French bank uncovers massive fraud
Updated: 2008-01-24 20:02
If confirmed, the fraud would far outstrip the Nick Leeson trading scandal in 1995 that bankrupted British bank Barings. Barings collapsed after Leeson, the bank's Singapore general manager of futures trading, lost 860 million pounds, then worth US$1.38 billion, on Asian futures markets, wiping out the bank's cash reserves. The company had been in business for more than 230 years.
The Bank of Credit and Commerce International failed after a 1991 scandal that led to claims by depositors and creditors exceeding US$10 billion at the time.
Gilles Glicenstein, president of asset management at rival French bank BNP Paris, France's largest, said, "It shows that we are in a very troubled period for banks, and I think that it's in such troubled periods that difficult things happen."
"This is not good news for Societe Generale, but also for banks in general. It can create doubt, but at the same time in this period, we are making efforts to be transparent in order to give confidence back," he said at the World Economic Forum in Davos, Switzerland.
Axel Pierron, senior analyst at Celent, an international financial research and consulting firm, was stunned that a trader could be involved in such a massive fraud 13 years after the Barings Bank collapse.
"The situation reveals that banks, despite the implementation of sophisticated risk management solutions, are still under the threat that an employee with a good understanding of the risk management processes can getting round them to hide his losses," he said.
At Societe Generale, the fraud announcement came on the back of subprime-related difficulties. Subprime writedowns linked to the crisis in financial markets amounted to 2.05 billion euros (US$2.99 billion), Societe Generale said.
The Paris-based bank said that with the fraud and writedowns, it expects net profit of 600 million euros to 800 million euros (US$874 million to US$1.16 billion) for all of 2007.
The Bank of France said it was immediately informed of the fraud and was investigating. The French market regulator said it had no comment. France's Banking Federation also declined to comment.
Shares of SocGen were suspended after falling 4.1 percent to 79.08 euros (US$115.25) Wednesday. Full-year results will be announced Feb. 21.
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