Did Societe Generale trades trigger market rout, Fed cut?

Submitted by cpowell on 05:48PM ET Thursday, January 24, 2008. Section: Daily Dispatches
By Sitaraman Shankar and Blaise Robinson
Reuters
Thursday, January 24, 2008

http://www.reuters.com/article/newsOne/idUSL2455504620080124

Societe Generale's shock disclosure of a fraud that lost it $7 billion has left investors wondering about a link between the fiasco and Monday's European stock market rout.

The sharp fall, which was followed by an emergency U.S. rate cut, came as SocGen tried to close out positions built up by one of its traders.

SocGen, France's second biggest bank, said on Thursday that it had been the victim of a massive and "exceptional" fraud by a junior trader resulting in losses of 4.9 billion euros, and announced a large capital increase.

SocGen said the trader, responsible for futures hedging on European equity market indexes, had taken massive fraudulent positions in 2007 and 2008 beyond his authority.

The bank said it had decided to close the positions as quickly as practicable after they were discovered on the weekend of Jan 19 and 20.

This has brought under the microscope the massive declines in European shares on Monday, January 21, when over $350 billion was wiped off the value of top British, German and French shares -- an amount equal to the combined gross domestic product of Hungary and Greece.

The FTSEurofirst 300, a pan-European stock market benchmark, fell nearly 6 percent on that day, its biggest one-day fall since the attacks of September 11, 2001.

And the U.S. Federal Reserve served up a surprise 75 basis-point interest rate cut on Tuesday, a move that managed to limit declines in U.S. stocks when they resumed trading after Monday's Martin Luther King Day holiday.

"The huge amount of futures selling could be one reason why markets fell off a cliff on Monday, and maybe that was an ingredient in forcing the Fed to bring forward a part of its interest rate cuts," said Andrew Bell, European strategist at Rensburg Sheppard.

A Fed source later said the central bank had not known about the SocGen fraud when it made its rate decision on Monday.

The stock slide on Monday has contributed to making January the worst month in more than five years on European bourses, and European shares have lost 12 percent so far this month, compared to a 3 percent gain at this time last year.

This was even after a sharp increase on Thursday, as hopes for a rescue package for monoline bond insurers in the United States, and strong results from handset maker Nokia offset any impact SocGen's announcement might have had.

...Huge volumes

Reuters data showed that the volume on DAX futures on Monday, Tuesday and Wednesday were the highest in at least five years and twice the average for the month, despite the United States holiday on Monday.

Talk swirled on Wednesday of a huge writedown at SocGen, and traders said it was possible that this was due to the bank unwinding massive positions.

Trader Rik Zwaneveld at AFS Brokers in Amsterdam said: "On Wednesday there was talk of a 40 billion euro writedown at SocGen. With the news today, a 5-billion-euro loss on 40 billion euros of positions is possible," he said.

L'Autorite des Marches Financiers (AMF), France's market watchdog, declined to comment on SocGen's unwinding of bad positions.

...Trigger for rate move?

The U.S. Federal Reserve cut its discount rate, or the rate at which it lends directly to banks, in August, soon after BNP Paribas, another French bank, spooked investors worldwide by freezing 1.6 billion euros worth of funds due to problems in the U.S. subprime mortgage sector.

Traders speculated that this time round, the travails at SocGen had played a similar catalytic role in the Fed's move.

Said a credit trader in Germany: "It kind of begs the question now: Did the Fed cut rates courtesy of a rogue trader at SocGen having to close out a massive position and sending the stock market into turmoil?"

The Wiki Man
RORY SUTHERLANDWEDNESDAY, 23RD JANUARY 2008
Rory Sutherland's occasional column on technology and the web

Following last week’s article, someone wrote asking me to dissuade them from buying the new ultra-thin Apple Air laptop, to which they had become curiously attracted. Delighted to help. In fact anything I can do to deprogramme you from the Apple cult will be time well spent. With luck you may end up devoting yourself to something more purposeful and constructive, such as Scientology.

It’s not that I don’t like Macs. My problem is with what we marketing chaps call user-imagery. Your typical Mac-owner belongs to that class of people which believe the greatest pleasure to be derived from life is to spend it feeling quietly superior to everyone else. In short, a bit intellectually self-satisfied: as a group, it would include environmentalists, all readers of Guardian Media, the entire Newsnight team, anyone who won’t let their children drink Coke and everyone who bought The God Delusion in hardback.

To me this smug streak goes against the grain of the internet age, which should allow ‘anyone to contribute without being hindered by the obscurity of his condition’. But my objection to this skinny laptop is not just philosophical but utilitarian. Why does it need to be so damned thin? What possible advantage does this wafer-like form confer? I have no idea of the circumstances of my own death, but I am fairly sure I won’t find myself gazing up at my family through a mass of tubes to tell them, ‘I’ve had a good life for the most part, but I just can’t shake off the feeling that my laptop was always a bit fat.’

And here lies the problem with much technical progress. It is often driven by numerical targets pursued to the point of meaninglessness.

Often we don’t need thinner or faster or lighter, we need different. The best innovation happens not when someone tries to impress a pre-existing market but when they attract a new one.

A more important innovation in the laptop world comes in the shape of the Asus EEE 701 — robust, simple and so cheap you can leave it in the car without worrying (the military have reportedly placed a bulk order). It does 90 per cent of what you want at 20 per cent of the price.

Someone else has had the idea of designing technology for Luddites — the new TV-B-Gone (www.tvbgone.com) lets you remotely turn off other people’s televisions — in bars, airports, shops, homes and (see YouTube for this wizard jape) at the Las Vegas Consumer Electronics show.

But the best recent example of this approach is the Nintendo Wii. Shigeru Miyamoto, the genius behind this platform, decided the arms race between the other two platforms (Xbox and PS3) focused too much on impressing existing hardcore gamers, pandering to their obsession with processing power and graphical realism. He decided on a different approach, using what he called his Wife-O-Meter. ‘Forget gamers,’ he seemed to say, ‘how can I create games which Mrs Miyamoto will want to play?’ The Wii was created to support not better graphics for a few nerdy obsessives, but better games for everyone.

I have to say he has a point. After all, if I want to play a really intricate, boring game with spectacular 3D graphics, I can just have a game of chess in the real world.

Rory Sutherland is vice-chairman of Ogilvy Group UK. A new sports column will begin soon.

More articles from: Rory Sutherland | this section

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The Coming Investment Boom in Silver

By: Theodore Butler

-- Posted 22 January, 2008 | Digg This Article | Discuss This Article - Comments: 0

From the very beginning of my interest in silver, my focus has been on basic supply and demand, with particular emphasis on remaining inventories. And why not? I am a commodity supply and demand analyst and the world did experience a structural deficit in silver for more than 60 years, beginning with World War II and lasting up until very recently. What could be more bullish for a commodity than drawing down and depleting an inventory that took thousands of years to accumulate?

Despite this fact, I have never dismissed the potential impact of increased investment demand on silver. I always felt that investment demand would be a bonus, or icing on the cake. Especially with the certainty of higher prices brought about by consuming more of something than what was being produced. By and large, that certainty has come to be recognized, as silver prices have risen amid growing awareness that world inventories have been depleted. Gone are the days when there was universal talk of inexhaustible inventories of silver.

A while back, I may have caused some consternation among silver enthusiasts when I wrote that the structural silver deficit appeared ended. I thought the days of unrestricted drawdowns from inventory, due to industrial consumption outpacing current production, were over. I based my thinking on the fact that the silver structural deficit couldn’t continue forever, as inventories available for depletion were finite and would eventually be exhausted. Sooner or later, all commodity deficits must end. The wonder in silver was that its deficit endured for more than 60 consecutive years, due to a variety of highly unique factors, not the least of which was an unusually large inventory to start with. I was careful to conclude, however, that the eventual end of the deficit didn’t necessarily imply that silver must then decline in price.

In reality, it does now appear that the industrial consumption silver deficit that the world witnessed for decade after decade is now over. Recent statistics indicate a balance, more or less, between total current supply (mine production plus recycling) and total current fabrication demand. I know many consider the talk of current fabrication demand being in balance with current total production to be blasphemy, but an analyst must deal with the facts as they develop. Besides, as I wrote at the time, industrial consumption deficits could return, from time to time, if world demand, especially from the BRIC countries (Brazil, Russia, India, and China) continued to accelerate, as appeared likely. More importantly, we were at a point when the industrial fabrication deficit, as the primary price influence, was about to be replaced by something else.

That something else, in my opinion, is the coming wave of investment demand about to engulf silver. If my thinking is correct, the time could be very short before silver will no longer be available for accumulation near current prices. There are a number of factors that lead me to believe that an investment surge is about to hit silver and influence its price for years to come. Some of these factors are developments that I would have never imagined could occur when I first started analyzing silver, more than 20 years ago. So bullish are these developments, as I have written previously, that I could not have dreamed them up even if I wanted to.

Going, Going, Gone

At the top of the list is the fact that the silver structural deficit lasted as long as it did. Commodity deficits, in which inventories must be drawn from in order to balance supply and demand, are always temporary situations, usually weeks and months, rarely stretching to more than a year. In silver, we had the shocking circumstance of a consumption deficit lasting more than half a century. How could this be?

