For Société Générale, the timing couldn't have been worse: On May 5, the same day that the French bank reported a $1.38 billion first-quarter profit, its most encouraging result in two years, Jérôme Kerviel struck again.
Kerviel, of course, is the junior trader who placed unauthorized bets on stock index futures and caused the bank to suffer a trading loss of some $6.5 billion in January 2008 when it unwound the deals. Kerviel, 33, has now published a book, The Spiral: Memoirs of a Trader, in which he says his Soc Gen bosses knew he was faking transactions and didn't stop him because he was making money for the bank. The bank expected traders to "obey, but know how to disobey," Kerviel says in the book. "Individualism and risk-taking reigned supreme."
Soc Gen declined to comment on the book. On its Web site, the bank says Kerviel "admits his misdemeanors...but is seeking to use the weaknesses in the bank's control systems as proof of complacence or even encouragement by his superiors." Kerviel's trial on charges of abuse of trust, faking documents, and hacking into the bank's computers is set for June 8.
The book appears as Soc Gen is trying to reboot under Chief Executive Officer Frédéric Oudéa, having replaced much of its top management and spent $200 million to overhaul internal controls. "We have the means to be ambitious," says Michel Péretié, head of the investment banking unit, which saw first-quarter revenue soar to $2.8 billion, a 74 percent increase over last year's figure.
Péretié says he plans to increase the unit's head count by up to 10 percent this year as he pushes to boost its mergers and acquisitions business, boost revenue from operations in the U.S. by 50 percent over the next three years, and build a fixed-income franchise to match Soc Gen's global No. 1 position in equity derivatives trading. "We are back to being a growth engine," says Péretié, a former Bear Stearns executive who joined Soc Gen in 2008. Soc Gen also is scouting acquisitions in emerging markets, especially Central and Eastern Europe; it already has extensive retail-banking networks in the Czech Republic and Romania.
Investors still need reassuring, though. Soc Gen shares are down 21 percent this year, the third-worst showing among 15 major Continental banks surveyed by Bloomberg. One big worry: the $48.5 billion in subprime and toxic assets still on the books. Soc Gen has taken nearly $12 billion in writedowns, including $310 million in the first quarter, and has said it may have to take as much as $1 billion more this year. Most other big European banks have largely finished cleansing their balance sheets, giving them resources to compete. Switzerland's UBS (UBS), for example, is hiring hundreds in its investment-banking business.
Publicity from the Kerviel trial, plus a class action filed in U.S. federal court by Soc Gen investors, won't make things any easier. Plaintiffs contend that Soc Gen not only failed to curb Kerviel's trades but also exposed the bank to outsized risksfor example, by buying $16.5 billion in credit-default swaps from American International Group, the most of any bank in the world. (Soc Gen recouped the loss when the U.S. government bailed out AIG.)
Some veteran Soc Gen executives now say the bank should have done more to control risk. "We gave precedence to the entrepreunial side," says deputy CEO Jean-François Sammarcelli, who joined Soc Gen in 1974. "It was the right strategy, but we could have carried it out better."
The bottom line: Soc Gen is trying to rebuild its reputation and its balance sheet, but Jérôme Kerviel and a backlog of bad assets are distractions.