/ 10 February 2008

New twists ahead in France’s rogue-trader saga

A new court battle will be held on Monday over the detention of French rogue trader Jerome Kerviel, while Société Générale is to soon launch an $8-billion capital increase to cover the losses they blame on him.

The decision by a Paris appeals court on Friday to back a prosecution demand that the 31-year-old trader be held in custody was the latest twist in the worst investment banking scandal in history.

His lawyer, Elisabeth Meyer, said she would go to a higher appeals court on Monday.

The prosecution said Kerviel could influence any accomplice or witness and at the same time as the hearing was held, police questioned a broker at a Société Générale subsidiary through which Kerviel handled many of his tens of billions of dollars in European share trades.

The broker was released on Saturday but remains an assisted witness, meaning he could still face charges.

Société Générale has blamed Kerviel for €4,82-billion ($7,1-billion) of losses from unauthorised trades worth at least €50-billion ($73-billion).

He faces charges, however, of breach of trust, fabricating documents and illegally accessing computers.

France’s Financial Markets Authority (AMF) was to meet on Friday to consider Société Générale’s planned €5,5-billion ($8,1-billion) capital increase to cover the loss and some of the €2-billion lost on the United States subprime loan market.

If it approves, Société Générale chairperson Daniel Bouton could launch the capital increase in coming days.

The French bank has been shaken to the core since suspicions about Kerviel’s trades were first raised on Friday, January 18. Before the weekend was over, the bank was in “potentially mortal” danger and the Bank of France had agreed a secret resuscitation plan.

According to official statements and Société Générale’s own account, the bank questioned Kerviel on the Saturday.

Early on the Sunday afternoon, the bank had enough information to estimate the damage: the €50-billion in market exposure far exceeded its shareholder funds.

Bouton informed the governor of the French central bank, Christian Noyer, who authorised him to unwind the contracts. This began on the Monday when stock markets were falling heavily, adding to its exposure.

Amid global market turmoil, the US Federal Reserves cut interest rates sharply on the Tuesday.

By Wednesday January 23, Société Générale has closed the positions. Noyer informed the French government, which was infuriated at not being told earlier, the European Central Bank and the New York Federal Reserve of the crisis.

Noyer chairs the French banking commission responsible for controlling French banks but he has insisted that “this affair has nothing to do with the Fed’s monetary policy”.

Early on the Thursday, Société Générale revealed that a lone trader had lost it €4,8-billion, wiping out most of its 2007 profit.

The bank also disclosed €2-billion in losses on subprime loans in the US and said it had investment bank guarantees for new capital of €5,5-billion.

A storm broke on many fronts, with talk of a takeover, that has only been eased by the capital increase plan.

There is still widespread incredulity in the banking industry that Kerviel could have acted alone.

Kerviel said in his first interview on February 5: “I never had any personal ambition in this affair. The aim was to earn money for the bank.”

Smiling and composed, he said: “I accept my share of responsibility but I will not be made a scapegoat for Société Générale.”

He had “yet to fully grasp” the implications, he said.

Noyer told a parliamentary commission that on the weekend the crisis broke, Société Générale had been in “potentially mortal” danger. — AFP