[Infowarrior] - French Bank Says Trader Hacked Computers

[Richard Forno]

French Bank Says Trader Hacked Computers

Jan 27, 4:59 PM (ET)

By JENNY BARCHFIELD and JOHN LEICESTER

http://apnews.myway.com/article/20080127/D8UEFUI00.html


PARIS (AP) - Societe Generale said Sunday that a trader who evaded all its
controls to bet $73.5 billion - more than the French bank's market worth -
on European markets hacked computers and "combined several fraudulent
methods" to cover his tracks, causing billions in losses.

The bank says the trader, Jerome Kerviel, did not appear to have profited
personally from the transactions and seemingly worked alone - a version
reiterated Sunday by Jean-Pierre Mustier, chief executive of the bank's
corporate and investment banking arm.

But, in a conference call with reporters, Mustier added: "I cannot guarantee
to you 100 percent that there was no complicity."

Kerviel's lawyer said the accusations of wrongdoing against his client were
being used to hide bad investments by the bank related to subprime mortgages
in the United States.

"He didn't steal anything, take anything, he didn't take any profit for
himself," the lawyer, Christian Charriere-Bournazel, told The Associated
Press by telephone. "The suspicion on Kerviel allows the considerable losses
that the bank made on subprimes to be hidden."

Officials said Kerviel was cooperating with police, who held him for a
second day of questioning Sunday, seeking answers to what, if confirmed,
would be the biggest-ever trading fraud by a single person.

The questioning was "going very well and the investigation led by the
specialists of the financial police is extremely fruitful," said Jean-Michel
Aldebert, head of the financial section of the Paris prosecutor's office.

Kerviel was giving "very interesting" explanations, Aldebert added. "From
what he told me, he was fine psychologically." He refused to say whether
Kerviel might face preliminary charges.

Kerviel, 31, has not been seen in public since the bank's bombshell
revelation Thursday that his unauthorized trades resulted in 4.9 billion
euros ($7.1 billion) in losses.

Even before his massive alleged fraud came to light, Kerviel had apparently
triggered occasional alarms at Societe Generale - France's second-largest
bank - with his trading, but not to a degree that led managers to
investigate further.

"Our controls basically identified from time to time problems with this
trader's portfolio," Mustier said.

But Kerviel explained away the red flags as trading mistakes, Mustier added.

"The trade was canceled, there was no specific follow-up to do," he said.
"From our understanding today, the number of mistakes was not higher than
(for) any other trader, so from our understanding that was not a reason to
ring a bell."

Kerviel's lawyer said the trader made money for the bank through 2007 and
has since been "thrown to the wolves of public opinion."

"He made profits for the bank until Dec. 31. From Jan. 1, he took risky
positions like all traders," said Charriere-Bournazel, who is also president
of the Paris bar association.

In a five-page statement Sunday, the bank said Kerviel used its money to
build massive positions in futures contracts tied to the performance of
baskets of stocks traded on exchanges in London, Paris, Frankfurt and other
European markets.

Since those bets greatly exceeded the amount of capital he was allowed to
put at risk, Kerviel entered fictitious and offsetting trades in Societe
Generale's computer system that appeared to minimize the odds of big losses,
the bank said. The trades were purposely chosen to avoid detection because
they did not require cash contributions and were not subject to margin
calls, which would require putting up more money if the fictitious bet
soured, it said.

The bank said he plowed 30 billion euros ($44.1 billion) into the Eurostoxx
index, another 18 billion euros ($26.5 billion) on the DAX in Germany and 2
billion euros ($2.9 billion) on the FTSE in London. The combined value of
those positions, 50 billion euros ($73.5 billion), is far more than the
bank's market capitalization of 35.9 billion euros ($52.6 billion), and
close to the annual GDP of countries such as Slovakia, Qatar or Libya.

Societe Generale took three days last week to sell or offset with hedges his
contracts, which amounted to bets on whether market indexes would rise or
fall. But the bank sought Sunday to counter suggestions that its sell-off
had caused already falling markets to plummet further than they otherwise
might have done. The bank said it unwound Kerviel's positions in "a
controlled fashion."

