The SocGen announcement

A junior employee was blamed last night for committing the biggest financial fraud in history after gambling away £3.7 billion on the stock market.

To his banking colleagues Jérôme Kerviel, 31, was a lowly and unassuming employee at Société Générale in Paris, getting by on a relatively modest £74,000 alongside traders who earned millions. Yet he was the mastermind behind the biggest scam banking has known, dwarfing the fraud committed by Nick Leeson at Barings and making a mockery of the bank’s sophisticated fraud detection systems.

“He was not one of our stars,” a senior board member, who declined to be named, said. Another described him as “a fragile individual” who was “without particular genius” and faced family problems. He is believed to have suffered a recent family bereavement and been unable to take a holiday for more than a year.

Last night it was unclear whether Mr Kerviel had pulled one final act of audacity by eluding capture, with bank executives unable to say whether he was in custody. His lawyer, Elisabeth Meyer, was quoted saying: “He is not running away. He is at the disposal of the police.” SocGen defended itself for failing to hand Mr Kerviel over to police after his alleged confession during an all-night interview with executives on Saturday. “Perhaps we made a mistake in that respect, but the authorities will pass judgment on it,” Daniel Bouton, the chairman, said.

There was also intense speculation that Mr Kerviel was unlikely to have acted alone. He used false client names and was apparently able to bypass SocGen’s control systems after working in the back office of the bank’s trading rooms, identifying flaws and weaknesses in a system that cost hundreds of millions of euros to install. But it is thought he was caught out when he forgot to override the bank’s alert system and the risk department noticed an unfamiliar client.

The disclosure was a new blow to trust in a financial system already in turmoil with the US sub-prime crisis. It also represents a severe blow to President Sarkozy at a difficult time for his administration. SocGen, which traces its origins back to Napoleon III, is a pillar of the French Establishment with close links to the political elite in Paris. Many of the bank’s senior executives are former civil servants. The fraud wiped out a year’s worth of profit for France’s second bank, a Gallic flagship that was state-owned for many years.

Mr Kerviel’s exploits were greeted with disbelief. For Christian Noyer, governor of the Banque de France, it was “unimaginable” that one lowly person could get away for a year with illicit dealing from his computer at SocGen’s towers at La Defense, Paris.

Michel Marchet, a bank trade-union official, told The Times: “He didn’t cheat for himself. It was a game. He wanted to pull off a big hit and score a fat cheque. He was a clean-cut young man who apparently had difficulties in his private life.”

Shareholders’ groups said that they were stunned that the bank, which is known for its rigour, had failed to spot positions in futures trading that amounted to about €30 billion.

The whereabouts of Mr Kerviel were unknown as police started a criminal inquiry. SocGen sacked him and five of his superiors. It depicted his actions as solitary, perverse, cunning and not aimed at personal gain.

The tale of Mr Kerviel’s alleged year of secret trading was related painfully by Mr Bouton, the chairman and chief executive of SocGen for six years. Mr Bouton, originally a member of the French civil service elite, offered his resignation at a board meeting, but was asked to stay on.

He said that the bank’s chiefs were alerted last Friday to an anomaly in the trader’s handling of futures contracts on European stock market indices. Questioned over the weekend, Mr Kerviel confessed to running “a concealed enterprise using the tools of Société Générale, with the intelligence to escape all control procedures”.

After reporting to the authorities, the bank made no announcement while it spent three days frantically selling off the misguided bets, worth billions of euros, that the trader had taken on the rise of markets. Word of the fraud could have sent the international market reeling, Mr Bouton said. “If we had announced it on Monday morning, the loss [for the bank] would have been ten times higher,” he said. “Its scale would have destabilised the whole market.”

The bank suffered from a nightmare in timing because equities tumbled for two days just as it was trying to close out the gamble on rising indexes, Mr Bouton said. A member of Mr Bouton’s team said: “These have been the hardest five days of our lives.”

