusing Kerviel of fraud, and two by small shareholders.

In an interview published Saturday, Societe Generale's chief executive, Daniel Bouton, insisted the bank's actions after discovering the fraud did not fuel turmoil on world markets.

"It's absurd!" Bouton said of the suggestion, in an interview with Le Figaro daily. "Anyone could calculate our contribution to the market in recent days."

Bouton was quoted as saying the bank, in closing the trader's unauthorized positions, respected market rules that forbid any player from intervening with sums worth more than 10 percent of a given market. The bank says that is why it took three days to close the positions.

The bank maintains it was the biggest loser in the case, because of the timing of the discovery.

Kerviel had been investing the bank's money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.

Bouton said the trader had been betting throughout 2007 that markets would fall. "He was therefore winning, virtually," he said.

But the bank says he had overstepped his authority and was wagering more money than he should have.

So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks.

But markets dropped this month, and fast. "This sad affair veered into a Greek tragedy: His virtual losing position became huge," Bouton was quoted as saying.

Losses grew
The bank's systems discovered an anomaly on Jan. 18, he said. On Sunday, the full scale of the problem was revealed to the bank's management — "enormous and totally abnormal," Bouton said.

"I decided ... to close the positions and alert the supervisory authorities," he said.

When Asian and European markets collapsed Monday, "that had a catastrophic effect. The losses of Societe Generale became even more enormous," he was quoted as saying.

Ultimately it took three days to close the positions, and the bank lost $7.2 billion.

Bouton said the overall health of the bank was not at risk, comparing the situation to arson at a factory of a big manufacturer — a devastating, but one-time, loss.

French presidential aide Raymond Soubie said the trader had been dealing with more than $73.3 billion. That figure outstrips the bank's market capitalization of $52.6 billion, and is close to the annual GDP of entire nations such Slovakia, Qatar or Libya.

What was motivation?
It remains unclear whether Kerviel's actions, if proved, were out of malevolence, ambition or some other reason. Three union officials representing Societe Generale employees said managers at the bank who briefed them about the fraud told them Kerviel was having family problems.

The debacle generated buzz at the World Economic Forum in Davos, Switzerland, and raised questions sector-wide about risk management.

French Finance Minister Christine Lagarde, speaking Saturday in Davos, said she has been asked to compile a report on the fraud, Dow Jones Newswires reported.

Lagarde said her report will look at "the reality of facts based on real hard data," and "how and why the controls did not work" to prevent the fraud. Lagarde said the report, whose results are to be made public, will address "what additional controls should be put in place to stop it happening again," Dow Jones said.

Societe Generale's shares have lost nearly half their value over the past six months. After an up-and-down day Friday, the shares closed down 2.5 percent at $108.62.

The company, which also posted another $2.99 billion subprime-related loss, planned to raise $8.02 billion in new capital.