The short answer revolves around a starkly unique confluence of verifiable events; a build up of massive quantities of inventories as a result of thousands of years of accumulated production, and the transformation of what was a monetary and cherished precious metal into a vital and modern industrial commodity that resulted in the depletion of the accumulated production. Long-time readers know that the depletion of thousands of years of accumulated silver inventory has always been a central theme of mine, as has been the resultant rarity and scarcity of above-ground silver. The less supply there is of something to invest in, the greater the price impact will be when demand appears.

Because the industrial and fabrication demand is, in my opinion, in balance with total production (mining plus recycling), none of the silver currently being produced is, effectively, available for investment demand. The only real source of silver for new investment demand is silver already held as investment, namely existing world inventories. In other words, since all newly produced silver is already spoken for by industrial and other fabrication demand, the only real silver available for new silver investors is the sale and resale of silver by existing silver investors.

In this sense, silver is now similar to gold, because gold’s total current production has always largely been taken by jewelry and other fabrication, with existing gold inventory the primary source of supply available for new investment. The key difference, of course, is that the available above ground gold inventory towers over the equivalent available silver inventory, both in ounces, by as much as 5 to 1, but particularly in dollar value, by more than 250 to 1.

One other difference between silver and gold is that for the life of the 60+ years of the silver structural deficit, there was very little, if any, net investment in silver. That has changed in recent years, and it is precisely this change, the rebirth of silver as an investment asset that is a shockingly bullish development. Think of it – the world draws down and depletes silver inventory for more than 60 consecutive years, exhausting the very source of what is available for investment, and only then collectively decides that silver is a good investment. Silver appears on the investment horizon at precisely the time there is less available as an investment than ever before.

I have long used the number of one billion ounces of silver bullion equivalent as a world inventory amount. This is higher than most accepted published accounts. In dollar terms, that comes to $15 billion. That is a very small amount, especially when compared to the $4 trillion dollar value of world gold inventories. But it is not just the extremely limited dollar value of silver inventories; it is also my sense of the nature of who holds the silver.

Closely Held

An extremely small percentage of the world’s investors, certainly way less than 1%, have any knowledge about the real facts in silver. That’s why there is limited investment. Those that do hold silver as an investment are about as rare as silver inventory itself. I run across a larger than normal number of silver investors, large and small. Maybe this is somewhat unscientific, but I’d like to share a few observations.

The vast majority are looking for substantially higher prices before selling. (Perhaps they have been influenced by my writings.) My strong sense is that many more are looking to add to their silver holdings, especially on price dips, rather than those looking to sell on near-term price rallies. For those holding real silver, either exclusively or in addition to mining stocks and leveraged positions, the real silver is considered core to be held for the longest holding period possible. In fact, holders of real silver rarely think of selling and converting to other assets, including cash. They think more in terms of specific long-term personal financial goals, or of passing on to heirs or charity, rather than selling.

My point here is that an incredibly small quantity of silver is held for investment and it is held in extremely strong hands. To pry this silver from these investors is going to take an unusually high and attractive price. Whenever you have a small and tightly held supply, you have the makings of a price boom on even modest demand.

There was a short period of time in the late 1970’s when speculators, led by the Hunt Bros., caused prices to climb ten-fold. And there was a quick doubling of the price of silver in 1998, when Warren Buffett bought a chunk. But, by and large, there has been no sustained broad net investment buying of silver over the past half century. That has now changed, for a variety of reasons.

For one reason, thanks to the Internet and instant, uncensored communications, more people are becoming aware of the investment merits of silver. Though the number is currently small, never in the history of the world has there existed so much money and so many investors looking to deploy that money. That the real silver story is still largely unknown is a powerfully bullish factor, as more investors are bound to uncover the story as time goes by.

Nothing brings more attention to an investment item than a rising price. It is dogma that in the investment world higher prices beget more investor demand. And while silver prices have lagged a bit this year, for the past five years silver has recorded bigger price advances than gold, platinum and palladium. Combine rising prices with a great investment story and you have the potential for an investment rush.

Most recently, nervousness and stress are in the investment air. The mortgage and housing and credit crises get more serious by the day. The impacts on the economy and the markets are great. The losses and write-downs from credit securities have been massive. The reaction from investors has been clear; a move to safety.

There has been a pronounced flight to the quality of the highest-grade securities. To paraphrase Will Rogers, the return of principal takes precedence over the return on principal. Nothing could be of higher credit quality than assets that are no one else’s liability. While most investors instinctively turn to gold, it is undeniable that silver is an asset as liability-free as gold.

Flight to quality buying isn’t something I normally dwell on as a reason to buy silver because there are so many who already advance this as a reason. What I would like to emphasize is that because there is so little inventory available that could be purchased, a fevered rush to safety in silver takes on added significance as a price factor. That a rush to the safety of silver has yet to occur is potentially a lot more bullish than one that has already occurred.

Big Money

Perhaps the most profound potential impact on the coming investment boom in silver is the newly created ability for institutional and other stock-only investors to buy silver. Of course, I’m referring to the recent creation of silver exchange traded funds (ETFs), as well as existing closed-end fund, the Central Fund of Canada. For the first time in history, institutional investors have the ability to invest in silver. In less than 2 years, the US-listed silver ETF, plus the versions in London and Switzerland hold 170 million ounces, with the Central Fund holding more than 40 million ounces. For all intents and purposes, this is more than 210 million ounces of silver that has been indefinitely taken off the market.

That this quantity of silver has been acquired is remarkable, in that it has occurred without any real signs of investment frenzy. While the price of silver has basically doubled since the announcement of the first silver ETF, there is no denying that the price rise feels subdued. Certainly, I never imagined that 170 million ounces of silver could have been purchased with such a muted price impact.

But I think there is a specific explanation for how that much silver could have been bought with so little relative impact on price. Further, I think that it would be a mistake to assume, as some do, that additional large quantities of silver are available to the ETFs at similarly muted prices.

I believe that a very large part of the 170 million ounces bought by the three ETFs so far is the same silver that I have previously written that Warren Buffett got snookered out of at the time the first silver ETF was introduced. If my analysis is correct, then a lot less "non-Buffett" silver resides in the ETFs than would appear. My point is that if a big chunk, or perhaps even the majority, of the ETFs’ holdings came from Buffett (who was said to hold 130 million ounces) in a single transaction, that would go a long way to explaining the muted price reaction (only a double) for the balance of the silver bought.

Most importantly, again assuming I am correct, the Buffett silver was a "one-off" transaction, that can’t be repeated, because there is no known silver hoard of that size in the world. In other words, the next 100 million ounces to be bought by the ETFs will cause a price impact greater than the last 100 million ounces purchased. To assume otherwise would be a mistake.

Another reason for optimism for silver investment demand to get kicked into high gear on higher prices is simply how investors collectively behave. The remarkable thing is that the silver ETFs now hold, by a wide margin, the largest known silver stockpile in the world. What the heck will those holdings amount to when a true silver buying fever hits?

While I have been pointing out that the ETFs allow, for the very first time, institutional investors to participate in silver, that’s not to suggest, in the slightest, that the silver ETFs will be, or should be the preferred choice for silver investors. Nothing is safer than what you hold yourself or is stored for you (with the clear ability to take possession of your specifically ear-marked holdings on your demand). The ETFs don’t allow this, except under certain thresholds (such as large minimum quantities, like 500,000 ounces in the US-traded version). And ETFs do involve additional levels of middlemen that complicate pure ownership. For institutions or other accounts that couldn’t own silver otherwise, the ETFs are fine, and will have a big ongoing impact on price. That’s my point.

Let me try to state something that I strongly believe in, yet don’t recall ever writing about before. I believe the very best form of silver you can own is physical silver in your personal possession. The next best form, and only if it is logistically impossible, due to the quantities involved, is silver stored for you by an independent storage facility (not the dealer you bought from) in which you know the serial numbers and weights (in the case of 1000 ounce bars).

I know it can be a pain in the neck for most people to buy and hold your own silver (in a safe deposit box or other personal safe storage), especially those who never bought and held silver before. But I am convinced that it is precisely this inconvenience that will enable the average person to hold his or her silver for the long term, through thick and thin.

When something is real easy to buy, it is usually real easy to sell as well. Futures and options and ETFs and mining stocks are much easier to buy and sell than real silver. That automatically makes them much harder to hold. When a quick phone call or the click of a computer mouse is all it takes to initiate or liquidate a large investment holding in an emotional reaction to a short-term price rise or fall, especially when margin may be involved, that is not always a good thing. Easy to buy and sell, and hard to hold can be very bad when it interferes with a long-term position. I have seen too many, including myself, disturb a long-term position in moments of weakness, with later regret. All because it was too darn easy. I have rarely seen anyone liquidate a long-term physical position on a whim. Since the big gains come with long-term positions, the fact that physical silver forces you, more than any other form of silver, to hold is a very good thing.

In summary, I believe we are in the very early stages of a long-term price boom in silver that will be caused by investment demand. The combination of an extremely small and tightly-held existing investment inventory, combined with a large potential investor base, funded with the largest buying power in history, hungry for the next hot investment, and still unaware of the true silver story is the stuff that makes investment dreams.

I have not forgotten, for one second, the industrial supply/demand situation, the coming industrial user inventory buying panic and the resolution of the largest concentrated short position ever witnessed, but an analyst should look at everything that promises to greatly impact prices. The purpose of this article is to get you to add the coming investment demand into the mix when you think about silver. But not before adding more silver to your holdings.

