PARIS — In what would be the largest fraud of its kind by a rogue trader, a junior employee at French banking giant Societe Generale cost the company $7.2 billion by making disastrous bets on European stock prices through a series of unauthorized and wildly outsized transactions, the bank said Thursday.
The alleged fraud by 31-year-old Jerome Kerviel staggered Societe Generale, France's second-largest bank. Its disclosure delivered a new blow to a European banking industry already reeling from losses on American sub-prime mortgage securities -- including a $3-billion write-down announced Thursday by Societe Generale itself.
"With everybody already quite scared about financial stocks, this creates even more of a threat to this sector," said Olivier de la Ferriere, a financial analyst at Richelieu Finance in Paris. "There is a real confidence crisis anyway [and] this does not help."
It also raised the possibility that the bank, in its haste to close out Kerviel's bad bets, may have exacerbated the European stock plunge earlier this week. That decline, in turn, was partly responsible for the U.S. Federal Reserve's extraordinary three-quarter-point interest rate cut Tuesday.
Societe Generale's chairman, Daniel Bouton, said in a letter to shareholders that immediately after discovering the scale of the alleged fraud Saturday, he decided to liquidate Kerviel's futures positions "in all urgency to avoid even worse consequences, given [their] size." Futures contracts allow traders to bet on the value of securities at a later date.
Bank officials said during a conference call Thursday in Paris that they had unwound all the transactions from Monday to Wednesday before publicly disclosing the alleged fraud. They added that the bank suffered an "enormous loss" because of unfavorable market conditions but that there was no evidence Kerviel personally profited from the scheme.
The timing and nature of Societe Generale's sales were unclear, however, as was their effect on European exchanges. Those markets plummeted more than 5% on Monday on the heels of a steep sell-off in Asian markets.
The Fed announced its rate cut early the next morning. A Fed official said the central bank was unaware of the Societe Generale situation when it took action, according to the Reuters news agency. The Fed maintained Tuesday that it dropped rates in response to "a weakening of the economic outlook" and deteriorating conditions in the financial markets.
