Rogue trader blamed for stock exchange turmoil

Rogue trader Jerome Kerviel was today being blamed for aggravating the turmoil that saw tens of billions of pounds wiped off the UK stock exchange earlier this week.

City watchers said attempts by Societe Generale to clear up the mess caused by the 31-year-old Frenchman – who lost the bank €4.9bn in one of the biggest banking frauds in history – had contributed to widespread falls across global markets on Monday.

Kerviel has yet to be formally sacked by France’s second largest bank, for what the company says was an elaborate deception by an “irrational” trader.

It is understood that the firm does not know the current whereabouts of the employee, who was based in its Paris office and confessed to the fraud over the weekend.

The bank said Kerviel managed to rack up hefty losses after gambling away billions of pounds on the direction of stock markets in a series of secret transactions.

It has also not yet confirmed his identity, but he has been named by the media as Mr Kerviel, a junior on its futures desk who joined the bank in 2000.

He was reportedly promoted from the back office to the Delta one trading desk two years ago.

The fraud dwarfs the losses involved in the infamous “rogue trader” case in 1995, which saw Nick Leeson cause the collapse of Barings bank after costing the group €1.07bn).

Societe Generale described its losses as “colossal”, but said the fraud would not bring the bank to its knees.

The situation appears to have been exaggerated by the extreme volatility seen in financial markets in recent weeks.

It has been suggested the bank’s efforts to unwind the trades could have contributed to the unusual turbulence seen this week.

David Buik, of Cantor Index, said: “The unravelling of the futures positions contributed to the situation, but it was not the main contribution.”

Anthony Scott, a stockbroker at City firm Charles Stanley, said: “It certainly didn’t help. Any market that is nervous for a number of reasons is going to be touchy. And anything that adds fuel to the nerves isn’t going to help.”

Howard Archer, economist at Global Insight, said: “It may well have contributed to the turmoil. Something like this can aggravate the situation, but there has to be underlying concern in the first place.”

Societe Generale discovered late last week that unauthorised and hidden trading positions had been set up last year and early this year.

It said the trader had since confessed to the “exceptional fraud” and was in the process of being dismissed, along with four or five managers.

The deception, coupled with €2.05m in relation to losses and writedowns linked to the US sub-prime mortgage market – will force the bank into a €5.5bn capital raising to boost its balance sheet.

But Societe Generale stressed it would still make net income for 2007 of between €600m

and €800m.

Chairman and chief executive Daniel Bouton, whose offer of resignation after the fraud emerged was rejected by the group, later said he believed the trader was acting alone.

He said: “I don’t know the person and his motives are totally irrational.

“It doesn’t seem that he was able to benefit from these colossal trades and directly he did not, that is for sure, although investigations will have to be carried out.”

The group confirmed that four or five of the trader’s managers had resigned after the discovery at the weekend.

Mr Bouton added: “This is just bad luck, it’s Murphy’s Law. We discovered it at the same time as the markets plummeted.

“US markets went up and we were really unlucky, but we had to settle these positions as fast as we could and we did so during the three-day market crisis.”

The group claimed that its compliance procedures were not at fault but experts, and original rogue trader Mr Leeson, both expressed their surprise that such a fraud was still possible.

Mr Leeson told BBC News 24: “What shocked me was the size. I never for one moment thought it would get to this degree of magnitude, this degree of loss.”

Investment banking audit expert Sandy Kumar, a partner at accounting giant Grant Thornton, said: “Most banks have cases where traders have been naughty, but in the majority of cases it is managed internally and kept quiet.

“It is the sheer scale of this which is unusual. It suggested that the independent checks just weren’t picking up on the trades.”

The Bank of France has said an inquiry will be conducted by the Banking Commission.

The case comes less than six months after fellow French bank Credit Agricole unearthed unauthorised trading at its New York subsidiary, which cost the group €250m.

Shares in Societe Generale dived 6% yesterday after the fraud was disclosed, but meanwhile the London market staged a dramatic turnaround as improved trading on Wall street boosted UK blue chips.