-- Posted 22 January, 2008

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Western diet boosts colon cancer risk by 300 per cent
Thursday, January 24, 2008 by: David Gutierrez

(NewsTarget) The rates of recurrence or death from colon cancer were nearly 3.5 times higher among patients who ate a typical Western diet than among those who followed it least closely, in a study published in the Journal of the American Medical Association.

Researchers collected data on 1,009 people who had undergone surgery and chemotherapy for colon cancer in the two years between April 1999 and May 2001. In all cases, the cancer had metastasized to the lymph nodes but had not spread to other organs. The participants filled out standardized surveys about their dietary preferences and habits during chemotherapy and the six months following. They were then tracked for five years.

Of the 1,009 patients who began the study, 324 experienced cancer recurrence during those five years, and 223 of those died. Only 28 of the people who did not experienced recurrence died in the same period.

The dietary habits of the cancer patients fell into two basic patterns: The "Western" diet was characterized by the consumption of large amounts of red and processed meats, refined grains and sugars; the "prudent" diet was characterized by consumption of large amounts of fruits, vegetables and relatively higher amounts of poultry and fish relative to red meat.

The researchers found that cancer recurrence and death were almost 3.5 times more common among people who adhered most closely to the Western diet than among those who ate the lowest amounts of red and processed meats, refined grains and sugars.

"Doctors who treat colon cancer patients need to have the conversation about diet," said researcher Jeffrey Meyerhardt. "From my own experience I know that patients ask about this a lot. They want to know what they should be eating and whether they should be exercising."

The researchers warned that the study only demonstrates a correlation, and not causality between diet and colon cancer. According to Michael Thun, a spokesperson for the American Cancer Society, however, there are already many other health reasons for eating higher amounts of fruits and vegetables and avoiding the foods associated with the "Western" diet.

But consumer health advocate Mike Adams has no doubt about the causes of colorectal cancer. "There's no question that eating dead, processed and chemically-treated foods promotes the development of colon cancer," he said. "Preventing colon cancer is as simple as adopting a diet primarily based on raw plants and living foods. Colon cancer simply disappears, and cancer risk throughout the body plummets on a raw foods diet."

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Small businesses handed CGT reprieve

By David Prosser, Deputy Business Editor
Friday, 25 January 2008

Up to 80,000 small business owners have been handed a reprieve from controversial reforms to capital gains tax rules that would otherwise have cost them £200m a year in extra charges.

Alistair Darling, the Chancellor, said he had decided to impose a lower rate of CGT on small business owners and entrepreneurs selling their businesses, rather than charging them the new rate of 18 per cent due to be introduced in April. The concession will mean small business-owners selling their businesses will pay only 10 per cent CGT, as long as their gains do not exceed £1m.

Mr Darling's announcement follows CGT reforms he proposed in October's pre-Budget statement that have been widely attacked.

The Chancellor said he had listened to criticism of the proposals from business groups but still intended to press ahead with the abolition of taper relief and the introduction of a new flat rate of CGT of 18 per cent.

Currently, taper relief enables taxpayers selling business assets they have held for more than two years to pay a reduced 10 per cent rate of tax. In October, Mr Darling said the abolition of the relief and the new CGT rate would raise additional tax revenues of £900m a year, though yesterday's concessions will reduce that by £200m.

John Wright, the national chairman of the Federation of Small Businesses, said: "The Chancellor said specifically that he wanted to help small businesses facing big tax rises from April and that is very good news indeed."

However, Richard Lambert, director-general of the CBI, said the CGT reforms would act as a disincentive to entrepreneurs considering building long-term businesses. "The reality is that these revised measures will do nothing to help the real business powerhouses of this country – although £1m might sound a lot, it could have been built up over 20 or 30 years," he said.

"The bottom line is that the reaction of the UK government, in the face of an economic slowdown, has been to slap on a major tax hike of £700m."

The £1m allowance will be a cumulative lifetime relief, rather than applying to each disposal made by a small business owner. It will also only be available to entrepreneurs selling businesses in which they own at least 5 per cent of the shares. As a result, employees in share ownership schemes will still have to pay the 18 per cent tax rate.

Mr Darling also announ-ced that he planned to hold further discussions with the insurance industry over how the new rules would be applied to insurance bonds. Under the rules, their products will be taxed more aggressively than savings plans such as unit trusts sold by fund managers.

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Profile: Rogue trader Jerome Kerviel
By Gordon Rayner and Peter Allen
Last Updated: 2:09am GMT 25/01/2008

Jerome Kerviel had allegedly just been caught perpetrating the biggest bank fraud in history, but that did not stop him trying to convince his boss that he had come up with a brilliant scheme for making massive profits for his employers.

Trader flees after £3.7bn Société Générale loss
Jean-Pierre Mustier, the chief executive of corporate and investment banking at Société Générale, spent six hours grilling the junior trader on Saturday night.

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But instead of coming clean about the scale of his losses, Mr Kerviel insisted he was acting in the best interests of the bank. The fact that he had already lost more than a billion pounds appeared lost on him, according to sources close to the bank.

"He spent hours trying to explain his way out of this," one insider told The Daily Telegraph.

"He seems to have been some kind of Walter Mitty character who had managed to convince himself that he had come up with a great new trading strategy, and if he was given time it would make a lot of money for the bank."

In fact, Mr Kerviel, 31, had fallen into the classic trap which has ensnared so many other gamblers - he chased his losses, betting more and more money in the hope of recovering what he had lost until the losses spiralled out of control.

His motives for the unauthorised trading are unclear. Sources at the bank described him as a man with "personal problems" but there was no evidence he was out for personal gain.

Instead, they believe that Mr Kerviel, who was earning around £75,000 - a modest sum for a trader who had been at the bank for eight years - was desperately trying to get noticed.

Having graduated from the middle-ranking Université Lumière in Lyon with a masters degree in finance, he joined SocGen in 2000, landing a job in the compliance department.

He was promoted to the bank's Delta One trading team in 2005, which specialises in the futures markets, but made little impact and was restricted to the most basic type of trading.

So in December he allegedly decided to start trading by himself, using up to £60 billion of the bank's money to bet on whether markets would rise or fall.

In his spare time, Mr Kerviel was accomplished at judo, to a level were he trained children at the sport. In his CV, seen by The Daily Telegraph, he also listed sailing as a hobby. He speaks fluent English.

He said that his immediate professional ambition was to "reach a position as a retail-listed derivative products trader, managing a volatility and Delta One book".

Colleagues described him as a "computer genius" who was allegedly able to hack into the bank's computers to hide his trading, until a basic slip-up on Friday, when he failed to disable the bank's automatic alert system and his irregular trading suddenly showed up.

At the time, the losses were around £1.2 billion, but as the markets plunged in the early part of this week, this trebled before the bank was able to shut down the fake accounts.

There was no sign of the trader at his £1,500-a-month apartment in a smart 19th century building in Neuilly-sur-Seine, within walking distance of his office in La Defense, yesterday.

A neighbour said: "We hardly ever see him. He's always at work."

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A Spiral of Losses by a ‘Plain Vanilla’ Trader
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By NELSON D. SCHWARTZ
Published: January 25, 2008
PARIS — On the elite trading floors here, where France’s brightest minds devise some of the most complex instruments in global finance, few people noticed Jérôme Kerviel.

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Richard Harbus for the International Herald Tribune
The headquarters of Société Générale in Neuilly, France. A midlevel worker is blamed for costing the bank $7.2 billion.
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Maya Vidon/European Pressphoto Agency
The Société Générale chief executive, Daniel Bouton, flanked by co-chief executives, Philippe Citerne, left, and Didier Alix.
He was lucky to be there at all. Many of his colleagues had been plucked from the prestigious Grandes Ecoles — the Harvards and M.I.T.’s of France — and wielded advanced degrees in math or engineering. Mr. Kerviel arrived from business school and started out shuffling paper in the back office.

But on Thursday the world came to know Mr. Kerviel, 31, as the most dangerous accused rogue trader ever, a young gambler who found himself sucked into a spiral of losses that left a $7.2 billion hole in Société Générale, one of France’s largest and most respected banks.

While Société Générale executives maintained that he had acted alone, many questioned how that was possible given the scope of the losses.

“There are plenty of excellent brains at Société Générale, consequently I find it hard to believe the risk management systems and all the auditors did not indicate anything at any level,” said Hélyette Geman, a professor of mathematical finance at ESSEC, a leading French business school, as well as professor at the University of London.

It is a remarkable turn of events for Société Générale, which since the mid-1980s has built itself into a global powerhouse in trading derivatives like futures and options.

“In France we considered Société Générale a magic bank,” Ms. Geman said.

Until now Société Générale, unlike many Wall Street banks, had seemingly sailed through the turmoil in the financial markets with its reputation intact. The January issue of Risk, a monthly magazine about risk management and derivatives, named the bank its “Equity Derivatives House of the Year.”

But Mr. Kerviel, described by bank executives as a shy junior trader, did not fit the mold at Société Générale. The bank lures its top talent from the country’s premier science and engineering schools in Paris. Mr. Kerviel grew up in Brittany, in western France, and attended the University of Lyon. He joined Société Générale in 2000 as what was effectively a clerk, processing and recording the trades made on the trading floor.

By 2006, Mr. Kerviel had worked his way up to the trading floor, where he specialized in arbitrage, or making bets on small difference between various European stock market indexes such as the CAC in France and DAX in Germany.

