The biggest trading loss in the history

By Gregory Viscusi and Anne-Sylvaine Chassany

 Jan. 24 (Bloomberg) -- Societe Generale SA said bets on

stock index futures by a rogue trader caused a 4.9 billion-euro

($7.2 billion) trading loss, the largest in banking history.

 Jerome Kerviel, 31, was the trader responsible, the Paris-

based bank said today. Societe Generale plans to raise 5.5

billion euros from shareholders after the loss and subprime-

related writedowns depleted capital. The Bank of France, the

country's banking regulator, is investigating the alleged fraud.

 The trading loss exceeds the $6.6 billion Amaranth Advisors

LLC lost in 2006, and is more than four times the $1.4 billion of

losses by Nick Leeson that brought down Barings Plc in 1995. An

offer by Chairman Daniel Bouton to resign after the trades were

discovered this past weekend was refused by Societe Generale's

board, the bank said.

 ``At first this seemed like a joke,'' said Nicolas Rutsaert,

an analyst covering European banks at Dexia SA in Brussels.

Societe Generale ``was a leader in derivatives and was considered

one of the best risk managers in the world.''

 Societe Generale fell 3.27 euros, or 4.1 percent, to 75.81

euros in Paris trading, bringing declines this year to 23 percent

and valuing the bank at 35.3 billion euros. The Dow Jones Stoxx

600 Index surged 5.2 percent today to 322.08, its biggest gain

since March 2003.

Fake Trades

 Societe Generale started unwinding the trading positions

linked to European stock index futures on Jan. 21, a day when

equity markets in France, Germany and the U.K. fell more than 5

percent. The next day the U.S. Federal Reserve cut interest rates

by the most in 23 years as ``financial market conditions

continued to deteriorate.''

 ``It's not possible that our covering operations contributed

to the market's fall,'' said Philippe Collas, the head of asset

management at the bank.

 The trading loss wipes out almost two years of pretax profit

at Societe Generale's investment-banking unit, run by Jean-Pierre

Mustier. The company said it's suing the trader, who had a salary

and bonus of less than 100,000 euros a year and worked at the

bank since 2000.

 Four to five people will be fired as a result of the loss,

Mustier told reporters at a press conference in Paris. Luc

Francois, the head of equity markets, is among those who will

lose his job, said spokesman Hugues Le Bret. He declined to

comment about Kerviel.

 ``The transactions that were built on the fraud were simple,

positions linked to rising stock markets, but they were hidden

through extremely sophisticated and varied techniques,'' Bouton,

67, said in a letter posted on the bank's Web site.

`In the Money'

 His approach was to balance each real trade with a

fictitious one, and his ``intimate and perverse'' knowledge of

the bank's controls allowed him to avoid detection, co-Chief

Executive Officer Philippe Citerne told reporters. He rolled over

his real trades before they reached maturity.

 By the end of December, he was ``massively in the money,''

said Collas. Since the beginning of the year his trades became

unprofitable.

 The trades first came to management's attention on the

evening of Jan. 18, when a compliance officer found a trade that

exceeded the bank's limits, Mustier said. When Societe Generale

called the counterparty, they were told the trade didn't exist.

 The employee, who moved to the trading floor from the back

office in 2006, helped with the investigations throughout the

weekend, said Mustier, who didn't identify the trader and said he

doesn't know where he is now.

 The trader didn't enrich himself from the fraudulent trades,

which began in early 2007, and his motivations are unclear,

Bouton said at the press conference.

`Breached' Controls

 He ``breached five levels of controls,'' Christian Noyer,

the governor of the Bank of France, said at a press conference

today. He described the trader as ``a computer genius'' and said

he was told he was ``on the run.''

 Management des Operations de Marche, a business school in

Lyon, lists Kerviel as a 2000 graduate.

 Societe Generale joins a list of at least five financial

firms since the start of the 1990s to suffer losses from

unauthorized trades, including Kidder Peabody, Barings, and

Allied Irish Banks Plc.

