Employee who cost French bank €4.9bn

France's reputation as the intellectual home of quantitative finance took a beating today after Societe Generale admitted that a lowly trader called Jerome Kerviel had incurred losses of €4.9bn. The bank accused Kerviel (right), said to be in his early 30s and on an annual salary of less than €100,000 - miserly by trading floor terms - of an elaborate and "exceptional" fraud.

The man and his superiors have been suspended and the Bank of France is investigating. But the bank's chief executive will remain in place and the bank will still record a profit for the past year. Its stock price has nonetheless plummeted and it seems an eternity since The Banker magazine named SocGen bank of the year for equity derivatives in 2006 and 2007.

London and New York as well as Paris are stacked with French money managers, who hit far above their weight. The emphasis on mathematics in the French school and university system are credited with this fact. Some of the greatest financial theoreticians teach in Paris' famed Ecoles Polytechniques, the graduate schools reserved for France's cleverest. In recent years, these schools' graduates have developed an outsized presence on the trading desks of banks and hedge funds around the world.

So how could one of the junior members of this brilliant tribe have made such a mess?

SocGen said yesterday that Kerviel had been taking unauthorised derivative positions on European equity market indices throughout 2007 and into this year. The positions were discovered on January 19 and 20 and the bank decided to close them down as quickly as possible. It is probable that the trader was facing unsustainable margin calls on his bets. Daniel Bouton, the CEO of the bank, said: "The transactions that were built on the fraud were simple positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques."

SocGen's head of asset management said the trader's positions at the end of December were "massively in the money", meaning if sold then they would have reaped a vast profit.
But as SocGen dumped the positions over the weekend and into Monday, the European markets plummeted. The pan-European Dow Jones Stoxx 600 experienced its largest percentage drop since 9/11, and ended Monday 5.4 per cent down. The French CAC-40 index fell 6.8 per cent. Sudden falls all around the world were capped on Tuesday morning by the US Federal Reserve announcing a 0.75 per cent cut in interest rates.

While macro strategists spoke of a great unraveling of the world's markets, it may just be that the trigger for the day's volatility was nothing more than SocGen's dumping of billions of dollars of futures positions. SocGen's fire sale ended with it losing €4.9bn or £3.7bn. But since Tuesday, markets around the world have rallied. Had SocGen held their nerve, they might not have lost so much.

The bank explained that Kerviel had spent time working in the firm's back offices where he had learned how its control systems worked. It said he had an "intimate and perverse" knowledge of the bank's controls. This was the same charge laid against the Barings trader Nick Leeson, who concealed his trades by fiddling with the back office operations. His losses in 1995 came to $1.4bn and sunk Barings.

One SocGen board member said of the rogue trader: "He was not one of our stars". A bank spokesman called Kerviel "very quiet and a loner", who had "made his dream of becoming a trader come true." By ramping up the talk of fraud and depicting the trader in such classic terms, the firm may hope to deflect a more basic charge of gross lack of oversight by management.

SocGen's stock price has been falling since late last week, suggesting that in Paris at least, rumours of the impending losses had leaked. ·