A senior banker at Société Générale described Mr. Kerviel “as a very junior trader, not a star.” As far as his superiors knew, this banker said, “he was starting to work on a small portfolio. He’s more of a shy person than an extrovert.”

All the same, covering the billions in market positions would have taken considerable skill. “Hiding it was a full-time job because you needed to know exactly what do,” this banker said.

The chief executive of Société Générale’s corporate and investment banking unit, Jean-Pierre Mustier, insisted that the bank’s own investigation showed what they termed the rogue trader to have acted without the knowledge or cooperation of his superiors.

“We’ve been going through the positions for four days,” Mr. Mustier said. “The research we have made has not shown any link with anyone else at Société Générale.”

Mr. Kerviel’s bad bets in the markets came to light a week ago. According to bankers familiar with the situation who asked for anonymity because the investigation was continuing, risk control specialists at the bank first discovered the suspicious trades on Friday. After combing through trading records all day Saturday, the executives discovered the extent of the fraud.

Mr. Mustier returned to Paris from London to oversee the investigation at Société Générale’s headquarters over the weekend. Mr. Kerviel was summoned and was questioned there Saturday night.

Among financial veterans of other trading floors as well as financial experts across Europe on Thursday, there was widespread incredulity that a junior employee like Mr. Kerviel could have racked up such huge losses without the knowledge of his superiors.

Like Nick Leeson, the trader who brought down Barings bank by making huge secret bets on Asian markets in 1995, Mr. Kerviel was something of an anomaly on Société Générale’s trading floor.

“I had students who have a hard time getting jobs at top French banks because of this elite system we have in France,” said Ms. Geman. “In the U.K. and U.S., it’s less of a club based on where you went to school when you were 19 or 20.”

According to officials at the bank, Mr. Kerviel’s losses came from bets made on what they termed “plain vanilla products,” relatively simple futures tied to major European stock indexes.

He had made bullish bets, a senior banker said, which were gradually unwound over the first three trading days of this week. The banker insisted that the closing of those positions had not contributed to the huge losses on European bourses Monday and Tuesday.

Adding to the mystery is the conclusion by Société Générale executives that Mr. Kerviel had not profited from his trades.

“We have no explanation for why he took these positions, and we have no reason to believe he benefited from a financial point of view,” the banker said. “We don’t understand why he took such a massive position.”

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Trader blamed for lost billions

Maya Vidon / EPA
Workers walk out of the headquarters of the French banking group Societe Generale in La Defense, outside Paris. Societe Generale uncovered $7.14 billion in fraud, one of history's biggest, by a single futures trader who orchestrated a series of bogus transactions that spiraled out of control amid roiling markets this week.
A French banking giant says a junior staffer's illicit investments cost it $7.2 billion.
By Michael A. Hiltzik and Geraldine Baum, Los Angeles Times Staff Writers
January 25, 2008
PARIS -- In what would be the largest fraud of its kind by a rogue trader, a junior employee at French banking giant Societe Generale cost the company $7.2 billion by making disastrous bets on European stock prices through a series of unauthorized and wildly outsized transactions, the bank said Thursday.

The alleged fraud by 31-year-old Jerome Kerviel staggered Societe Generale, France's second-largest bank. Its disclosure delivered a new blow to a European banking industry already reeling from losses on American sub-prime mortgage securities -- including a $3-billion write-down announced Thursday by Societe Generale itself.

Rogue trader
click to enlarge

"With everybody already quite scared about financial stocks, this creates even more of a threat to this sector," said Olivier de la Ferriere, a financial analyst at Richelieu Finance in Paris. "There is a real confidence crisis anyway this does not help."

It also raised the possibility that the bank, in its haste to close out Kerviel's bad bets, may have exacerbated the European stock plunge earlier this week. That decline, in turn, was partly responsible for the U.S. Federal Reserve's extraordinary three-quarter-point interest rate cut Tuesday.

Societe Generale's chairman, Daniel Bouton, said in a letter to shareholders that immediately after discovering the scale of the alleged fraud Saturday, he decided to liquidate Kerviel's futures positions "in all urgency to avoid even worse consequences, given size." Futures contracts allow traders to bet on the value of securities at a later date.

Bank officials said during a conference call Thursday in Paris that they had unwound all the transactions from Monday to Wednesday before publicly disclosing the alleged fraud. They added that the bank suffered an "enormous loss" because of unfavorable market conditions but that there was no evidence Kerviel personally profited from the scheme.

The timing and nature of Societe Generale's sales were unclear, however, as was their effect on European exchanges. Those markets plummeted more than 5% on Monday on the heels of a steep sell-off in Asian markets.

The Fed announced its rate cut early the next morning. A Fed official said the central bank was unaware of the Societe Generale situation when it took action, according to the Reuters news agency. The Fed maintained Tuesday that it dropped rates in response to "a weakening of the economic outlook" and deteriorating conditions in the financial markets.

Societe Generale's loss swamps the previous high water mark for activity by a rogue trader set by Nicholas Leeson, who lost $1.38 billionin Asian futures and other derivatives at Barings Bank in 1995. The damage bankrupted the 233-year-old British bank, which was subsequently taken over by Dutch financial firm ING.

Bank officials and securities analysts said it was unlikely that the new scandal would have the same effect on Societe General, which was founded in 1864 and has 120,000 employees in 77 countries.

It owns, among other properties, Los Angeles-based TCW Group, the parent of Trust Co. of the West, which manages $153 billion for clients. A TCW spokesman said the firm was "in no way directly or indirectly related to any of the losses announced today by Societe Generale."

"This is a very big bank," said Ruth Lea, economic advisor and director at Arbuthnot Banking Group in London. "It's not as if it's unenviable. I'd be very surprised if it didn't see its way through this."

Kerviel -- whom Societe Generale executives did not name but who was identified in news reports from Europe -- began working at the bank's back office in 2000, assigned to help create the internal programs that placed transaction limits on individual traders.

In 2005 he was moved to a trading desk, where bank officials said he was given only limited authority to hedge the bank's trading positions in European stocks with stock index futures. This involves making countervailing bets on stocks' future performance as an insurance policy against adverse moves in the bank's portfolio.

His salary was pegged at 100,000 euros, or about $148,000 a year, including bonus; the bank said his trades were expected to generate a modest $20 million in revenue a year.

Instead, Bouton and other bank executives said during their conference call, Kerviel regularly exceeded his trading limits without detection, starting as early as 2006.

Using the knowledge he had gained in the back office, Kerviel concealed his actions by fabricating balancing trades, using "extremely sophisticated and varied techniques," Bouton said in his letter to shareholders.

At least for a portion of 2007 his trading was profitable. Just before the start of the new year, however, he undertook a huge bet that European stock markets would rise in January.

Instead, they fell sharply, losing nearly 10% through last Friday. The following day, Societe Generale officials confronted Kerviel with evidence of his unauthorized trading.

He immediately confessed and was fired but spent the weekend helping managers create a liquidation strategy, the bank said.

The bank said it had filed legal charges against him and that "four or five" officers responsible for financial surveillance had also lost their jobs. But executives said they believed they had discovered the full extent of the unauthorized trading.

Bank executives said during the conference call that they could not explain the trader's motivation, beyond the possibility that he was trying to show that the bank's financial control procedures could be defeated. They added that they had not yet determined whether he had accomplices inside or outside the bank.

"The reasons are incomprehensible," said Jean-Pierre Mustier, head of Societe Generale's investment bank.

Kerviel's lawyer, Elisabeth Meyer, said Thursday that he remained available to law enforcement officials and was "not on the run," according to the Paris daily paper Le Figaro. French labor union officials representing bank employees told the Associated Press in Paris that they understood he had been having unspecified "family problems."

French politicians said the events had no implications beyond the management and regulation of Societe Generale. French Prime Minister Francois Fillon called the alleged fraud a serious matter, but said "it has nothing to do with the current situation on the global financial markets."

Bouton announced Thursday that the bank would show a profit of $875 million to $1.16 billion for 2007, a sharp decline from earnings of $7.6 billion in 2006. He said he had offered to resign after the disclosure of the fraud allegations, but the bank's board rejected the overture.

Still, the bank said it would raise $3 billion through an emergency stock sale that was already underwritten by a consortium of other banks. The capital increase was made necessary by the trading loss as well as the write-downs from its exposure to U.S. credit securities, Bouton said.

Although Lea and other analysts speculated that the loss might make Societe Generale more vulnerable to a takeover, Bouton turned away questions about that possibility.

In trading Thursday in Paris, shares of Societe Generale sank 4.1% even as the CAC-40 index of French stocks surged 6% amid a broad rally in European equities.

Analysts said Thursday that, beyond the financial toll, the most immediate consequences of the huge loss would be directed at Societe Generale's internal surveillance systems, which had plainly broken down.

"Where were this young man's bosses?" asked Lea of Arbuthnot. "Who was minding him?"

Naturally, the toll caught the attention of Leeson, now a soccer club manager in Ireland. The former Barings trader told British Broadcasting Corp. that the size of the loss left him "shocked."

michael.hiltzik@latimes.com

geraldine.baum@latimes.com

Hiltzik reported from Los Angeles and Baum from Paris.

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Another one Bites the Dust

By: Peter Schiff, Euro Pacific Capital, Inc.