 French President Nicolas Sarkozy wouldn't comment on the

investigation beyond calling it ``fraud,'' said spokesman David

Martinon. Foreign Minister Bernard Kouchner said in an interview

at the World Economic Forum in Davos, Switzerland, that he is

``concerned'' about the case.

 Takeover Target

 The bank said it will post a profit of 600 million euros to

800 million euros for 2007 and pay a dividend equal to 45 percent

of its earnings. ``Most of the sectors, in France and abroad,

continue to produce good, and sometimes excellent results,''

Bouton said.

 Bouton and Citerne won't receive bonuses or stock options

for 2007, and will forgo their salaries for the first half of

this year. Mustier won't receive a 2007 bonus or stock options.

 The company said it plans to raise capital by selling shares

in a rights offer underwritten by JPMorgan Chase & Co. and Morgan

Stanley. Following the transaction, the bank's Tier 1 ratio, a

measure of solvency, will rise to about 8 percent from 6.7

percent at the end of 2007.

 Bouton, asked whether the affair made Societe Generale a

more likely takeover or merger target, said ``we are not looking

for this. Our goal is to have the bank working as well as

possible after this incredible accident.''

 Bouton said he wasn't seeking capital from sovereign funds,

which have invested in banks including Citigroup Inc., Merrill

Lynch & Co. and UBS AG in the past two months.

Rogue Traders

 ``It's a disaster,'' said Guy De Blonay, who helps manage

about $41 billion at New Star Asset Management Group Plc in

London. Still ``an acquirer could be tempted. You have got a

superb franchise here at an attractive price.'' De Blonay said he

had bought shares in the bank today.

 Societe Generale, founded in 1864, has 120,000 employees in

77 countries and 22 million retail-banking clients, according to

information on its Web site.

 ``Banks, despite the implementation of sophisticated risk

management solutions, are still under the threat that an employee

with a good understanding of the risk management processes can

get round them to hide his losses,'' said Axel Pierron, a senior

analyst at Celent, an international financial research firm.

 Societe Generale has ranked first or second during the past

five years in client surveys of equity derivative firms,

according to Risk Magazine. In 2007, it received the award for

``Equity Derivatives House of the Year'' from The Banker, a

London-based monthly magazine.

 `Mr. Copper'

 Societe Generale's report of fraud comes four months after

French competitor Credit Agricole SA said an unauthorized

proprietary trade at its investment-banking unit in New York cost

it 250 million euros.

 In 1994, Kidder Peabody, then owned by General Electric Co.,

took a $210 million charge against first-quarter earnings to

reflect what it said were false profits recorded by bond trader

Joseph Jett. The allegations and unrelated bond losses led GE to

sell most of Kidder to Paine Webber in 1995. UBS AG bought Paine

Webber in 2000.

 Sumitomo Corp. disclosed a $2.6 billion loss in 1996 on

copper trades. The Japanese firm blamed unauthorized trades by

its chief copper trader, Yasuo Hamanaka, who was known as ``Mr.

Copper'' in the markets because of his aggressive trading.

Hamanaka was sentenced to eight years in prison in 1998.

 Allied Irish

 Allied Irish Banks Plc discovered in 2002 that John Rusnak,

a trader at its Allfirst Financial Inc., had amassed and hidden

$691 million of losses over more than five years before the

company noticed any discrepancies. Rusnak was sentenced to 7 1/2

years in prison. Allied Irish sold the Baltimore-based unit to

M&T Bank Corp.

 Societe Generale said that it has already closed all the

positions set up by the trader, who had used his experience

working in the back office to hide his trades through fictitious

transactions.

 Societe Generale said it's taking 1.1 billion euros of

writedowns linked to the U.S. residential real estate market, 550

million euros related to U.S. bond insurers, and 400 million

euros on other unspecified risks.

 In the third quarter, the bank reported 375 million euros of

writedowns and trading losses linked to turmoil in financial

markets. The world's biggest financial companies have announced

more than $120 billion in writedowns and credit losses as the

U.S. housing slump rattles debt markets.