Rogue trader to face second day of questioning

The French trader accused of massive bank fraud is co-operating with police, who were expected to hold him for a second day of questioning today, officials said.

“He’s feeling fine, he’s collaborating and ready to explain himself,” Jean-Michel Aldebert, of the Paris prosecutors’ office, said.

He said Jerome Kerviel, 31, gave himself up of his own free will. He was taken into custody on Saturday afternoon. Police were questioning him about allegedly fraudulent trades that France’s No. 2 bank, Societe Generale, says cost it billions of euros in jittery markets.

A judicial official said Kerviel most likely would be kept in custody until Monday, when he could be presented to a judge and face preliminary charges.

Kerviel had not been seen in public since the bank said on Thursday that his unauthorised trades lost it £3.8bn.

His motives remained a mystery, and the bank said it appeared that he did not gain personally from the unauthorised trades. Acquaintances described Kerviel as reserved and considerate, a young man who once taught children judo and held the door for elderly neighbours.

The debacle – which has rattled an already nervous banking sector and appeared to be the biggest-ever trading fraud by one person – has fuelled a debate about risk management, with France’s conservative president condemning speculation.

“If we can make profits in a matter of hours, we can also have huge losses,” said President Nicolas Sarkozy during a visit to India. “We must stop with this system that has gone haywire and that has lost track of its aim.”

“It appears to be time to … inject a bit of common sense into all these systems,” he added.

French officials have said that Kerviel, a relatively inexperienced trader, was dealing with more than £36bn. That is more than the bank’s market capitalisation of £26bn, and is close to the annual GDP of countries such as Slovakia, Qatar or Libya.

Kerviel had been investing the bank’s money by hedging on European equity market indices, meaning he bet on how the markets would perform at a future date.

Societe Generale said it discovered the fraud last weekend and unwound the trader’s losing bets starting on Monday, when world markets tumbled.

Some experts have suggested Societe Generale may have exacerbated the fall and indirectly led to the US Federal Reserve’s subsequent decision to cut rates.

In an interview published on Saturday, Societe Generale’s chief executive, Daniel Bouton, dismissed as “absurd” the notion that the bank’s actions helped fuel the turmoil on world markets.

Bouton said Kerviel had been betting throughout 2007 that markets would fall - a winning position. But the trader had overstepped his authority and was wagering much more money than he should have, Bouton said.

So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralise his earlier gains and cover his tracks.

But this month’s quickly dropping markets turned “this sad affair ... into a Greek tragedy: His virtual losing position became huge,” Bouton was quoted by Le Figaro as saying.

Despite the bank’s losses, which Bouton called “enormous and abnormal,” he insisted Societe Generale’s viability was not at risk.

Experts and others, including France’s prime minister, have questioned whether a single futures trader could have managed such large sums. Some have suggested Societe Generale might have used Kerviel as a scapegoat for other losses, like those related to the subprime crisis.

The bank says the scale of the damage was so great only because of the bad timing of the discovery – right before the worst day in world markets since September 11, 2001. It also fired Kerviel’s supervisors.