Nothing beats a good trading scandal

The past week has produced a frenzy of headlines, from the FTSE index hitting seven-year lows and the Federal Reserve's surprise 75 basis point rate cut, to the billions of dollars in writedowns at major dealers. But nothing grabs the attention as much as a good old-fashioned trading scandal.

The revelation last Thursday that Société Générale (SG) had suffered a €4.9 billion loss at the hands of a rogue equity index futures trader certainly was a change from the usual reports about the US subprime crisis and fears of declining global economic growth.

The French bank said on Thursday morning that the trader, Jerome Kerviel, had taken "massive fraudulent directional positions" in European equity market index futures in 2007 and 2008, "beyond his limited authority". He then hid the positions by logging non-existent transactions - as a former middle-office employee, the bank said, he was able to do so and avoid detection for some time. Now that's more like it.

The fraud was the largest in investment banking history, dwarfing the $1.4 billion trading scandal that collapsed Barings Bank in 1995, and reminiscent of Citibank, China Aviation Oil and National Australia Bank in 2004, Amaranth and Deutsche Bank in 2006 and Calyon in 2007.

In a letter to the bank's customers, SG chairman Daniel Bouton said he first learned about the trades on Saturday, January 19. "We have suffered a very significant loss," he wrote. "Control procedures have been revised and reinforced to avoid any reoccurrence of further similar risk."

Trading in SG shares was suspended on the Paris stock exchange.

Rating agency Fitch downgraded the bank from AA to AA- on hearing the news, saying, "the extent to which the fraudulent positions taken were concealed raises questions about the effectiveness of the bank's processing systems and creates reputational risk for the group". Although SG's writedowns appeared "adequate given current market conditions", the agency said, "the erosion of SG's reputation in the markets will affect its ability to retain leadership in its key fixed-income and equity activities".

But, of course, this is partly because the bank revealed it would take €2.05 billion in writedowns for the fourth quarter, including €1.1 billion related to US mortgage risk exposure and €550 million in exposure to US monoline insurers - of which €159.5 million relates to the recently downgraded insurer Ambac.

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