SocGen Posts Record Fourth-Quarter Loss on Trading, Writedowns

SocGen Posts Record Fourth-Quarter Loss on Trading, Writedowns

Feb. 21 (Bloomberg) -- Societe Generale SA, France's second- largest bank by market value, said unauthorized trading and subprime-related writedowns combined to produce a record 3.35 billion-euro ($4.9 billion) fourth-quarter loss.

The net loss compares with a 1.18 billion-euro profit in the final quarter of 2006. For the full year, Societe Generale's net income fell to 947 million euros from 5.22 billion euros, the Paris-based bank said in a statement today, matching preliminary results announced on Feb. 11.

Societe Generale blames the reversal mostly on unauthorized bets by 31-year-old Jerome Kerviel, whose positions led to 4.9 billion euros of losses. Those trading losses, the biggest in banking history, raised questions about oversight at the 144- year-old bank, run by Chairman Daniel Bouton. A report from three independent board members yesterday said management failed to follow up on 75 warnings over more than two years about Kerviel.

``They should have done better,'' said David Moss, a fund manager at F&C Asset Management in London who spoke before the results were released. ``He shouldn't have been able to cause the level of losses that he has. The systems are designed to avoid that.''

The trading losses, along with 2.05 billion euros of writedowns and provisions linked to the U.S. subprime mortgage crash, forced Societe Generale to raise 5.5 billion euros from shareholders this month to replenish capital.

The bank has fallen 28 percent in Paris trading this year, and closed at 71.15 euros yesterday. That exceeds the 20 percent decline in BNP Paribas SA, France's biggest bank, which yesterday reported a 42 percent slump in fourth-quarter profit to 1.01 billion euros.

False Hedges

Bouton, 57, offered to resign amid the trading scandal and the board twice voted to retain him. Societe Generale announced on Jan. 24 that Kerviel, a trader on the ``Delta One'' desk in Paris, had built up 50 billion euros of positions in European stock index futures and disguised them with fake hedges. The bank unwound the trades between Jan. 21 and Jan. 23.

The report released yesterday, from a committee headed by former PSA Peugeot Citroen Chief Executive Officer Jean-Martin Folz, said Kerviel acted alone and that the bank has tightened controls to prevent a repeat of the situation.

The report refrained from drawing conclusions about the responsibility of Kerviel's managers, citing a criminal investigation by French judges. It did say that compliance officers rarely went beyond established routine checks.

The committee said there were 75 red flags between June 2006 and the beginning of 2008 that should have alerted managers to Kerviel's unauthorized trades. The warning signs included a trade with a maturity date on a Saturday, bets with ``pending'' counterparties and missing broker names, the report said.

`No Initiative'

While procedures were respected and questions were asked, ``no initiative was taken'' to check Kerviel's assertions, ``even when they lacked plausibility,'' the report said. ``When the hierarchy was alerted, it didn't react.''

Kerviel has been charged with hacking into the bank's computers, falsifying documents and breach of trust. He is in jail during the investigation. If convicted, he faces up to five years in prison, his lawyer Guillaume Selnet said.

Kerviel told police that other traders and managers create hidden gains and losses to smooth over earnings, and that his superiors must have been aware of what he was doing. He said his managers went along because they too would have been fired had his unauthorized trading been exposed.

Growth Outside France

While Kerviel's positions weren't discovered until Jan. 18, Societe Generale is booking the losses in the fourth quarter. As a result, Societe Generale's investment bank recorded a loss of 3.9 billion euros in the period and 2.22 billion euros in the year. In 2006, the investment bank earned 2.34 billion euros.

Societe Generale's French retail banking network earned 315 million euros in the quarter, compared with 318 million euros in the year-earlier period. Earnings from overseas consumer banking rose 53 percent to 202 million euros, as the company expanded in Eastern Europe and North Africa.

Without the Kerviel incident, Societe Generale said it would have lost 131 million euros in the fourth quarter and earned 4.17 billion euros for the year.

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