Société Générale’s losses of $8.2 billion from fictitious deals by a genius/rogue futures trader are astounding, disturbing, hysterically funny even, but they are not fraud, except in the general meaning of the word as “sham”.

But fraud is what SG’s chief executive Daniel Bouton called them in his press release:

Société Générale a découvert une fraude interne d’une ampleur considérable, commise par un collaborateur de sa division de banque de financement et d’investissement.

Fraud is usually deception for personal gain, but Jerome Kerviel did not steal the money.

Presumably if his equity futures bets had not turned bad he would have been promoted instead of being fired, and his personal gain would have been a bonus and a nice lunch with M. Bouton.

According to the bank Kerviel has been adding fictitious trades to real ones for quite a while and through an “intimate and perverse knowledge” of SG’s internal system of controls was able to conceal them.

Apparently he bet the bank that the equity market would go up, silly frog. The trades were reported to Daniel Bouton over the weekend and then, willy-nilly, he ordered them unwound on Monday, which worsened, possibly even created, this week’s rout, which in turn led to the US Federal Reserve cutting rates 0.75 per cent.

So how does Ben Bernanke feel today? It seems the Fed’s biggest emergency rate cut ever may have been sparked by a lie.

This is not, one has to say, Société Générale’s finest hour, and despite repeated use of the word “isolated” in last night’s statements, the consequences are unlikely to end here for France’s no.2 bank. SG will have been profoundly damaged by this disclosure, and so has banking generally to some extent.

The “fraud” is being widely compared this morning to Nick Leeson’s fictitious trades for Barings Bank in the early 90s, which lost US$1.38 billion and led to Barings’ collapse in 1995.

Kerviel’s trades have lost US$7.14, more than five times Nick Leeson’s losses, and SG is making a rights issue worth US$8 billion to cover them plus US$2 billion in sub-prime loan write-downs, quietly disclosed at the same time as the sensational Kerviel “fraud”.

SG has commenced legal proceedings against Kerviel and the man himself is said to be on the run, no doubt carrying a copy of Nick Leeson’s new book, Coping With Stress.

Leeson, by the way, is now general manager of Galway United Football Club in Ireland and does quite nicely from the speaking circuit and book sales, so it’s not all bad for Jerome, although he might have to put in some time in a French dungeon first.

Back in Paris, the Governor of the Bank of France, Christian Noyer, told reporters he was “totally serene” about the affair, which is a beautiful thing. It obviously takes a lot to ruffle French central bankers.

But it is hard to imagine that Ben Bernanke is feeling terribly serene this morning and nor anyone with a lot of their capital in the banking system. Interbank spreads will widen, although sharemarkets are responding with a huge bounce because this week’s reversal is now revealed as illusory.

But is Jerome Kerviel the only “computer genius” (as Christian Noyer called him) in the global banking system subverting internal controls to conduct fictitious futures trades to lift bonuses or cover up embarrassment?

How much of the world’s derivatives market is fiction? Just un peu, or beaucoup?

Peter Fray

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