Are you sure?

Probe says SocGen's controls 'failed'

French Finance Minister Christine Lagarde said Societe Generale SA's internal controls “clearly” failed to detect a trader's deals that led to a €4.9 billion loss.

Lagarde yesterday presented to Prime Minister Francois Fillon results of her investigation into how 31-year-old Jerome Kerviel amassed €50 billion in bets on European stock index futures before they were discovered by France's second-largest bank.

“Very clearly some internal mechanisms at Societe Generale did not work and those that worked were not followed-up with appropriate actions,” Lagarde said.

Investigation of the errant transactions, which led to the biggest trading loss in banking history, have focused on the bank's management oversight and also on why the Bank of France Governor Christian Noyer waited three days before informing the government. Lagarde said yesterday that she will seek a more “precise” dialogue between the government and banking regulators in the future.

Fillon and other members of the government have criticized Noyer for not informing them of the losses. French President Nicolas Sarkozy was told about the deficit with a delay “that isn't normal,” his chief of staff Claude Gueant was quoted as saying by Le Parisien. Noyer has said he waited until the positions were liquidated before informing the government to avoid leaks.

“The need of confidentiality can be a reason not to inform the ministry of finance or the prime minister,” Lagarde said at a parliamentary hearing today. “We must work on defining who the interlocutors are who must be informed.”

Bank auditors will be summoned to her office to discuss the report, Lagarde said. The Bank of France's banking commission and the stock markets watchdog Autorite des Marches Financiers provided information for the probe.

The report calls for stricter risk controls at banks, Lagarde's statement said. It identifies four areas where bank controls need to be improved to prevent fraud, and recommends that the fines the banking commission charges for failing to meet regulatory standards be raised.

France will propose similar discussions on a European and international level, she said. Societe Generale said in an e-mailed statement that the report doesn't throw into question its risk management controls.

She reiterated the need to have a “wall” between the back, middle and front offices and that more attention be paid to “behavioral aspects” such as vacation time taken by traders. (China Daily)