France: Bank Fraud Could Have Been Stopped

French Finance Minister Christine Lagarde said Monday that some internal controls at Societe Generale failed or were not heeded before the banking giant announced billions of euros in losses precipitated by a rogue trader.

Lagarde submitted a report on the case to the French prime minister Monday that notes the bank's weaknesses but largely backs up its version of events before and after the bombshell announcement Jan. 24 of the trading drama.

Lagarde said the bank followed market rules in unwinding the trader's transactions. Her report suggested other banks could be susceptible to similar problems and urged greater controls on banks in France and worldwide.

"Very clearly, certain mechanisms of internal controls of Societe Generale did not function, and those that functioned were not always followed by appropriate modifications," Lagarde told reporters after submitting her report.

The bank says it lost euro4.82 billion (US$7.09 billion) in cleaning up unauthorized transactions by trader Jerome Kerviel. It says Kerviel evaded the bank's security controls and overstepped his authority and bet euro50 billion (US$73 billion) - more than the bank's market value - on futures in European equity markets.

Lagarde's report said the Finance Ministry had no reason to question the bank's assertion that Kerviel acted alone.

The bank would not comment Monday on the report.

The report did not assign blame but highlighted lessons to be learned from the scandal, which has deeply shaken France's banking sector and prompted speculation that Societe Generale could be bought out or broken up. Lagarde defended and explained the report later Monday to lawmakers at the National Assembly.

The bank says the losses were so staggering because of bad timing: Just as it discovered Kerviel's activity and started closing his positions, world financial markets fell. Some have speculated the bank's actions in liquidating Kerviel's moves may have helped send stock markets down.

Lagarde said Societe Generale's management of the transactions was "in conformity with the existing regulations."

"The unwinding of the positions at the source of the loss on Jan. 21, 22 and 23 was done in a professional way in difficult market conditions that could not be attributed to Societe Generale," Lagarde said in a statement.

Lagarde's report said that if Societe Generale had announced the unauthorized positions before closing them, that could have upset "the stability of the French and international financial systems."

Lagarde urged closer study of trading risks linked to human error or fraud and suggested tighter and more consistent banking controls.

"France will propose ... that discussions at a European and international level be accelerated so that international standards can be applied to all the actors," the report said.

The report proposed that the French Banking Commission should be allowed to impose higher penalties on banks that break the rules.

The loss wiped out the bulk of SocGen's net profit for 2007, and came as the bank is already suffering from the crisis on U.S. subprime mortgage markets.

The bank's shares, which have fluctuated wildly since the announcement, were trading down 3.1 percent at euro81.05 (US$120.68) at midday trading Monday.

Investigating judges have filed preliminary charges against Kerviel for forgery, breach of trust and unauthorized computer activity.