-- Posted Friday, 25 January 2008 | Digg This Article | Source: GoldSeek.com

Over the past half-century, the United States has seen its global dominance in dozens of industries slip away. One plum that we have maintained is our gargantuan financial services industry, whose contribution to total GDP more than tripled between 1947 and 2005. However, the current global financial crisis, manufactured on Wall Street and exported to the entire world, may result in the U.S. losing its financial crown as well.

Once upon a time America owned the automobile industry. But after several decades of excessive taxation, onerous government regulation, union extortion, and a crushing lack of foresight and innovation, we no longer dominate an industry that we practically invented. Just as Detroit no longer claims center stage in the world automobile marketplace, soon New York will lose its position at the center of global capital markets.

In the first place, the center of finance tends to go where the money is. Right now all the money is coming from Asia and the Middle East. When the United States was the world’s greatest creditor nation and its largest supplier of capital it made prefect sense for that capital to be allocated here. But why should the Chinese send their savings to New York only to have it re-invested back in China? Wouldn’t it make more sense for the Chinese to allocate their capital locally rather then out-sourcing the job to us?

In the second place, when the strength of the dollar was widely regarded it made sense for global savers to allocate substantial percentages of their savings to U.S. dollar denominated investments. This preference gave Wall Street a competitive advantage in attracting capital. However, now that confidence in the dollar has evaporated, perhaps permanently, this advantage has been lost. Further, investment in the U.S. was encouraged by America’s respect for private property, low taxes, and minimal government regulation. However, this advantage has been lost as other nations have strengthened their private property laws, deregulated, and lowered taxes, while we have done the opposite. As a result, thus far this century, the returns on U.S.-based investments have far underperformed those achieved in every other major market.

Most importantly, Wall Street’s reputation, once its greatest asset, is also in jeopardy. Just as Detroit lost its reputation for high quality cars, bankrupted dotcoms and worthless subprime debt are creating similar problems for Wall Street. You can’t expect to keep your customers if you continually sell them shoddy merchandise. Wall Street has spread hundred of billions of dollars in losses around the world and in so doing shattered its reputation with some of its best customers.

However, in the last few years Wall Street has not only screwed customers but their own shareholders as well. At one time all of our major investment banks, such as Goldman Sachs, Lehman Brothers, Morgan Stanley, Bear Stearns, Smith Barney, Shearson, E.F. Hutton, Kidder Peabody and Solomon Brothers, were private partnerships. However, during the 1990’s they all went public (of course many merged first so they no longer exist as independent firms). Goldman Sachs was the last to go public in 1999. The transition allowed Wall Street partners to cash out, transferring future risks to new shareholders. In so doing they were able to capitalize on bubble valuations, yet through lavish bonus compensation packages, still keep the lion’s share of the profits for themselves. In other words they got to have their cake and eat it too.

As a result of this transfer of risks, the business models of America’s leading financial institutions shifted, with profits coming from riskier sources such as proprietary trading and structured finance. To line their own pockets, Wall Street willingly exposed its shareholders to risks that it would never have assumed with its own capital. This moral hazard set the stage for the enormous losses shareholders are now suffering, and are a direct consequence of the phony profits booked in prior years. However, while shareholders are left holding the bag, Wall Street’s former partners now turned employees have already walked away with huge IPO and stock option windfalls, as well as lavish bonuses paid on phantom profits.

The coming crash will plainly expose these conflicts of interest, and the reaction will be severe. In the end, finance and banking, like manufacturing, will be yet another industry lost to foreign competition. The new financial capitals will likely be in Asia, the Middle East, and Europe. New York will certainly still have a role to play, but much like Detroit, it will be but a shadow of its former self.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

More importantly, don’t wait for reality to set in. Protect your wealth and preserve your purchasing power before it’s too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

-- Posted Friday, 25 January 2008

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The Bank Robbing Effect of Financial Desperation

By: Richard Daughty, The Mogambo Guru - The Daily Reckoning

-- Posted Friday, 25 January 2008 | Digg This Article | Source: GoldSeek.com

I was surprised as hell to see that Total Fed Credit was down by another $1.7 billion last week. This is Big Important Stuff (BIS) because it is this selfsame TFC which creates, as if by magic, new credit to be instantly available in the banks, which is turned into money when someone borrows it from the banks, which makes the money supply go up, which makes the price of something go up immediately (as this new money is used to bid up the price of something, as why else would you borrow money?), and which eventually makes the prices of everything go up as the money gradually diffuses throughout the economy, which makes life miserable for people who don't make more money with which to pay the higher prices, and they get angry and desperate, which probably explains why the Orlando Sentinel newspaper reports that bank robberies in Florida increased 40% in 2007.

A relevant piece by Paul Gores of jsonline.com had the headline, "Bank robberies on the rise", with the subhead, "And more criminals are getting away, FBI statistics show." The point is that not only is bank robbing 40% more popular by 40% than last year, but the FBI used to solve 75% of bank robberies in 2003, but only about half now.

There are a lot of reasons bandied about for this, of course, including the fact that the FBI is spending more of its time on anti-terrorism stuff with those luscious big budgets, freedom from pesky Bill of Rights restrictions or Constitutional restraints, and flashy news-at-eleven glory as they unleash one expensive, intrusive, ineffectual-yet-showy initiative after another to heroically "save America from terrorism!", and now they must spend less time on helping solve some stupid bank robberies because that old-time cops-and-robbers stuff ain't going to help anybody's career in this day and age.

And, of course, everybody has lots of suggestions for expensive ways for banks to fight this scourge of bank robbing, including glass shields for bank cashiers, turnstiles, upgraded video surveillance equipment, employee training, alarm systems, new vaults, new bank designs, and blah blah blah.

The only thing missing was the fact that people would not be robbing banks unless they were desperate for money. I mean, how desperate do you have to freaking be to rob a place that you know has beaucoup alarms, security equipment and cameras all over the place, and where you have a staggering 50-50 chance of being caught and charged with a felony for which you will be found guilty because you are guilty?

The irony is that the REAL crooks are the banks themselves! Hahaha! The Federal Reserve has been wildly, childishly, stupidly moronic in creating so damned much money and credit, year after year, expanding the money supply (monetary inflation), that they have stolen the buying power of your money.

This constant, new supply of money cheapens the existing stock of money, and now the compounded effect is that the filthy, foul Fed has engineered the loss of almost a third of the dollar's buying power in the last five years or so, and in total the Fed has screwed us out of 97% of the value of the dollar that existed when the slimy legislation authorizing the Federal Reserve was slipped through an almost-deserted Congress by a few conspirators on Christmas Eve in 1913.

Thus, the Fed was born in sin, and then lived in it, too, as they immediately set about creating too much money and credit to produce the boom of the Roaring Twenties, which naturally led to the bust of the Great Depression. Nice work, Federal Reserve! Hahahaha!

And now that we have had a decade since that idiot Bill Clinton repealed the Glass-Steagle Act which prevented the damned banks from acting like idiots again and profiteering in the securities markets, we are paying for Bill Clinton's corruption and stupidity, which is another reason not to vote for his socialist wife, as if anyone needed another reason.

And so now, alas, here we are again. The world-record boom of the 90's, started by the absurd Reaganomics with its ridiculous theories of "cut taxes and borrow the money because deficits don't matter", so popular in the 80's, collapsed in 2000, temporarily resuscitated by Greenspan's negative real interest rates (the low interest rate is less than the inflation rate), is now back, and worse than ever because a monstrous housing bubble and collateralized debt markets that he also created are collapsing, too!

The Federal Reserve is, like me (according to my Employee Performance Reviews), laughably incompetent beyond any shadow of a doubt, and that is the One Big Freaking Reason (OBFR) why it is imperative that Ron Paul be elected President of the United States, and why the rest of those clueless campaigning poseurs be rounded up and charged with malfeasance, which I am not sure is a real crime anymore, but it should be, and it WILL be if The Mogambo has to run for President and rig every damned Diebold voting machine in existence since the rest of the American people are too damned stupid to vote for Ron Paul or rig the machines in his favor, which explains why they cannot even vaguely comprehend the enormity of what is happening, even though it is so simple that children understand it intuitively, which I prove by noting that even newborn babies instinctively cry at the horror of a fiat currency and unlimited fractional-reserve multiplication of money by the banks!

To prove it for yourself, go up to somebody with a new baby, and say to the mother "Oh! What a cute baby! May I get a closer look?", and then get right in that baby's face and yell, as loud as you can to get its scant attention, "Fiat currency! Fractional-reserve banking!" You will immediately notice that the baby will start crying! And the mothers usually start yelling and screeching like banshees, too! Everybody knows it!

Well, the essence of the Austrian Business Cycle Theory has nothing to do with babies, but shows how irresponsible monetary inflation must produce price inflation, that monetary inflation is a bad, bad thing (BBT), and thus only a complete moron, completely ignorant of the entire history of the world, would dare to think that inflation in prices is ever benign. It is not. Ever.

The stupid Federal Reserve, on the other hand, actually hopes that the new money is being borrowed and used to buy stocks and bonds, making their prices go up, proving that the Fed DOES know that monetary inflation causes price inflation, even though they think it is a good thing! At least in stocks and bonds.