The chairman apologised to shareholders for “this terrifying accident” which added to a ¤billion loss in the sub-prime collapse. He emphasised that the fraud was an exception that stemmed from an employee who had learnt how to disguise his actions from the bank’s rigorous monitoring system. He had worked for his first five years in the “middle” and “back” offices, which check transactions. “As a trader, he knew the system and stayed one step ahead of the controls.” Mr Bouton said. He added that he would forgo six months of his chairman’s salary in order to repair some of the damage.

The trader had no authority to carry out more than small hedging operations with so-called “plain vanilla” futures. He had used highly sophisticated techniques to multiply the volume of his transactions, Mr Bouton said.

Mr Bouton said that the existence of SocGen was not threatened by a fate similar to Barings, which closed after Mr Leeson lost £800 million in 1995. The bank will still report a profit of about €800 million for 2007, he said.

Jean-Pierre Mustier, chief of the bank’s corporate and investment banking, said that that he had interviewed the trader and was convinced that Mr Kerviel had acted alone.

The claim was greeted sceptically by shareholders’ groups. Frederick-Karel Canoy, a lawyer who filed a suit on behalf of shareholders, said that Mr Kerviel should be given a medal for ingenuity if he had acted alone. “There was negligence by the firm. The trader is being made a scapegoat. There is a lot of hypocrisy and connivance in that milieu,” he told The Times. “It is not impossible that they have bought the trader’s silence.”

Gilles Glicenstein, president of asset management at BNP Paribas, SocGen’s chief rival, stepped in with support. “It shows that we are in a very troubled period for banks, and I think that it is in such troubled periods that difficult things happen,” he said. His words did not dampen speculation that SocGen could now be swallowed up in a takeover by BNP.

How to lose

1.You work for one of the world’s biggest investment banks, and spend time in the unglamorous back office learning how to circumvent the risk controls

2.You take out bets on the future movements of world stockmarkets

3.If you think that, for example, the FTSE 100 will rise you go to the futures market and place a bet

4.Someone at another bank, who thinks the FTSE will fall, matches the bet

5.The FTSE falls and you lose money; the FTSE rises and you win. It’s an open-ended bet, so your wins and losses will fluctuate with the markets

6.If you start to lose, you hide your trades and double up your bets to try to recover the losses

Jérôme’s bets

A. Jérôme Kerviel bets that in 2007 markets will fall and in 2008 they will rise

B. He can hide these bets because his former job in the bank taught him how to avoid security systems designed to prevent workers from making unathorised investments

C. On January 19 bank chiefs disciver the hidden bets

D. On January 21 the bank began to close the open bets. Most are that stockmarkets will rise but on Monday global markets plunge, forcing the bank to accept a £3.7bn loss

E. Other traders react to sudden market movements helping to foster panic and trigger more selling in already nervous markets

F. The Fed takes fright at the market meltdown and responds with its biggest emergency cut to base rates in

Buzz words

Financial instrument A tradable share in a company, a currency, a standardised commodity, such as a barrel of oil or bushel of wheat, or any financial product based on these

Plain vanilla Term given to the most basic or standard financial instruments, such as a share

Derivatives Financial instrument, the price of which is derived from the underlying value of something else, which can be as diverse as a share market index or the price of wheat. Futures and options are types of derivatives

Futures Financial contract that obliges the buyer to purchase an asset, or the seller to sell an asset, at a set price at an agreed date in the future

Option A financial derivative that gives the holder the right, but not the obligation, to buy or sell a security or another financial asset at an agreed price during a certain period of time or on a specific date. Traders use options to speculate, which is a relatively risky practice. Hedgers use options to reduce the risk of holding an asset

Going short Betting that the price of a financial asset will fall

Biggest losers

$2.6bn lost by Yasuo Hamanaka a Japanes copper trader in 1996

$1.4bn lost by Nick Leeson a trader with Barings Bank. The bank folds as a result

$1.1bn lost over 11 years by Toshihide Iguchi, a bond trader at Daiwa Bank

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