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SocGen sickness

• Robert Peston
• 24 Jan 08, 08:50 AM

Only one thing will be discussed here in Davos today: the alleged fraud by a trader at which has cost the French bank €4.9bn, or £3.7bn.

I feel slightly sick thinking about it, as I sit surrounded by snow-capped peaks. The sheer scale of the loss is overpowering.

It takes the crisis in the global banking markets into a whole new area.

So here are the questions:

1) Did it take place in London, where SocGen has a big presence?

2) Is the loss related to mis-valuation of structured finance products, abuse of what is known as the "mark-to-model" approach to assessing the value of stuff like collateralised debt obligations?

Funnily enough, there were strong rumours at a big bank's party last night that there was a nasty lurking in the French banking system.

I wonder whether this debacle will add to or lessen the unusually strong mood of anti-Americanism here, which is particularly conspicuous among continental bankers and politicians.

Many of their banks are reeling from losses on investments linked to sub-prime - and they blame Wall Street for manufacturing and selling this poison.

I have to say that there is a plausible counter-argument, which is that at least some of the fault lies with the foolish German and French bankers who bought the toxic stuff.

Rather than simply whinge about the excesses of Anglo-American financial capitalism, the Franco-German contingent might ask why their own banks were so easily seduced into buying securities whose intrinsic risks they plainly did not comprehend.

UPDATE 09:05
Well London and Wall Street may well be able to breathe a sigh of relief, in that it looks as though the great financial centres are not implicated at all in the SocGen scandale.

The alleged fraud took place in Paris, and - in SocGen's words - was carried out in "plain vanilla futures hedging on European equity market indices". So there was no connection to CDOs or structured finance.

SocGen says that a single trader - who had "in-depth" knowledge of the group's control procedures having previously been employed in an administrative role - concealed massive trading positions built up over 2007 and 2008 through "a scheme of elaborate fictitious transactions".

In other words, its significance is in showing the vulnerability of a mighty bank to the mischief-making of a single rogue trader. It’s eerily reminiscent of the Barings disaster of the early 1990s - which was supposed to have prompted all banks to put in place better checks and controls on the activities of their trading desks.

UPDATE 12:11
Bankers in Davos are saying three things about the fleecing of Soc Gen:

1) They don't understand it. For a trader in "plain vanilla" index futures to exceed his limits to that extent should be impossible, given the controls that exist in most banks.

2) The Americans, Germans and Brits, all of whom have seen crises at their local banks, are unattractively relieved that the French have joined the international roll call of shame.

3). There is a widespread fear that other horrors are lurking in Europe's banking system - and a wish that the Europeans follow the example of the Americans by ‘fessing up to their mistakes as soon as possible.

As Mervyn King, the Bank of England Governor, said earlier this week, the financial system can't be healed till the severity of its illness is fully disclosed.

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