Christine Lagarde on the SocGen Scandal
As BusinessWeek went to press on Jan. 30, events surrounding the Société Générale scandal were moving fast. The bank's board decided not to ask CEO Daniel Bouton to step down in the wake of a trading debacle that cost the pillar of the French financial Establishment more than $7 billion; the government was strongly discouraging talk of a takeover by any foreign institution; French President Nicolas Sarkozy, British Prime Minister Gordon Brown, German Chancellor Angela Merkel, and other European leaders were meeting in London to discuss financial transparency; and French Finance Minister Christine Lagarde was readying a report on the incident set off by trader Jérôme Kerviel. When the scandal broke, I flew to Paris and on Jan. 28 spent an hour with Lagarde, a lawyer who spent much of her career at the global firm Baker & McKenzie.
Everyone wants to know how it is possible that a 31-year-old trader at SocGen was able to cause the largest banking crisis ever.
Largest banking crisis ever? I don't know about that. Let's bring things into perspective. It's a loss of nearly €5 billion, and based on the latest information we have from the criminal investigation taking place, it was caused by a single individual—an extremely computer-literate trader who essentially broke through five different firewalls.
How did that happen?
This is exactly what I want to know. I want to know three things: What was the chronology and who was involved? Why did the controls that were in place at Société Générale not stop that gentleman from doing what he did? And what new systems can be put in place to prevent that from happening again?
Do you believe it was just this one individual and no others were involved?
I have no reason to believe there were others. In fact, he was a very lonely character [operating] in his own little corner, hiding behind the [computer] screen, hiding behind the keyboard, hiding behind codes.
Do you agree that at the end of the day, it doesn't matter how many risk controls you have in place if someone wants to commit fraud?
That's what the president of the bank said to me in the last couple of days.
Then what can your office do to ensure that something like this never happens again?
We're talking about, I think, three levels of transparency. Transparency of financial instruments, and that addresses the subprime issue. [We need] clear analysis of financial instruments. The second has to do with disclosure. Financial institutions, insurance companies, all of them have to be transparent and disclose regularly the entire reality of their balance sheets and accounts. The third level of transparency is relationships within trading rooms and between trading rooms and control areas. Clearly, the professionals have to come up with proposals so that what happens on the trading floor does not collude with what happens in the control area. This gentleman was knowledgeable about the operating systems within the bank because he had worked in the back offices prior to joining the trading floor.
President Sarkozy [who wasn't told about the scandal until Jan. 23] was clearly upset about the delay in learning about this. Should the board of Société Générale have told the French government sooner?
It would not have been for the board of the bank to alert authorities because Société Générale is a private bank. What the bank rightly did was to inform the governor of the central bank, Banque de France, on Sunday [Jan. 20], as soon as they found out the magnitude of the situation. [But] it is a matter that will be reviewed.
It sounds like the Bank of France should have given that information to the President when it found out.
Again, that is going to be under review, but the governor of the central bank is a respectable gentleman. There's no reason to believe at this stage that he wanted to hide anything.
It has been reported that, according to prosecutors, SocGen was made aware of irregular trades in 2005. And then in November of last year, they were again made aware of questionable trades by this very same trader.
It's certainly going to be part of our investigation, and I have my people working on that at the moment. I'm going to see what the governor of the central bank and the president of the AMF, which is the equivalent of the SEC, have to say about why they did not disclose earlier.
There are reports indicating that your government will not allow SocGen to be acquired, particularly by a foreigner. Correct?
Point one, SocGen generated profit in 2007 despite what happened. Point two, they've managed to secure and guarantee a capital increase of over €5 billion. They are not under the constraint of finding a partner or major support in the banking community…. [As far as a foreign takeover,] it is the job of government to be sensitive to whatever might be a threat to shareholders or employees of SocGen.
Will we see injections of capital as we did with Abu Dhabi investing in Citigroup? Would you allow that?
Don't forget, SocGen has indicated that it has launched a [capital] increase, which will be secured by existing shareholders, of which a good percentage are already foreigners.
What do you think the implications of all this will be?
I think it will bring a sense of urgency for everyone. I was delighted to see Prime Minister Brown also advocating better regulation, more transparency, and improved governance. We're all going in the same direction. But it's interesting that the professionals themselves are now saying we need to do something, which is not usually the case.
Has the U.S. housing slowdown caused cracks in the vibrancy story throughout Europe?
Certainly the U.S. housing slowdown has tempered vibrancy. All of Europe's economies will be slowed to some extent.