The discovery that a rogue trader at France’s second largest bank, Societe Generale, has managed to lose $7.1 billion beggars belief. This is the biggest fraud in the history of banking. It may even have contributed to the recent stock market chaos which forced the US Federal Reserve to cut its interest rates last week. That has yet to be assessed. But what is not in question is seriousness of this scandal. It is not going to be just the Societe Generale that suffers. It undermines confidence in French banks as a whole, indeed in the international banking system — a system already battered by the US subprime crisis. If this can happen at so prestigious and till now so seemingly reliable a bank, where else? Are there other rogue traders at work in other banks? Is our money safe in the banks’ hands?
What makes the story all the more shocking is that the bank did not realize that such a vast amount of money had been lost. It only discovered the fraud when the culprit owned up.
That suggests incompetence and mismanagement on a staggering scale and it really is not enough for the bank to try and put all the blame on the individual involved, which is what the bank’s chief executive, Daniel Bouton, is trying to do. To claim, as he has done, that the fraud was a “one-off” and deny it was a trading or risk-management fault is demonstrably untrue and he will have to go too, as will others of the bank’s top management. That a junior could manipulate the system so easily and lose so much without anyone knowing says that this is a bank that is badly run and has bad operating systems. The individual should never have been allowed to work as a trader given that he knew the control procedures having previously worked in the middle office. It is a major breach of security; banks do not permit such job transfers.
When rogue trader Nick Leeson lost Barings Bank $1.28 billion in 1995, it killed the bank and earned him a six-and-a-half-year jail sentence. In this case, Societe Generale will not be destroyed — the French government will not let it go under — but there is little chance that it will remain independent. It had already been hit to the tune of $2.99 billion by the subprime crisis and is now going to have to try and raise €5.5 billion to offset all the losses. But who is going to want to invest in a bank that is so badly managed? The only way its credibility is going to be restored is through a clear-out of management and being taken over by another bank. Nine years ago, BNP tried to buy it. Maybe this time it will succeed.
But it is not just Societe Generale which will be affected. President Nicolas Sarkozy says that the French banking system is solid. He has to say that but he is wrong. This scandal will put all French banks under the microscope and every problem is going to be exposed, which will further damage confidence. But there will be one good consequence: It is very likely to result in a restructuring of the French banking industry which many bankers elsewhere believe is long overdue.
