SocGen Pounded on Losses and Revelations

The bank's record fourth-quarter loss and fresh questions about its internal controls increase pressure for a management shakeup

Société Générale's (SOGN.PA) share price took another hammering on Feb. 21, falling nearly 9% in Paris trading as it reported a record $4.9 billion fourth-quarter loss from rogue trading and U.S. subprime write-offs. Even as the big French bank launched an $8 billion capital increase to regain its financial footing, a new investigation report raised fresh questions about its failure to act on warnings about Jérôme Kerviel, whose unauthorized trades cost the bank more than $7.1 billion.

Late on Feb. 20 a committee appointed by SocGen's board released the most-detailed—and the most damning—accounting so far of the rogue trading scandal. According to its preliminary report, the bank's internal control system generated 75 alerts about questionable trades by Kerviel, starting in 2006.

Bank controllers responded to each of the alerts, but rather than making detailed inquiries they accepted false documents and explanations that Kerviel provided, "even when these lacked plausibility," the report said. Nor did the controllers notify their superiors, even when they received alerts about transactions that greatly exceeded the sums that Kerviel was authorized to trade.

Systemic Flaw

The report also noted a key flaw in SocGen's control system that allowed Kerviel to cover his unauthorized trades by creating fictitious offsetting trades: Rather than tracking each trade individually, the system merely recorded the balance shown on Kerviel's books.

That weakness, and the lack of "initiative" by bank staff, allowed Kerviel to carry out rogue trades for nearly three years, starting in 2005, the report said. While the sums involved in the early trades were relatively modest, by mid-2007 he was betting tens of billions of euros.

Confirming Kerviel's earlier statements to prosecutors, the preliminary report found that he acted alone, and that he did not make any personal financial gain on the trades. Those findings confirm "the principal characteristics of the fraud as we reported it," SocGen CEO Daniel Bouton said in a conference call with reporters on Feb. 21, as the bank announced 2007 earnings.

$8 Billion Share Sale

Reporting that 2007 profits plunged to $1.39 billion from $7.67 billion the previous year, SocGen said it would slash its dividend from $7.64 to $1.32. The numbers were in line with forecasts that the bank provided earlier in February. Without the Kerviel losses, SocGen said it would have earned $6.13 billion for the full year.

The latest disclosures on SocGen's lax internal controls are likely to increase pressure for a management shakeup. Several executives in the division where Kerviel worked have been removed from their jobs, and Bouton offered his resignation when Kerviel's trading losses came to light in late January. But the board asked him to remain as the bank prepared its $8 billion share sale.

From Feb. 21-29, SocGen investors will be able to purchase additional shares at €47.50 ($69.83), about 27% below the current price of €65. Outside investors would have to buy additional rights that would push their cost above $100 per share—a provision intended to defend against a possible hostile takeover. But if SocGen shares keep sliding, it could still fall prey to, most likely, a French rival such as BNP Paribas (BNPP.PA).

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