Société Générale: What Went Wrong 27 January 2008
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Rogue traders. First it was Barings, then now Société Générale.For Société Générale, five questions must be asked:
Société Générale, The Events (as we understand them) January 7 2008 Mr Kerviel makes a series of bets that Germany’s Dax index, the French Cac40, and the Euro Stoxx 50 would rise. He buys futures contracts, as normal, but does not hedge against market falls. (Hedging would usually involve selling the underlying shares, or over-the-counter derivative contracts with clients.) Eleven days later, internal controls identifies suspicious activity. By then the Euro Stoxx 50 has fallen by a cumulative 7 per cent, and the position has generated (according to SocGen), a loss of between €1.5bn and €2bn. This implies Mr Kerviel had taken a notional long exposure of €21-€29bn. Jan 18, 2008 SocGen shares plunge 8.2 percent, with traders and fund managers citing market speculation of huge write-downs at the bank.The International Herald Tribune runs a report on its Web site saying that Bank of France Governor Christian Noyer has been monitoring the balance sheets of banks such as SocGen. The Bank of France later denies that Noyer ever said this.Later that evening, a compliance officer notices a trade that has breached one of the bank’s thresholds. The officer telephones another brokerage, with which SocGen had apparently made the trade, and is told that the firm has no record of any such transaction taking place. Jan 19/20 2008 On Saturday, SocGen senior executives begin investigating suspicious trades which are traced to Kerviel. The trader is hauled in and top management questions him. Kerviel is questioned by the SocGen board. Jan 20 – Bouton says he informs the Governor of the Bank of France and the head of France’s AMF stock market authority when he learns of the situation. Jan 21 2008 SocGen management decides to liquidate positions. Equity markets plunge that day, with many stock indexes suffering their worst one-day close since the terror attacks of Sept. 11, 2001. SocGen’s decision to close down the position in a falling market means the bank makes even more of a loss than it would have done in a more usual market environment. Market traders later wonder if the SocGen rogue trader was partly responsible for the global equity market slump. Jan 24 0700 GMT SocGen issues a statement saying it has uncovered a 4.9 billion euro fraud at the bank. It says Bouton and Jean-Pierre Mustier, head of investment banking, tendered their resignations but these were not accepted. 1000 GMT – SocGen holds press conference to discuss the fraud. Bouton says the bank does not know the whereabouts of the trader whom it does not identify. 1525 GMT – SocGen sources identify the trader as Kerviel. A photo of Kerviel from the SocGen internal website is soon circulating around dealing rooms and fund management houses in Paris. Jan 24 2008 SocGen issues a statement saying it has uncovered a 4.9 billion euro fraud at the bank. It says Bouton and Jean-Pierre Mustier, head of investment banking, tendered their resignations but these were not accepted. At 1000 hours GMT SocGen holds press conference to discuss the fraud. Bouton says the bank does not know the whereabouts of the trader whom it does not identify. At 1525 GMT SocGen sources identify the trader as Kerviel. The Key Issues
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