What was Kerviel’s job?

To trade securities known as equity index futures. These are effectively bets on the future direction of country stockmarket indices such as France’s CAC 40 and Germany’s DAX, the equivalent of the FTSE 100 in Britain. In theory most if not all his trading should have been low-risk and low-margin because he was an arbitrageur, exploiting tiny differentials in the prices of the same securities in different marketplaces, or he was placing hedges to offset risk taken by other traders. He was only allowed to have a total exposure (the most the bank could lose) of €20 million at any one time.

What happened in practice?

From January 6 Kerviel started taking huge bets that share markets would go up. Instead, they fell, and continued to fall, and the more they fell, the more his losses on paper mushroomed. He used a variety of means to conceal what he was doing. He invented fictional clients and in some cases fictional counter-parties so that it would appear his “net” position (his bets that markets would go up minus his bets that they would go down) appeared modest.

How was he found out?

SocGen’s chairman, Daniel Bouton, referred to a “fishy” trade done in December, but said the bank only learnt of the problem only a week ago yesterday, when a counter-party to one of Kerviel’s supposed trades said it didn’t know anything about one of his claimed transactions.

How did his bosses react?

A SocGen team worked through the night to ascertain the scale of the problem. Kerviel was called in on Saturday and under interrogation by SocGen’s investment banking chief, Jean-Pierre Mustier, “confessed” to the scam. The losses, based on Friday’s closing market prices, came to between €1.5 billion and €2 billion. On Sunday they informed their regulators. But the French President, Nicolas Sarkozy, the country’s Prime Minister, Francois Fillon, and the Economy Minister, Christine Lagarde, were not told until Wednesday. A plan was agreed on Sunday to close out all the bets as soon as possible and only then to inform the market. SocGen went into the market in extremely hostile conditions, with prices moving against it much of the time. The eventual bill came to €4.9 billion.

Were the interests of SocGen put before the interests of the wider market?

Some argue that there was a false market early this week because most share traders were unaware of the distortion caused by the secret closing down of these huge bets. But SocGen risked causing much wider panic if it had disclosed its pain while the bets were still open. Disclosure of an unquantifiable black hole in a bank at the heart of Western capitalism could have caused major panic among shareholders and possibly depositors.

Would the market meltdown on Monday have happened anyway?

Share dealers were already jumpy, concerned that President Bush’s newly unveiled stimulus plan would not be enough to stave off recession and also jittery about the stability of important financial institutions known as monoline insurers. But it seems reasonable that the closing out of a colossal €50 billion of stockmarket bets in the futures market would have hit prices in the physical share market.

Was the United States spooked into its interest-rate cut?

Some investors believe the US Federal Reserve was duped into Tuesday’s emergency 0.75 per cent cut, the biggest for a quarter century, because it didn’t know about the artificial factors contributing to Monday’s meltdown. It is possible that the Banque de France could have told the Fed of problems. But it kept other regulators in the dark. The Fed meets next week and had been expected to cut rates again. If it doesn’t do so, that might suggest it now feels that with the benefit of knowledge of the SocGen scandal it overdid it on Tuesday.

Could Kerviel have perpetrated all this on his own?

Yes, says SocGen, whose interviews with the trader and analysis of his trades suggests that he had no accomplices. Some consultants are more sceptical, arguing that they have never seen a system so flawed that a single person, however talented, could circumvent every control without alerting anyone.

What charges might he face?

The French police have opened an investigation on suspicion of forgery. This is an umbrella charge that will allow investigators to pursue other possible breaches of the law. SocGen’s lawsuit against its trader alleges “an attack on an automated information system”.

Will SocGen survive?

SocGen will still report a net profit for the year of between €600 million and €800 million, though it is slashing the dividend. It has also negotiated a guaranteed €5.5 billion boost to its balance sheet from investors. But its reputation as one of the best banks at managing risks has taken a battering and some clients and shareholders may decide to abandon the company.

Will the markets now calm down?

Not necessarily. Traders remain deeply anxious. There is a widespread view that the credit crunch, the abrupt souring of banking sentiment that began last August, is not yet played out.

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