€4.9 billion fraud at Société Générale

The bank announced this morning that the unnamed trader had taken "massive fraudulent directional positions" in European equity market index futures in 2007 and 2008, "beyond his limited authority", and had then concealed the positions by logging non-existent transactions. As a former middle-office employee, the bank said, he was able to do so and avoid detection for some time. He and his supervisors will be fired.

The bank also revealed it would take €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 - of which €159.5 million relates to the recently downgraded insurer Ambac.

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

He added the rights issue would fully offset the losses from the trades. The rights issue has been fully underwritten by JP Morgan and Morgan Stanley, and will raise the bank's Tier I capital ratio to 8%, allowing it to proceed with its planned acquisition of Rosbank.

SG shares have been suspended from trading on the Paris stock exchange.

Though SG describes the losses as "fraud", they appear to result from a rogue derivatives trader. Although operating on a far larger scale, this latest incident joins a string of other losses due to unauthorised trading, at institutions such as Barings Bank in 1995, Citibank, China Aviation Oil and National Australia Bank in 2004, Amaranth and Deutsche Bank in 2006 and Calyon in 2007.

Rating agency Fitch downgraded the bank from AA to AA- on hearing the news, saying "the extent to which the fraudulent positions taken were concealed raises questions about the effectiveness of the bank's processing systems and creates reputational risk for the group". Although SG's writedowns appeared "adequate given current market conditions", the agency said, it added that "the erosion of SG's reputation in the markets will affect its ability to retain leadership in its key fixed-income and equity activities".

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