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As if the current stock market turmoil was not enough, financial stocks, or the 'financials' as the pundits call them, have been further weakened by what appears to be the biggest fraud in investment banking history. The French powerhouse, Société Générale may become prey to a takeover following its disclosure on 24 January that it had lost some €4.9 billion due to the highly complex fraudulent actions of one of its equity derivatives traders. The Financial Times reported that Jerome Kerviel is alleged to have 'risked billions of euros on equity derivatives - in effect betting on future movements in European stock markets - and created elaborate ficticious hedging positions to cover his tracks in a covert scheme'. The FT explains how SocGen, 'the world's leading equity derivative trading house...quickly unwound the positions he had amassed, estimated at €40bn-€50bn' and that 'SocGen will raise €5.5bn through an emergency rights issue, underwritten by JP Morgan and Morgan Stanley'.
It seems that a sophisticated act of deception, apparently committed by a single rogue trader, has cast doubt over the future independence of the bank, not to mention the position of SocGen's executive chairman Daniel Bouton who immediately tendered his resignation - an offer which was rejected by the bank's board.
The FT reported that the rogue trader's whereabouts were unknown, although the French media stated that the authourities and relatives were in contact with him. It appears that Mr Kerviel went into hiding when the news of his actions broke, which is hardly surprising given that media interest in the scandal soon reached fever pitch. In 1995, the rogue trader Nick Leeson hit the headlines after his $1.4bn deception brought down Barings Bank.
