French bank says trader hacked computers

Updated: 2008-01-28 07:03

"He made profits for the bank until Dec. 31. From Jan. 1, he took risky positions like all traders," said Charriere-Bournazel, who is also president of the Paris bar association.

In a five-page statement Sunday, the bank said Kerviel used its money to build massive positions in futures contracts tied to the performance of baskets of stocks traded on exchanges in London, Paris, Frankfurt and other European markets.

Since those bets greatly exceeded the amount of capital he was allowed to put at risk, Kerviel entered fictitious and offsetting trades in Societe Generale's computer system that appeared to minimize the odds of big losses, the bank said. The trades were purposely chosen to avoid detection because they did not require cash contributions and were not subject to margin calls, which would require putting up more money if the fictitious bet soured, it said.

The bank said he plowed 30 billion euros ($44.1 billion) into the Eurostoxx index, another 18 billion euros ($26.5 billion) on the DAX in Germany and 2 billion euros ($2.9 billion) on the FTSE in London. The combined value of those positions, 50 billion euros ($73.5 billion), is far more than the bank's market capitalization of 35.9 billion euros ($52.6 billion), and close to the annual GDP of countries such as Slovakia, Qatar or Libya.

Societe Generale took three days last week to sell or offset with hedges his contracts, which amounted to bets on whether market indexes would rise or fall. But the bank sought Sunday to counter suggestions that its sell-off had caused already falling markets to plummet further than they otherwise might have done. The bank said it unwound Kerviel's positions in "a controlled fashion."

"Our impact on the market was quite minimal," Mustier said.

Societe Generale said Kerviel misappropriated other people's computer access codes, falsified documents and employed other methods to cover his tracks - helped by his previous years of experience when he worked in other offices at the bank that monitor traders. Acquaintances described Kerviel as reserved and considerate, a young man who once taught children judo and held the door for elderly neighbors.

Kerviel's downfall started in the days before Friday, Jan. 18, when Societe Generale tightened lending restrictions on one of its customers, an unnamed large bank. He had apparently used that bank's name for one or more of his fictitious trades, and it led to what Societe Generale described as having "additional controls" put in place.

Kerviel's superiors in Societe Generale's equity trading division reviewed an e-mail that day from the large bank supposedly confirming trades he had booked. But they were suspicious about where the e-mail came from and launched an emergency investigation.

A day later, Kerviel was called to Societe Generale to explain. In the meantime, bank investigators confirmed that the large bank did not know about the trades.

After first not providing a clear explanation, Kerviel eventually confirmed that he had entered fictitious trades, the bank said. It then took a bank team throughout the night and into Sunday, Jan. 20, to identify all the exposure. Societe Generale's chief executive, Daniel Bouton, notified the governor of the Bank of France that day, and a decision was made to unwind the trades as quickly and as quietly as possible.

A complicating factor was that the bank was finishing work that Sunday on details of a separate announcement about the size of the multi-billion-dollar charge it would take for bad bets on mortgage-related investments in the U.S. News of that misstep was delayed until Thursday, when along with the fraud losses, the bank said it would take a 2.05 billion euro ($2.99 billion) write-down.

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