A Tale of Rogue Traders

A story about a rogue trader:

LONDON (MarketWatch) — Societe Generale has uncovered a massive 4.9 billion-euro ($7.1 billion) fraud linked to a single rogue futures trader, France’s second-largest bank said Thursday.

The company (FR:013080: news, chart, profile) also said it will post additional write-downs of 2.05 billion euros in the fourth quarter, and it’s planning a capital increase on the order of 5.5 billion euros in the next few weeks.

The rogue trader, whose role at the bank was to make “plain vanilla” hedges on European stock-market indexes, used his knowledge of the bank’s control procedures “to conceal these positions through a scheme of elaborate fictitious transactions,” SocGen said in a statement.

$7.1 billion is a lot of money.

SocGen officials told reporters that the trader’s actions were “inexplicable” and that he didn’t benefit directly from the fraud. Investigations are continuing to see if he made any indirect profit or was working with anyone outside the bank.

Analysts at Standard & Poor’s put the bank under review for possible downgrade following the announcement. “The loss resulting from the fraud appears to be an isolated event triggered by exceptional circumstances,” said S&P analyst Elisabeth Grandin.

But that’s not all they’re writing down…

Regarding its additional write-downs, SocGen said they consist of 1.1 billion euros related to U.S. residential mortgage risk and 550 million euros linked to its exposure to U.S. bond insurers. There’s also a further 400 million euros of unallocated additional provisions.

So a French bank is out at least $1.65 billion for their involvement (as a very, very small player) in the US mortgage market. I wouldn’t be surprised if in the end, that involvement costs them more than $7.1 billion. It has certainly cost a lot of US banks a lot more… I also note (there’s no point in calling it a prediction) that many of the folks most responsible for this mess, from Uncle Alan to Tony Mo’ Zillo are walking away with a big payday. All rogue traders are equal, but the ones with corner offices are more equal than others. And they remain more equal.