But now they are desperately hoping and praying that those two major lynchpins of the economy are nice and healthy, and then the banks will be healthy, too, even though the banks have been acting like corrupt skunks for years, which is what banks naturally do, and that is why government is supposed to ride herd on those banker weenies every freaking minute of every freaking day, like my wife does me, as I am just as irresponsible, although even she admits I only ruined her life and the lives of the kids, and not everybody in the country, and arguably the world, like the Federal Reserve has.

But notice how only I get the blame I deserve! And then people want to know why I wallow in self-pity; because it's the only kind I ever get!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.

-- Posted Friday, 25 January 2008

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Société Générale trader hacked into computers
By Gordon Rayner, Chief Reporter
Last Updated: 2:09am GMT 25/01/2008

The rogue trader accused of the biggest fraud in banking history stayed "invisible" for weeks by hacking into his bank's computer system and removing all traces of his multi-billion pound losses, it has been claimed.

Trader flees after £3.7bn Société Générale loss
Jerome Kerviel made a mockery of Société Générale's reputation as one of the world's best-run banks by effectively "switching off" automatic warning systems designed to instantly flag up any unusual trading patterns, it is alleged.

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Despite a massive overhaul of compliance procedures by all banks in the wake of the 1995 Nick Leeson affair, when his fraudulent trading caused the collapse of Barings Bank, SocGen was guilty of a "catastrophic failure" to prevent a similar incident, experts said.

Mr Kerviel is alleged to have used his considerable computing skills and inside knowledge gained during five years working in the bank's compliance department to hide up to £60 billion of illegal trading, which resulted in losses of £3.7 billion.

It was only when he slipped up on Friday by failing to "deactivate" part of the bank's warning system that his alleged fraud was discovered.

SocGen's chairman and chief executive, Daniel Bouton, said: "The ghost trader had an in-depth knowledge of the control procedures resulting from his former employment in the middle office, and he managed to conceal these positions through a scheme of elaborate fictitious transactions."

Despite employing 2,000 people in its compliance department, the bank was seemingly powerless to stop Mr Kerviel gambling with its money.

Ralph Silva, an analyst for the Tower Group financial services firm, said: "This was a catastrophic failure in SocGen's operational risk programme.

"This trader has found some way to beat the system, and the worry for other banks is that their control procedures will always lag behind a determined fraudster."

Mr Kerviel, who is said to have set up fake accounts to take huge bets on the movement of European stock markets, was hauled into the bank's office in Paris's La Defense for an all-night grilling on Saturday, at which point the bank's losses stood between £1.2 billion and £2 billion.

In the time it took the bank to wind down the allegedly false accounts created by Mr Kerviel, the stock markets had plunged and the losses grew to £3.7 billion.

Jean-Pierre Mustier, the chief executive of the bank's corporate and investment banking department, said he was "convinced" the rogue trader had acted alone.

Mr Bouton said: "His motives are totally irrational. It doesn't seem that he was able to benefit from these colossal trades and directly he did not, that is for sure, although investigations will have to be carried out."

Mr Bouton added that Mr Kerviel's salary was: "Not more than €100,000 including bonus. Having said that, he's not received a bonus this year, and probably won't be asking for one."

Shares in SocGen were suspended yesterday. It said it was taking legal action against Mr Kerviel, and that he was facing a possible criminal prosecution.

"Five or six" senior traders who were meant to be managing him were also sacked.

The bank said its full-year net profit would drop to £450-600 million from £3.72 billion a year earlier because of the alleged fraud, and other losses. The bank also announced further loses of £1.5 billion related to the global credit crunch.

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A mess of the banking industry's own making
By Martin Baker
Last Updated: 1:35am GMT 25/01/2008

Commentary

The SocGen fraud story has everyone rubbing their eyes in disbelief. So how could the whole sorry mess occur? The explanation lies in the human stories behind the markets.

Trader flees after £3.7bn Société Générale loss
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For many people who work in banks, numbers become meaningless. In 1995, Nick Leeson's losses of £860 million were enough to bring down Barings Bank. But he apparently had been in an even worse mess and traded his way out of it before he got caught.

Numbers are just a form of metaphor (in the City after all, a million pounds, once a fortune, is now known as a "bar"). So after a while it becomes a game and the trader can't let go - online poker for the global economy.

Concealment is another matter. Here, office politics kicks in. If you know the IT systems people - as, apparently, Jerome Kerviel did - you can create a mosaic of partial information.

Lots of colleagues do you little favours without knowing the full set-up. In Leeson's case there was the fateful 88888 account - a suspense account disclosing the full horror of the losses.

Finally, there's the star system. Traders who make money become gods in their own little universe. Senior management doesn't question the golden goose. They let the stars - and the lowly Kerviel was an aspiring one - set up their own departments; they give them huge bonuses.

They want to believe in the stars because it's easier that way. Serious management control and internal audits go begging.

Consider the narrative: a young, Paris-based trader loses billions. The activity can be hidden because of internal politics. Once the story breaks, the media latches on to the individual and he becomes a rogue trader.

You can be sure that Kerviel will morph into a financial version of Lee Harvey Oswald (operating alone - it's never senior management's fault). Amid a rising tide of panic, the trader is sacked and then goes missing.

• Martin Baker is a financial commentator and author. He is married to Nicola Horlick, one of the City's best-known fund managers. His latest novel, Meltdown, is published by Macmillan; price £10.

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Société Générale rogue trader: Q&A
By Gordon Rayner, Chief Reporter
Last Updated: 1:35am GMT 25/01/2008

After a rogue trader with France's Société Générale was accused of the world's biggest banking fraud - with losses of £3.7 billion - the Daily Telegraph answers the key questions at the heart of the scandal.

Trader flees after £3.7bn Société Générale loss
Gordon Rayner: The 20 biggest trading disasters
What exactly did Jerome Kerviel do?

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Mr Kerviel's job was to take out "hedges" - effectively covering bets against the bank's major trades, so that if his colleagues were betting on the markets going up, he would make bets on the markets going down so that any losses would be partly covered by the hedges.

But instead of sticking to his straightforward, junior role, he is alleged to have fraudulently set up fake accounts to trade on the futures markets, using the bank's money to bet heavily that the markets would go up, in a form of spread betting, when in fact the markets slumped and incurred huge losses which totalled £3.7 billion by the time he was caught last Friday.

How did he get away with it for so long?

The rogue trader began his activities in December, when he managed to break even, then started again earlier this month, when his losses began to mount.

His bank, Société Générale, employs 2,000 people in its compliance department, who should normally spot any irregular trading patterns within minutes using an automatic computerised warning system.

But Mr Kerviel, who had previously worked in the compliance department, was a computer whiz who knew how to turn the warning system off and disguise his losses.

What will happen to him now?

The bank is in the process of sacking him and his immediate managers, who were directly responsible for overseeing his work, but it seems certain he will now face criminal proceedings over what is alleged to be the biggest bank fraud in history.

What happens to the bank?

Although SG, France's second-largest bank, was able to absorb the £3.7 billion loss and still turn in a profit, the actions of its rogue trader could still have long-term implications.

Steven Philippsohn, the head of fraud at City solicitors PCB Litigation, said: "The bank could face substantial fines from the French banking regulators, its directors could face disqualification proceedings and the shareholders may well take action against the directors for any drop in the value of shares.

"Added to that, of course, is the huge loss of confidence which the bank is likely to suffer."

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Le Rogue Trader: Financial world left stunned by £3.7bn fraud
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By John Lichfield in Paris
Friday, 25 January 2008

The world of high finance, already shaken by the imprudent greed of some of its biggest corporate names, was stunned yesterday by the largest ever fraud by an individual "rogue" trader.

Jérôme Kerviel, a Frenchman aged 31, working for Société Gé*érale, one of the world's most reputable banks, lost almost €5bn (£3.7bn) in a series of complex, concealed deals on European stock derivatives.

The relatively junior bank employee, who earned less than €100,000 a year, managed to evade supposedly fraud-proof safeguards to stake an estimated €50bn – which is more than the GDP of Slovenia, Uganda or Cuba – on the future direction of European stock markets. France's second largest bank had to scramble desperately to abandon his concealed trades on Monday and Tuesday, against the calamitous background of sharply falling European stock exchanges.

According to one, unconfirmed, report, M. Kerviel was on the run last night after admitting his actions last weekend. Senior officials of SocGen said they "knew nothing" about his whereabouts. They admitted they had let him "go home" last Saturday and had kept the fraud secret until they had closed down his illegal deals. Officials said M. Kerviel was in a "fragile" mental state after family problems and had possibly acted out of "malevolence".

The massive fraud came at the worst possible time for the global finance industry. It will renew doubts about the stability, and ruling morality, of leading banks in the wake of the global recession threatened by the sub-prime crisis in the United States and beyond.

The French bank's president and chief executive Daniel Bouton, described the trader's behaviour yesterday as "totally irrational". He said there was no evidence of self-enrichment through embezzlement of funds.

M. Kerviel was an expert on the bank's computerised, anti-fraud protections from his previous work in another, junior managerial post. He was promoted to the bank's financial futures desk, Delta One, in the La Défense business district, west of Paris, two years ago.

In the space of the past year, he is believed to have set up an independent, "virtual" company at the heart of SocGen. He created a morass of larger and larger, unauthorised trades. He disguised them by seeming to cancel them on the computer and replacing them with, other, more reasonable but fictitious deals.

Unnoticed by his superiors, M. Kerviel bet huge sums – much larger than he was authorised to commit – on stock market "futures". He is also suspected of hacking into the bank's computers to alter data and cover his tracks.

