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Sunday, January 27, 2008

French Lessons

The recent SocGen scandal whereby Jerome Kerviel has been fingered by directors of Societe Generale, one of France's most banking prestigious institutions, as being solely responsibly for losing Euros5BN has provided a little "light relief" for other banks and investors caught up in the turmoil in the world's financial markets.

However, the matter does raise some rather intriguing questions about how Soc Gen has handled itself during this crisis.

Firstly, and most obviously, how was a relatively junior trader able to get away with such large scale deception over a long period of time?

From January 7th Kerviel had exposed SocGen to the tune of Euro50BN.

How is it that no one noticed this until, allegedly, Friday the 18th?

Reports now indicate that SocGen had seen warning signs much earlier. A classic warning sign of fraud, is an individual who never takes a holiday. Kerviel had not taken a vacation for over 8 months.

Where was the bank's internal audit department?

Why didn't SocGen act on these warning signs?

How is that one lowly trader acting on his own could evade all of SocGen's internal controls, designed top prevent frauds such as this?

SocGen claim that he was working alone.

Yet is this plausible?

Who else helped him?

Another intriguing factor is the timing of the SocGen unwinding of its positions. They unwound their positions on Monday 21st January, the very day that world markets began another freefall, and the day that the Fed made an emergency rate cut of 0.75%.

It seems that Kerviel and SocGen added to the woes of the financial markets, and may have been responsible for pushing the Fed into an emergency rate cut.

Aside from losing Euros5BN, as a result of this fraud, on the same day that SocGen announced this loss (Wednesday 20th January) they also announced losses on sub prime deals of around Euros1.5BN. Note: SocGen are taking the Euro5BN loss to their 2007 results.

How very odd that they combined the announcements!

Was there really a fraud there?

Is it possible that Jerome Kerviel is being made the scape goat for some really lousy legitimate trades made by SocGen?

The timing of the announcement is also raising a number of questions, not least why did they not announce this on the day/weekend that they discovered the fraud?

Indeed, President Sarkozy was kept in the dark for three days over this fraud. He was not told until Wednesday. Suffice to say he is not best pleased, and is asking the very same question.

Why keep quiet for so long over this matter?

The accounting treatment of the losses, taken to the 2007 results, also does not stand up to scrutiny. Why were they not taken to the 2008 results, the year in which the losses were made?

Clearly we have much to learn from the French about how to treat such issues!

It is clear that a lot more is going to come out in the next few days, those in SocGen who think that the worst is over should think again.

Others are going to be joining Kerviel, as he "helps police with their enquiries".

Daniel Bouton, SocGen's chief executive, and Christian Noyer, the governor of the central bank, take note.

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