Thursday, January 24, 2008

French bank SocGen says hit by $7.16 billion fraud

PARIS (Reuters) - French bank Societe Generale 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 euros ($7.16 billion) and announced plans to raise 5.5 billion euros 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 Chairman 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 Societe Generale 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.


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 euro charge related to an unauthorized trading position.

SocGen also announced further writedowns of 2.05 billion euros related to the global credit crunch.

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

SocGen said it expected a 2007 net profit of between 600 and 800 million euros -- well below its 2006 profit figure.

SocGen shares closed down 4.15 percent at 79.08 euros on Wednesday. The stock has fallen around 20 percent since the start of 2008.

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