The scale of M. Kerviel's losses dwarfs any previous fraud by any individual "rogue" trader. Société Gé*érale, a pillar of the French financial establishment since the 19th century, estimates its losses as €4.9bn or $7.2bn. That is almost five times as much as the $1.38bn blown by the British trader Nick Leeson on the Asian futures market in 1995: losses that destroyed the British merchant bank Barings. The money lost by the French bank approaches in dollar terms the $10bn wiped out by the world's biggest banking scandal, the collapse of the fraudulent Bank of Credit and Commerce International in 1991.

Société Gé*érale, the French government and the banking world sought yesterday to portray the disaster as the results of the deranged and inexplicable behaviour of a single individual. However, the calamity generated awkward new questions on the reliability of the anti-fraud defences erected by banks since the Leeson affair and similar rogue trading scandals in the US and Japan,

"We get the feeling that the financial markets have become a big casino which has lost control. It seems incredible that Société Gé*érale can lose €5bn through one operator," said Alain Crouzat, a portfolio manager at Montsegur Finance in Paris.

Centre-left French politicians asked if there was any moral difference between a single employee carried away with a desire to make a financial killing and the large US, and other, banks who had been swept along by the profiteering craze for "sub-prime" or unsound loans.

François Hollande, leader of the Parti Socialiste, called for new legislation to enforce more "transparency" in large transactions by French banks.

France has, until now, been relatively sheltered from the sub-prime crisis. Société Gé*érale had been a European leader in investing in new forms of financial instruments. It admitted yesterday, it had also lost €2.2bn on bad US investments, infected by the sub-prime virus. The bank, nonetheless, managed to record a profit of €800m in 2007 (compared to €5bn in 2006).

Unlike Barings, SocGen, the 13th largest bank in Europe, is not in danger of collapse. It has already raised over €5bn on the markets to help replace its losses.

The bank's shares were at first suspended yesterday but then fell more than 4 per cent when trading resumed. A group of 100 shareholders in SocGen then began a civil lawsuit against unnamed bank officials for "fraud, breach of trust, use of forged documents, complicity and receipt of stolen goods".

M. Kerviel also faces criminal action. The bank has begun legal proceedings against him for "forgery" and "intruding" into its computer hard disks. He and all the managers responsible for him have been fired. M. Bouton, offered to resign earlier this week but was asked to carry on by his board.

M. Kerviel worked for a division of the bank that traded in stock exchange "futures". More specifically, he worked on so-called "plain vanilla" futures – bets on the direction of European share prices.

Plain vanilla futures are relatively simple financial instruments that take out a position on the upwards or downwards direction of stock exchanges and can be cancelled up to an agreed date.

SocGen said yesterday it had uncovered the fraud in a routine inspection last weekend. M. Kerviel had evaded detection because he knew when the inspections took place. Finally, he made a mistake.

He admitted his actions last weekend and was allowed by the bank to go home. Senior bank officials admitted yesterday it might have been a "mistake" but they were anxious to conceal the fraud until they had taken action to abandon M. Kerviel's massive cat's cradle of illegal trades.

When the full extent of the fraud was uncovered – amounting to an "accumulator" bet of more than €50bn on rising share prices – European stock exchanges were in freefall on Monday. A taskforce of the bank's most senior officials – sworn to secrecy – scrambled to sell off the futures and save as much of the money as possible. "It was the worst two days of my life," one bank official told Le Monde.

M. Bouton told a press conference that initial investigations suggest the trader was acting alone: "It was an extremely sophisticated fraud in the way it was concealed." But he said the trader's actions were "totally irrational". There was no sign that the dealer had sought to make personal gains.

"From his trading position, he created his own clandestine business within our trading floor ... He managed to hide each position he took by taking other positions."

Another SocGen official described M. Kervile as "relatively junior, not one of our stars." Small wonder, if the trader was working, not for SogGen, but on his own, mysterious network of trades.

The man who broke a bank – and other trading disasters

Yasuo Hamanaka

Sumitomo; Lost £1.3bn in 1996

Hamanaka, a chief copper trader at Sumitomo Corporation – one of the largest trading companies in Japan – was jailed for eight years in 1998 after it emerged he had conducted off-the-book and bogus trades for more than 10 years. At first, Hamanaka's fraudulent activity, driving up the price of copper, had made Sumitomo huge profits, but eventually cost the corporation £1.3bn.

Nick Leeson

Barings; Lost £827m in 1995

Leeson, who worked in Barings' Singapore office, at first made great profits for the bank through unauthorised speculative trades in derivatives and futures. His efforts added £10m to Barings' annual income and earned Leeson a bonus of £130,000. However, his luck turned and he began hiding his trading losses in one of the bank's error accounts. The losses grew to £208m by the end of 1994 as he made more desperate attempts to recoup the money. Leeson fled in February 1995 after taking a final gamble that the Toyko Stock Exchange would not move significantly overnight. It would have been a pretty safe bet, had the Kobe earthquake not struck, sending Asia's markets into a frenzy. Leeson left a note saying "I'm sorry". The bank's losses at this stage were £827m, twice the bank's trading capital. After a failed bail-out attempt, Barings was declared insolvent, after more than two centuries of trading, on 26 February. In December 1995, Leeson was jailed for six years Singapore, and was released in 1999. He is now the commercial director of Galway United FC.

Toshihide Iguchi

Daiwa Bank; Lost £557m in 1995

Iguchi, a former car salesman who rose to become one of Daiwa's senior US executives, confessed in 1995 that he had lost £557m through unauthorised bond trading. Hiding his losses from his bosses while he tried to trade back to a profit, Iguchi sometimes traded as much as £250m worth of US Treasury securities in a day. It emerged he had falsified more than 30,000 trading slips over a decade. He was jailed for four years for fraud and falsifying documents, and had to pay £1.3m in fines.

John Rusnak

Allied Irish Bank (AIB); Lost £350m in 2002

Rusnak was a Baltimore-based currency trader for Allfirst bank, which had been part of the AIB Group. Betting mainly on the Japanese yen, Rusnak used fictitious options contracts to hide his trading losses of more than £350m over several years. By 2002, when checks revealed the bank's exposure, Rusnak had secretly bet £3.8bn of AIB's money on the yen rising against the dollar – a good deal more than his trading limit of £1.25m. Rusnak faced a jail sentence of 30 years, but achieved a 7.5-year term after a plea bargain with US prosecutors. He will have to pay £500 a month when he is released, and is still liable to pay back all of the £350m he lost.

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No amount of monitoring will stop a determined trader
By Tom Stevenson
Last Updated: 12:28am GMT 25/01/2008

Have your say Read comments

The emergence, and disappearance, of a rogue trader at Société Générale could not have come at a worse time. Confidence in the banking system was at rock bottom, shattered by a cocktail of slack lending, incompetence and greed. Now an alleged fraud has been thrown into the mix.

Read more by Tom Stevenson
Société Générale in danger of takeover
Jérome Kerviel joins an illustrious group of mavericks who have single-handedly brought their employers to the brink or, in the case of Nick Leeson, pushed them clean over the edge of the abyss.

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He takes his place with Sumitomo's "Mr 5pc" Hamanaka, who illegally cornered the copper market for 10 years, and Peter Young, who ran up huge losses at Morgan Grenfell before sweeping into City of London magistrates' court in a dress. Who said finance was dull?

The similarities between Kerviel's case and Leeson's are striking - both learned how to conceal their trades while working in the back office, both maintained the pretence for a surprising period of time, both appeared to be in it for nothing more than a bigger bonus, both ended up on the run.

It will take time for the full picture to emerge. How, for example, someone whose role was the simple hedging of SocGen's proprietary positions thought he could get away with massive bets on the direction markets would take. How a relatively junior trader could run rings around the internal controls of a bank with one of the industry's most admired derivatives operations. How, after the rapid growth in the last 10 years of compliance, this could happen again. Clearly, no end of monitoring, oversight and box-ticking can prevent a determined trader.

Where does this leave SocGen? Most likely still standing, after its success in getting away a rescue rights issue. Even throwing in some sub-prime losses failed to wipe out last year's profits.

If it were not French and a perceived national champion, SocGen's future independence would look less certain. Most of its peers anyway have too many problems of their own to contemplate a bid. Maybe it wasn't such a bad time to join the rogues' gallery.

All this drama just adds to the fun

FTSE 100 sees biggest ever one-day rise
It is an indication of how feverish the markets have become in this most extraordinary of weeks that Kerviel has been credited not just with bringing France's second biggest bank to its knees but with single-handedly causing Monday's global share price collapse.

The whisper is that SocGen had to close out such massive futures positions so quickly that the whole system was destabilised.

The beauty of this story is that it's impossible to know one way or the other. As with men in Afghan caves shorting airline stocks ahead of the 9/11 attacks, it is destined to become accepted wisdom whether it's true or not.

Whatever the cause, this will go down as one of the most spectacular weeks in market history. The 266.5-point rise in the FTSE 100 was the biggest points rise ever and came three days after the biggest fall.

Follow the markets in Ben Bland's Market Forces
A scarcely believable 13 FTSE 100 stocks rose by more than 8pc yesterday, three of them by more than 10pc. The City desk has never been such fun.

