In what appears to be the largest trading fraud ever carried out by a single person, a young trader at French bank Société Générale is accused of making unauthorized bets on stock markets that cost the bank a loss of nearly $7.2 bn.

A scam committed by a rogue trader stains not only the bank, but French pride, too. On January 24, 2008, when French President Nicolas Sarkozy was busy touring India, signing business deals and touting France as a dynamic destination open to foreign investment, he would not have imagined even in his wildest dreams that something ominous could happen to his country's much-vaunted financial system.

On that day, in one of the biggest frauds in banking history, Société Générale (SocGen), France's second biggest bank, disclosed that it had lost a staggering $7.2 bn from rogue trading by a single employee. The exceptional fraud masterminded by 31-year old Jerome Kerviel, a junior derivatives trader, surfaced from the bets he made on `plain vanilla' products (relatively simple futures) tied to major European stock indexes. In its public explanation of the scandal, SocGen admitted that the trading positions taken by Kerviel had reached more than $73 bn, far exceeding the bank's market capitalization of $50 bn. The Bank stated that Kerviel took advantage of his knowledge of the Bank's internal control systems which he gained during his five-year stint in the back-office job.

The news came as double whammy, because the Bank has already announced a write-down of €2.05 bn related to the US credit crunch. Moreover, in the third quarter of last year, it had also reported write-downs of €375 mn related to the US subprime mortgage crisis. The scam gave a severe blow to the already fragile investors' confidence in the banking sector as well as tarnished the image of the French banking system. Questions have also been raised about banks' risk management procedures and their ability to control their own trading positions. Now, the future of SocGen is in jeopardy. Its stock prices have also declined since the beginning of the year. Moreover, the current revelation has triggered fresh speculation about a possible takeover of SocGen, which was already a perennial candidate for consolidation in the European banking sector, at a bargain price.

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