From Forbes (Original article here )
Societe Generale stunned investors on Thursday when it announced that “exceptional fraud” at its French markets division, and new subprime related write-downs, would cost it up to $10.2 billion.
The fraudulent positions adopted by an unnamed trader in 2007 and 2008 are costing France’s second largest bank 4.9 billion euros ($7.2 billion). SocGen also announced write-downs Thursday worth 2.1 billion euros ($3.0 billion), from failed investments in collateralized debt obligations and bond insurers in the United States.
The bank will now sell 5.5 billion euros ($8.0 billion) in shares to strengthen its capital position.
Leading European shares shrugged off the news. The Dow Jones Eurostoxx 50 was trading up 5.1%, at 3,761.43 points, as shares across the board bounced back from heavy losses on Wednesday.
SocGen’s fraud is one of the largest in Europe, far larger than the £800 million ($1.6 billion) lost by Nick Leeson, who triggered the collapse of Britain’s Barings Bank in the 1990s.
Soon after SocGen’s announcement, Fitch Ratings downgraded its long-term default rating to “-AA,” from “AA,” and the bank’s individual rating to B, from A, citing the substantial trading losses that had occured within its core trading division.
It described the subprime mortgage-related write-downs as adequate, given market conditions, and said the bank’s valuation of these assets was reasonable.
No details are yet know of the enfant terrible that caused Thursday’s shock write-down. SocGen said the trader worked in European stock market index futures where big bets are made on the direction of market indexes like France’s CAC-40, or the FTSE 100.
“Aided by his in-depth knowledge of thoe control procedures resulting from his former employment in the middle-office, he managed to concel these positions through a scheme of elaborate fictitious transactions,” the bank explained Wednesday. It added that the trader had confessed to the fraud and that a dismissal procedure had been launched.
Societe General said it had rejected a proposal by chief executive Daniel Boution to resign.
Thomson Financial contributed to this report.