French bank hit by €4,9-billion fraud

French bank Société Générale (SocGen) disclosed one of the biggest alleged frauds in financial history on Thursday, adding to a wave of gloom surrounding world markets battered by credit market losses.

SocGen, France’s second-biggest listed bank, said it had uncovered an “exceptional fraud” by one of its traders.

It said this would cost the group €4,9-billion and announced plans to raise €5.5-billion through a capital increase to shore up its balance sheet, also reeling from a crisis in global credit markets.

The fraud disclosure brought back memories of Nick Leeson, the British trader who in 1995 brought down blue-blooded merchant bank Barings after racking up huge losses.

SocGen said it was in the process of dismissing the Paris-based trader, who it did not name, and added that the trader’s managers would leave the company.

It added that its board had rejected an offer by chairperson and chief executive Daniel Bouton to resign.

SocGen shares were suspended.

The Bank of France announced an inquiry by the Banking Commission and said no further comment was necessary after Société Générale took steps to strengthen its balance sheet.

French Economy Minister Christine Lagarde will make a statement during the day on the issue, her office said.

“The most serious thing is that this puts into doubt the risk-management systems at some banks,” said Fortis analyst Carlos Garcia.

A source at SocGen said the trader was “not one of its stars” and was relatively young. SocGen said the trader had been handling plain vanilla futures contracts on European stock-market indices, betting on broad share market movements.

It was not immediately clear what role French police were taking in the investigation. The French prosecutor’s office was not available for comment.

Further write-downs

Analysts said the episode would have a major impact on the reputation of SocGen, which was founded in 1864 and is one of France’s most prestigious blue-chip companies.

UBS said in a research note that the fraud would impact the credibility of its derivatives business, which has been one of its fastest-growing units and has a world-leading reputation.

Shares in rivals like BNP rose.
The fraud could rekindle BNP’s ambitions to take control of SocGen, analysts said.

The losses also echo a similar blow on a much smaller scale last year to France’s biggest retail bank, Credit Agricole, which in September announced a €250-million charge related to an unauthorised trading position.

SocGen also announced further write-downs of €2,05-billion related to the global credit crunch.

Banks around the world have been hit by credit market losses related to United States subprime mortgages. These mortgages are the riskiest property loans, often extended to people who have payment difficulties or a bad credit history.—Reuters

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