Societe Generale loses $5bn to fraud - who's next?
FREE email from MoneyWeek
Discover the latest profit opportunities and understand what’s really going on in the investment world with our punchy daily email. CLICK HERE
This genius investor does dizzying levels of research to uncover...Half Price Shares!
More grim news hit the markets this morning, and memories of the Nick Leeson saga at Barings were reawakened, as France’s second-largest bank, Societe Generale, revealed that it had uncovered nearly €5bn of losses attributed to unauthorised trades by of one of its Paris-based futures traders.
The immediate consequences for the bank – which has already written off around €2bn relating to subprime losses - look pretty dire. A €5.5bn emergency share issue will plug the gaping holes in its balance sheet and annual profits forecasts have been slashed by up to 80% compared to last year. And that all comes on the back of the bank losing around half its value in the market turmoil of the past six months.
So, how did it happen? Specific details have yet to emerge but all the signs are that the fraud was not only embarrassingly large but, unlike some of Nick Leeson’s trades, potentially alarmingly straightforward. The bank has admitted already that the trader in question traded “plain vanilla futures” in the equity derivatives division. That suggests that he just placed simple bets on which way share prices and equity indices were heading.
His ace card it seems was previous experience of processing trades acquired in the bank’s “middle office” before he moved into a “front office” dealing role. But it seems quite incredible that he was able, single handedly, to conceal what was presumably a series of large, unauthorised, transactions from both his immediate seniors and the bank’s internal risk experts.
So what next for the troubled bank? Clearly the immediate priority is to identify and deal with the perpetrator plus anyone linked to him. Despite the size of the losses it seems the buck will be stopping well short of the top as the Chairman, Daniel Bouton, has already offered to resign but has been turned down. Then Soc Gen will need to focus urgently on rebuilding its shredded reputation to prevent business walking out of the door to rivals. Should it fail to do so there is a good chance one or more of its competitors may seize the opportunity take it over cheaply.
But for investors, the wider concern is – who’s next? Fortis analyst Carlos Garcia told Reuters: “The most serious thing is that this puts into doubt the risk management systems at some banks. You can't suddenly announce, from one day to the next, a hit of $7 billion. In the light of this we've downgraded banks that are very linked to trading income or whose capital base is weak."
And if this kind of money can be lost by a trader in a relatively transparent part of the derivatives market, what horrors may be lurking behind some of the more exotic and complex trades of the past few years?
As Edward Hadas puts it on Breakingviews.com, “fraud flourishes in bull markets along with reckless incompetence. The price is paid when markets fall. If a respected institution could lose so much money with such apparent ease, losses from less careful shops could prove even larger.” We suspect there are many more nasty revelations to come.
FREE! For all our latest advice on making profitable investments, claim your 3-week FREE trial of the MoneyWeek website and magazine now.
FREE! MoneyWeek’s daily investment email. A quick, useful and entertaining round-up of the latest investment news, sent to your inbox first thing every morning.To sign up to our “Money Morning” email for FREE, just click here.
Money Morning is the FREE daily email from MoneyWeek
– a punchy round-up of the latest investment news and profit opportunities.
DON’T MISS IT!
