SocGen on 48-hour dumping spree post-fraud: sources

PARIS/LONDON (Reuters) - French bank Societe Generale (SocGen) conducted one of the most dramatic market sell-off operations in 48 hours after discovering an alleged fraud at the bank, traders and fund managers said on Friday.

They said the bank unwound more than a million Eurostoxx stock index futures contracts from January 21 to 22.

Estimates for the value of the contracts that SocGen dumped ranged from 20 billion euros ($29 billion) to 70 billion euros.

"What's emerging is that SocGen was brutal in the way it unwound its positions," said a trader at an investment bank.

The trader, like others sifting through the turmoil left by SocGen's losses, declined to be named because of the sensitivity of trading and banking relationships.

"It's possible they learned some lessons from what happened to Barings. It prevaricated as it negotiated with the Bank of England and positions moved further against it," he added.

The British bank toppled in 1995 after rogue trades carried out and concealed by Nick Leeson who fled and was later jailed.

The trader blamed for the SocGen scandal has not been seen since the losses became public but his lawyer says he is available to talk to French police and other investigators.

Colleagues named him as Jerome Kerviel.

On Thursday, SocGen disclosed the 4.9 billion euro ($7.2 billion) fraud debacle.

Kerviel used his inside knowledge of the bank's computer systems to cover up spiraling losses on his trading account, the bank said. That included using fake names and passwords.

He built up positions during 2007 but the global credit crunch, caused by losses in the U.S. mortgage sector, meant the market started to turn against him.

Traders and fund managers said that, upon learning of the fraud on January 19, SocGen decided abruptly to liquidate its positions into a falling market on January 21.

It is that decision which most baffles SocGen's competitors.

"People are trying to work out why they were in such a hurry to unwind, knowing that they were just digging a deeper hole," said a source close to a rival bank.

Monday saw many stock markets suffer their worst one-day drop since the September 11, 2001 terrorist attacks. A day later the U.S. Federal Reserve cut interest rates aggressively.

"The real story here is basically, this guy, paid 100,000 euros a year, sitting in some office at SocGen, forces the Fed to cut rates by 75 basis points, which is basically what happened," said a hedge fund manager, asking not to be named.

The Fed said it had not been unaware of the losses when it cut rates and remained comfortable with its decision.

Traders exchanged estimates saying SocGen might have had to unwind more than a million Eurostoxx futures contracts.

"Based on a loss of 4.9 billion euros, and given market moves we estimate that the aggregate flow required to produce these losses is 50 to 70 billion euros," said a note from a U.S. investment bank. The note was given to Reuters by a fund manager on condition of anonymity.

Basing its calculations on the open interest, or unfulfilled contracts, in the futures markets, this bank estimated that the exposure was 75 percent in Eurostoxx 50 futures contracts, and the remainder in Dax futures.

ACTED ALONE?

Another fund manager, who declined to be named, said he estimated SocGen had unwound 1.5 million Eurostoxx futures contracts from Jan 21 to 22.

SocGen said it discovered the situation late on Friday, when a compliance officer noticed a trade that breached one of the bank's thresholds. Further investigations quickly led to Kerviel, sources close to the matter said.

Over the weekend, the bank's top management confronted him to find out what happened. Kerviel, who was told by the bank that it planned to dismiss him, left its offices and the bank said on Thursday it did not know where he was.

SocGen executives have said the trader was acting alone.

However, many failed to believe this was the case.

"It's impossible he was acting by himself," said Agilis Gestion fund manager Arnaud Scarpaci on Friday.

(Editing by Suzy Valentine)