Police question trader blamed for SocGen loss

Sat Jan 26, 2008 4:55pm EST
By James Mackenzie and Andrew Hurst

PARIS (Reuters) - French police questioned a junior trader on Saturday blamed for causing a $7 billion loss at bank Societe Generale after keeping his superiors in the dark for months about thousands of illicit deals.

A judicial source said Jerome Kerviel, 31, was in custody at the headquarters of the finance police in southeast Paris.

Police can hold suspects for an initial 24 hours of questioning and then seek a 24-hour extension before prosecutors decide whether or not to open the procedure for laying charges.

On Friday, police visited the gleaming Societe Generale offices where Kerviel worked until last weekend, poring over his computer records, and also searched the apartment where he lived on the western outskirts of Paris.

Kerviel's family say he is being made a scapegoat for the world's worst rogue trading scandal.

The crisis was revealed on Thursday when SocGen said one of its more junior traders had found a way around internal checks to make huge bets on the future direction of stock exchange prices and then covered his tracks as losses piled up.

The bank itself discovered the illicit positions eight days ago and unwound them at the start of this week as financial markets plunged, compounding the losses.

Authorities are putting pressure on SocGen's managers to explain how a bank that won accolades for innovation and boasted state-of-the-art risk controls could have been tripped up by a junior trader acting alone.

The scandal at Socgen struck at the height of a global credit crisis, set off by a meltdown in U.S. subprime mortgages, which has forced banks around the world to take tens of billions of dollars in charges as the value of their exposures crumbled.

SARKOZY DEMANDS REFORM

French President Nicolas Sarkozy demanded changes to the running of international financial markets in the wake of the fraud scandal at Societe Generale, saying it was time to restore a sense of proportion.

"We have to put a stop to this financial system which is out of its mind and which has lost sight of its purpose," Sarkozy said on Saturday while on a visit to India.

"If one can make profits in a few hours, one can also make gigantic losses in a few hours as well. And it is time to realize that (we need) to insert a bit of wisdom into all these systems."

When it announced the fraud, SocGen also unveiled a writedown of 2.05 billion euros on subprime-related exposures. Until then, SocGen had not taken any significant charges despite constant market rumors it faced substantial liabilities.

The fraud scandal struck a heavy blow to SocGen's investment banking business, which acquired an international reputation for sophisticated financial engineering.

A picture of how Kerviel was able to hide his massive trades has been gradually taking shape as his managers speak to the media about the affair.

"MUTATING VIRUS"

SocGen's Executive Chairman Daniel Bouton compared the bank's downfall to a Greek tragedy as Kerviel desperately attempted to conceal his huge bets on a fall in stock market prices, but only deepened his predicament in the process.

Kerviel was able for months to keep one step ahead of his supervisors by manipulating fictitious trades and evading checks like "a mutating virus", Bouton said in an interview with Paris daily Le Figaro published on Saturday.

Jean-Pierre Mustier, head of SocGen's investment banking unit, told the Financial Times the rogue trader was managing hundreds of thousands of concealed deals and an equal number of fake hedges to give the appearance that any loss was offset.

"Every two or three days, he was changing his position. He would input a transaction that would trigger a control in three days and before that happened he would replace it with a different one," Mustier was quoted as saying.

SocGen has lodged a complaint with police based on three main charges -- fraudulent falsification of bank records, fraudulent use of such records and computer fraud. A group of small SocGen shareholders have also filed a complaint, which includes accusations of fraud and breach of trust.

The various charges carry maximum prison terms of between 2 and 5 years, plus fines of up to 375,000 euro ($549,500).