24 January 2008

The largest Bank Fraud in History

While the world's rich and famous and the masters of global finance and industry gather in the Swiss Alpine resort of Davos for their annual "World Economic Forum", Société Générale, the second-largest bank in France, has just uncovered a massive fraud by one of its own traders which will cost it € 4.9 billion (which is equivalent to $ 7.1 billion or £ 3.7 billion). It also announced new write-downs of € 2.05 billion, related to the "sub-prime" mortgage crisis in the USA. Trading in the bank's shares, which have fallen by nearly 50% over the past six months, was suspended in Paris after the announcements.

Société Générale's chief executive Daniel Bouton offered his resignation, but it was rejected by the bank's board. It appears that he will have to stay and face the unpleasant facts a "very junior trader" could create, apparently unchecked and unsupervised, right under his eyes in the Paris head office.
The bank will need to seek € 5.5 billion in new capital to offset the losses, but it said it would still make a profit of € 600 to 800 million for 2007, despite the blows to its balance sheet.

"One of our traders," a spokesman announced, "has taken massive fraudulent directional positions in 2007 and 2008, beyond his limited authority." He added that the trader in question, whose current whereabouts seem to be unknown, had confessed to the fraud and was being dismissed. His managers will have to leave the bank as well.
Frederic Hamm, fund manager at Agilis Gestion, believes that this fraud "impacts the reputation of the bank", and it would be more than odd if it did not.
Richard Fuld, chairman of Lehman Brothers, took the news more coolly and said that "nothing stuns me, nothing really surprises me these days." Well, perhaps the boss of such a large bank can allow himself this degree of aloofness and cynicism. But for the rest of us, those whose money has been squandered once again by a rogue and foolish insider of the international financial system, it is outrageous. In fact, it is the largest ever recorded single case of fraud against a bank in the world, and it cries out loud for consequences - in economical as well as legal and political terms.

Ion-Marc Valhi of Amas Bank is one of the more critical insiders and said this morning: "I am sorry, but I have a hard time buying the fact that a single trader was able to set up a 'secret trade' of 4.9 billion without anybody finding out." I agree. What bank would allow a fairly minor employee the uncontrolled access to her entire financial assets? Well, one would think none, but reality tells us a different story today.

In my opinion the biggest scandal in this is not the actual fraud as such and the unprecedented loss it has caused, but the fact that the banks, supposed to look after our money and keep it safe, are allowed to use it for betting and gambling operations on the international markets. It is important to realise that the losses Société Générale is facing now are not the result of bad loans or imprudent investment. They are the result of gambling, of losing bets on the future development of shares. These so-called "future markets", as they are misleadingly named (since there is really no market), are just enormous bookies' dens and its operation is in no way different from betting on a horse or predicting the outcome of any sporting match. These days betting seems to be ever more popular, but it should be left to individuals, who do it with their own money. Banks, on whose stability and services everyone depends in a modern economy, should not be allowed to gamble, and especially not with their customers' money. It is more than time to lay down the law on this, in clear terms and backed up by international agreements (like those we have in the meantime on "money laundering"). Otherwise we could as well just take all our money and throw it into the sea.

The Emerald Islander

P.S. Only three days ago - in the face of the turmoil on the world's stock markets, but not knowing anything about the scandal at Société Générale - I did ask if we can trust the banks. I think that my question has been answered much clearer and quicker than I ever expected.


Alexander "Sunny" Bergen said...

I wonder if you are an economist as well as a historian. If not, then let me compliment you even more on your understanding of economy. And on the clarity with which you can express the facts and analyse the background of economical matters.
I am becoming a regular visitor to this blog, as it gives insights and analysis more clearly than any of the UK newspapers.


No, I am not an economist, at least I did not study economy at university and have no degree in economics. But I would regard myself as a person who has some common sense, and being in charge of a company - even though it is a very small one - makes one quite aware of economic processes.

Thanks again for visiting and leaving a comment. I hope you will continue to be a regular reader of my thoughts here.

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