for 5-billion-euro French bank fraud
loss on the physical sale of corn will be offset by her $200 gain on the
futures hedge. Because prices in the cash market supposedly parallel
one another,67 the purchase of the offsetting futures contract, and
subsequent profit on the futures transaction, protects against a decline
in the cash price of the producer's inventory.6' In other words, the
futures markets provide an insurance function for the hedger.'
The second purpose of futures markets is to provide a means of "speculation."7 In contrast to the hedger, the speculator" is willing to
assume either the long or short position depending upon in which
direction the speculator believes that prices will move.' Speculators,
although highly criticized73 and regulated,74 perform an important
function in that they "transfer risk from hedgers to speculators who
are willing to bear it and can presumably afford it."5 Although
Congress recognized the benefit speculators offer to the market, 76 it
also sought to limit detrimental speculation." Section 4a(a) of the
CEA, entitled "Excessive Speculation-Limits On Trading,"
authorizes the Commission to set limits on both the positions (i.e. the
quantity of futures contracts a trader either purchases or sells) and the
daily volume of trading in a particular contract. 8 The excessivey suspended at the bank's request and stock closedRogue trader blamed 4.14 percent down on news of the fraud and a 2.05 billion euro loss in the US subprime mortgage market.
The bank said the losses cut its 2007 profit to 600-800 million euros from 5.2 billion euros in 2006 and that it needed a capital increase of 5.5 billion euros to restore its balance sheet.
The fraud is another blow to investor confidence in a global banking sector already suffering from multi-billion dollar writedowns at some of the biggest lenders in Britain and the United States.
The case dwarfs that of Nick Leeson, the original British "rogue trader" who lost 1.5 billion dollars at Barings, causing the failure of the venerable British bank in 1995. Leeson commented Thursday that the international banking system "is as vulnerable as it was in my day."
French Prime Minister Francois Fillon -- speaking at the World Economic Forum in Davos -- said the fraud was "a serious matter but at the same time, it has nothing to do with the current situation on the global financial markets."
Societe Generale chief executive and chairman Daniel Bouton said the trader had used "extremely sophisticated and varied techniques" to carry out the fraud and that he "had the intelligence to escape all control procedures."
The bank, which insisted he had acted alone, said he took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority."
Experts however had trouble accepting that a trader could have managed to successfully hide such colossal losses.
"It seems a bit much to believe that for an entire year this would have gone undetected," said Elie Cohen, a professor of economics at the Paris Institute of Political Studies.
"One person alone cannot trigger such a catastrophe," commented Arnaud Riverain from the private firm Arkeon Finance. The bank's trading desk must have suffered from some "dysfunction", he said.
Kerviel, who earned less than 100,000 euros per year, allegedly built up the huge losses dealing in derivatives tradings.
"The transactions which involved the fraud were simple -- taking a position on shares rising -- but hidden using extremely sophisticated and varied techniques," said Bouton in a statement.
He said the trader had been suspended after confessing to the fraud and that legal action would be taken against him.
Asked about his whereabouts, Bouton responded: "I don't know where he is."
One of France's three biggest banks, Societe Generale filed a court complaint against the trader, accusing him of falsifying bank documents, using falsified bank documents and unauthorized computer access.
And as the Paris prosecutor's office opened a preliminary investigation into the scandal, scores of shareholders lodged suit against the bank for fraud and misconduct.
The bank has already announced it was firing executives "responsible for the supervision and controls on the operations concerned."
Bouton, whose offer to resign was rejected, said both he and his deputy Philippe Citerne would forego their salaries for six months and their bonuses for 2007.
Finance Minister Christine Lagarde said she had asked the country's banking regulator to bring in tougher controls in response to the scandal.
Societe Generale said in a statement that the rogue trader had been carrying out what it called "vanilla futures hedging" on European equity markets -- industry jargon for the most basic kind of futures purchase.
It said he had an in-depth knowledge of the bank's control systems, and managed to cover his tracks "through a scheme of elaborate fictitious transactions."
These were discovered and investigated on January 19 and 20, it said.
A Societe Generale union source said it appeared that the trader had not acted for personal profit.
"The trader in question was experienced, knew how the bank worked. It seems he was playing the markets, but not for his own profit, and caused enormous losses," the source told AFP.
A human resources official described him as a "fragile" individual, "without particular genius" and facing family problems.
The scandal is only the latest of its kind to hit the international finance industry.
Three years after Nick Leeson caused the meltdown of Britain's Barings bank, Japanese trader Yasuo Hamanaka was jailed in 1998 for a decade of rogue trading which cost the Sumitomo Corporation of Japan 2.6 billion dollars.
In 2002 John Rusnak, a trader employed by Allied Irish Bank, was jailed for seven-and-a-half-years by a US court for losing the company 750 million dollars through unauthorised currency trading.
Societe Generale's stock has lost 20 percent of its value since the start of the year and 50 percent since last May.
The Fitch credit ratings agency lowered its ranking for Societe Generale debt to AA- from AA. Some analysts said the bank risked becoming a takeover target.