Darling's dithering over CGT has lost him trust

Darling bows to pressure on CGT reform
Alistair Darling's climbdown on capital gains tax represents the worst of all possible outcomes for the Chancellor. It costs him £200m, confirms the Government's reputation for dithering and fails to rebuild the confidence of the business community.

By reducing the proposed CGT rate from 18pc to 10pc on the first £1m of business gains, the Chancellor makes a shrewd calculation that 90pc of the 80,000 or so businessmen who sell up each year will be better off. Corner shopkeepers are happy but on any other measure this concession is a failure.

Most obviously the creation of yet another tax tier trips up on the simplicity test with which the Chancellor set out his stall soon after moving into Number 11.

Secondly, the concession fails to address the concerns of the more ambitious entrepreneur, the risk-taker creating jobs and wealth. A businessman making £10m on the sale of his company will now pay £1.72m in CGT rather than £1.8m. He's not 80pc worse off than before, just 72pc. Wow.

Thirdly, the abolition of taper relief means Britain is uniquely tackling the global growth slowdown by increasing the tax burden on businesses already facing higher input costs, wage pressures and wilting demand.

The Chancellor's only significant tax measure to date was a shambles from the start, launched on the hoof to pay for a hasty response to the Tories' pre-emptive strike on inheritance tax.

Adding insult to injury, Mr Darling has prevaricated for so long before tweaking his plan that businessmen and their advisers now have only a few weeks to organise their affairs before the new rules come into force in April.

Around 18pc of recently polled businessmen said they trusted the Chancellor. Presumably that will soon be cut to just 10pc.

tom.stevenson@telegraph.co.uk

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From The Times
January 25, 2008
High ambition and low tricks behind world's biggest scam

Charles Bremner, Adam Sage and Marie Tourres in Paris
The SocGen announcement

A junior employee was blamed last night for committing the biggest financial fraud in history after gambling away £3.7 billion on the stock market.

To his banking colleagues Jérôme Kerviel, 31, was a lowly and unassuming employee at Société Générale in Paris, getting by on a relatively modest £74,000 alongside traders who earned millions. Yet he was the mastermind behind the biggest scam banking has known, dwarfing the fraud committed by Nick Leeson at Barings and making a mockery of the bank’s sophisticated fraud detection systems.

“He was not one of our stars,” a senior board member, who declined to be named, said. Another described him as “a fragile individual” who was “without particular genius” and faced family problems. He is believed to have suffered a recent family bereavement and been unable to take a holiday for more than a year.

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Last night it was unclear whether Mr Kerviel had pulled one final act of audacity by eluding capture, with bank executives unable to say whether he was in custody. His lawyer, Elisabeth Meyer, was quoted saying: “He is not running away. He is at the disposal of the police.” SocGen defended itself for failing to hand Mr Kerviel over to police after his alleged confession during an all-night interview with executives on Saturday. “Perhaps we made a mistake in that respect, but the authorities will pass judgment on it,” Daniel Bouton, the chairman, said.

There was also intense speculation that Mr Kerviel was unlikely to have acted alone. He used false client names and was apparently able to bypass SocGen’s control systems after working in the back office of the bank’s trading rooms, identifying flaws and weaknesses in a system that cost hundreds of millions of euros to install. But it is thought he was caught out when he forgot to override the bank’s alert system and the risk department noticed an unfamiliar client.

The disclosure was a new blow to trust in a financial system already in turmoil with the US sub-prime crisis. It also represents a severe blow to President Sarkozy at a difficult time for his administration. SocGen, which traces its origins back to Napoleon III, is a pillar of the French Establishment with close links to the political elite in Paris. Many of the bank’s senior executives are former civil servants. The fraud wiped out a year’s worth of profit for France’s second bank, a Gallic flagship that was state-owned for many years.

Mr Kerviel’s exploits were greeted with disbelief. For Christian Noyer, governor of the Banque de France, it was “unimaginable” that one lowly person could get away for a year with illicit dealing from his computer at SocGen’s towers at La Defense, Paris.

Michel Marchet, a bank trade-union official, told The Times: “He didn’t cheat for himself. It was a game. He wanted to pull off a big hit and score a fat cheque. He was a clean-cut young man who apparently had difficulties in his private life.”

Shareholders’ groups said that they were stunned that the bank, which is known for its rigour, had failed to spot positions in futures trading that amounted to about €30 billion.

The whereabouts of Mr Kerviel were unknown as police started a criminal inquiry. SocGen sacked him and five of his superiors. It depicted his actions as solitary, perverse, cunning and not aimed at personal gain.

The tale of Mr Kerviel’s alleged year of secret trading was related painfully by Mr Bouton, the chairman and chief executive of SocGen for six years. Mr Bouton, originally a member of the French civil service elite, offered his resignation at a board meeting, but was asked to stay on.

He said that the bank’s chiefs were alerted last Friday to an anomaly in the trader’s handling of futures contracts on European stock market indices. Questioned over the weekend, Mr Kerviel confessed to running “a concealed enterprise using the tools of Société Générale, with the intelligence to escape all control procedures”.

After reporting to the authorities, the bank made no announcement while it spent three days frantically selling off the misguided bets, worth billions of euros, that the trader had taken on the rise of markets. Word of the fraud could have sent the international market reeling, Mr Bouton said. “If we had announced it on Monday morning, the loss would have been ten times higher,” he said. “Its scale would have destabilised the whole market.”

The bank suffered from a nightmare in timing because equities tumbled for two days just as it was trying to close out the gamble on rising indexes, Mr Bouton said. A member of Mr Bouton’s team said: “These have been the hardest five days of our lives.”

The chairman apologised to shareholders for “this terrifying accident” which added to a ¤billion loss in the sub-prime collapse. He emphasised that the fraud was an exception that stemmed from an employee who had learnt how to disguise his actions from the bank’s rigorous monitoring system. He had worked for his first five years in the “middle” and “back” offices, which check transactions. “As a trader, he knew the system and stayed one step ahead of the controls.” Mr Bouton said. He added that he would forgo six months of his chairman’s salary in order to repair some of the damage.

The trader had no authority to carry out more than small hedging operations with so-called “plain vanilla” futures. He had used highly sophisticated techniques to multiply the volume of his transactions, Mr Bouton said.

Mr Bouton said that the existence of SocGen was not threatened by a fate similar to Barings, which closed after Mr Leeson lost £800 million in 1995. The bank will still report a profit of about €800 million for 2007, he said.

Jean-Pierre Mustier, chief of the bank’s corporate and investment banking, said that that he had interviewed the trader and was convinced that Mr Kerviel had acted alone.

The claim was greeted sceptically by shareholders’ groups. Frederick-Karel Canoy, a lawyer who filed a suit on behalf of shareholders, said that Mr Kerviel should be given a medal for ingenuity if he had acted alone. “There was negligence by the firm. The trader is being made a scapegoat. There is a lot of hypocrisy and connivance in that milieu,” he told The Times. “It is not impossible that they have bought the trader’s silence.”

Gilles Glicenstein, president of asset management at BNP Paribas, SocGen’s chief rival, stepped in with support. “It shows that we are in a very troubled period for banks, and I think that it is in such troubled periods that difficult things happen,” he said. His words did not dampen speculation that SocGen could now be swallowed up in a takeover by BNP.

How to lose

1.You work for one of the world’s biggest investment banks, and spend time in the unglamorous back office learning how to circumvent the risk controls

2.You take out bets on the future movements of world stockmarkets

3.If you think that, for example, the FTSE 100 will rise you go to the futures market and place a bet

4.Someone at another bank, who thinks the FTSE will fall, matches the bet

5.The FTSE falls and you lose money; the FTSE rises and you win. It’s an open-ended bet, so your wins and losses will fluctuate with the markets

6.If you start to lose, you hide your trades and double up your bets to try to recover the losses

Jérôme’s bets

A. Jérôme Kerviel bets that in 2007 markets will fall and in 2008 they will rise

B. He can hide these bets because his former job in the bank taught him how to avoid security systems designed to prevent workers from making unathorised investments

C. On January 19 bank chiefs disciver the hidden bets

D. On January 21 the bank began to close the open bets. Most are that stockmarkets will rise but on Monday global markets plunge, forcing the bank to accept a £3.7bn loss

E. Other traders react to sudden market movements helping to foster panic and trigger more selling in already nervous markets

F. The Fed takes fright at the market meltdown and responds with its biggest emergency cut to base rates in

Buzz words

Financial instrument A tradable share in a company, a currency, a standardised commodity, such as a barrel of oil or bushel of wheat, or any financial product based on these

Plain vanilla Term given to the most basic or standard financial instruments, such as a share

Derivatives Financial instrument, the price of which is derived from the underlying value of something else, which can be as diverse as a share market index or the price of wheat. Futures and options are types of derivatives

Futures Financial contract that obliges the buyer to purchase an asset, or the seller to sell an asset, at a set price at an agreed date in the future

Option A financial derivative that gives the holder the right, but not the obligation, to buy or sell a security or another financial asset at an agreed price during a certain period of time or on a specific date. Traders use options to speculate, which is a relatively risky practice. Hedgers use options to reduce the risk of holding an asset

Going short Betting that the price of a financial asset will fall

Biggest losers

$2.6bn lost by Yasuo Hamanaka a Japanes copper trader in 1996

$1.4bn lost by Nick Leeson a trader with Barings Bank. The bank folds as a result

$1.1bn lost over 11 years by Toshihide Iguchi, a bond trader at Daiwa Bank

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