"Our impact on the market was quite minimal," Mustier said.

Societe Generale said Kerviel misappropriated other people's computer access
codes, falsified documents and employed other methods to cover his tracks -
helped by his previous years of experience when he worked in other offices
at the bank that monitor traders. Acquaintances described Kerviel as
reserved and considerate, a young man who once taught children judo and held
the door for elderly neighbors.

Kerviel's downfall started in the days before Friday, Jan. 18, when Societe
Generale tightened lending restrictions on one of its customers, an unnamed
large bank. He had apparently used that bank's name for one or more of his
fictitious trades, and it led to what Societe Generale described as having
"additional controls" put in place.

Kerviel's superiors in Societe Generale's equity trading division reviewed
an e-mail that day from the large bank supposedly confirming trades he had
booked. But they were suspicious about where the e-mail came from and
launched an emergency investigation.

A day later, Kerviel was called to Societe Generale to explain. In the
meantime, bank investigators confirmed that the large bank did not know
about the trades.

After first not providing a clear explanation, Kerviel eventually confirmed
that he had entered fictitious trades, the bank said. It then took a bank
team throughout the night and into Sunday, Jan. 20, to identify all the
exposure. Societe Generale's chief executive, Daniel Bouton, notified the
governor of the Bank of France that day, and a decision was made to unwind
the trades as quickly and as quietly as possible.

A complicating factor was that the bank was finishing work that Sunday on
details of a separate announcement about the size of the
multi-billion-dollar charge it would take for bad bets on mortgage-related
investments in the U.S. News of that misstep was delayed until Thursday,
when along with the fraud losses, the bank said it would take a 2.05 billion
euro ($2.99 billion) write-down.

Societe Generale traders began unwinding Kerviel's losing bets at the
beginning of European trading on Monday, just as Asian markets were in a
free-fall and European shares were poised to plummet after a big drop in
U.S. markets on the previous Friday. It took until Wednesday to finally
close the books on Kerviel's adventures, the bank said.

Kerviel's lawyer cast suspicion on the way Societe Generale unwound the
position, saying it did so in "totally unusual conditions."

"This decision was driven by other motives," he claimed, without
elaborating.

Some experts have suggested Societe Generale may have exacerbated the fall
and indirectly led to the U.S. Federal Reserve's subsequent decision to cut
rates.

But in its explanatory note released on Sunday, the bank defended itself by
saying the trades represented no more than 8.1 percent of the volume in
futures trading each day on the Eurostoxx, DAX and FTSE.

Mustier said Kerviel's motivations were still unclear. "We don't know, we
don't understand" what drove him to do it, he said.

"This event is a massive shock for us," he said.

The bank said Kerviel built up two portfolios of investments - but that one
of them consisted of "fictional operations," leaving the bank hugely
exposed.

"In order to ensure that these fictitious operations were not immediately
identified, the trader used his years of experience in processing and
controlling market operations to successively circumvent all the controls
which allow the bank to check the characteristics of the operations carried
out by its traders," the bank's statement said.

"He had a very good understanding of all of Societe Generale's processing
and control procedures."

It was the bank's most detailed explanation yet of the debacle that has
further rattled the banking industry, already reeling from the subprime
mortgage crisis in the U.S. Some observers have said the crisis could also
leave the bank vulnerable to a takeover.

An aide to French President Nicolas Sarkozy suggested the state could step
in to prevent any possible hostile bids.

"I think the state will not stand idly by if any predator attempts to take
advantage of the situation," Henri Guaino told RTL radio on Sunday.

The situation has prompted calls for tighter regulation - 13 years after
trader Nick Leeson, whose illegal speculation bankrupted British bank
Barings, first highlighted the potential risks from rogue traders operating
without proper oversight.

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Associated Press Writer Pierre-Antoine Souchard in Paris and AP Business
Writer Chuck Hawkins in New York contributed to this report.

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