Rogue trader costs SG €4.9 billion

The rogue trade - described by SG as "isolated and exceptional" - is perhaps the largest of its type ever committed. It dwarfs Nick Leeson's $1.4 billion theft from Barings Bank in 1995.

The equity index trader, identified as 31-year-old Jérome Kerviel, took "massive fraudulent directional positions" in European equity market index futures in 2007 and 2008, "beyond his limited authority", and then concealed the positions by logging non-existent transactions, according to SG. As a former middle-office employee he was able conceal his positions easily and avoid detection for some time. He and his supervisors have been dismissed.

SG chairman Daniel Bouton first learned about the trades on January 19, he said in a letter to the bank's customers. "We have suffered a very significant loss," he wrote. "Control procedures have been revised and reinforced to avoid any reoccurrence of further similar risk."

The bank has also announced €2.05 billion in writedowns for the fourth quarter of the year, including €1.1 billion related to US mortgage risk exposure and €550 million in exposure to US monoline insurers.

SG shares have been suspended from trading on the Paris stock exchange, and on hearing the news Fitch Ratings downgraded the bank from AA to AA-. The rating agency says that the extent of the fraud raises serious questions about the effectiveness of the bank's processing systems and creates reputational risk for the group. Even with the rights issue, the bank is now at risk from a takeover.

Thomas Sheffield, technical director on Aon's directors and officers, and financial institutions team says: "New banking regulations in the EU have focused on requiring banks to develop internal methods to ensure that these risks, while perhaps still harmful, in terms of reputation for example, are not crippling to the financial institutions." That said, it would be interesting to find out whether SG's regulatory capital for operational risk under the advanced measurement approach would have covered the €4.9 billion loss.