Business chiefs stunned by SocGen affair

DAVOS, Switzerland (Reuters) - Business leaders said on Friday they were aghast at a $7 billion fraud at French bank Societe Generale, which comes just as banks worldwide are reeling from losses inflicted by the subprime mortgage crisis.

Bankers gathered in the Alps for the annual meeting of the World Economic Forum feared the scandal, which was announced on Thursday, could erode confidence.

"It's something that further damages the image of banking at a time when people are already very concerned about risks," Corrado Passera, the chief executive of Italian bank Intesa Sanpaolo, told Reuters.

But senior finance officials said the fallout seemed contained and there should be no rush for new regulations.

Angel Gurria, head of the Organisation for Economic Co-operation and Development, said in the current climate of concern over possible economic recession the Societe Generale affair could have triggered huge stock market losses.

"But it did not. So it's been treated as an isolated incident, it's going to be dealt with, and that means the market is strong, stable," he told Reuters on Friday.

"It's a very serious incident to one bank. Other banks have been suffering incidents of other nature, subprimes. This is a different kind and this does not show a systemic problem."

News of the Socgen affair dominated the Davos gathering in the mountains of Switzerland where top corporate executive had already been asking what had gone wrong with the world's financial system after several banks were hit by huge subprime mortgage losses. The losses undermined banks' confidence to lend to each other and put a brake on credit markets.

However, stock prices continued on Friday to claw back losses driven by fears of recession. A U.S. tax stimulus package has helped ease concern, but markets remain vulnerable.

Socgen, France's second-largest listed bank said a junior employee on its derivatives trading desk had confessed to carrying out a sophisticated fraud, triggering $7.16 billion in losses. It said it did not know where the trader was.

FLOOD OF HEADLINES

Mexican central bank chief Guillermo Ortiz said regulators should not rush to impose heavy-handed rules, but a flood of headlines surrounding the scandal and the U.S. subprime mortgage crisis could damage trust in the financial system.

"The worst thing is the damage to confidence," he told Reuters.

The European Union's financial markets chief also cautioned against hasty introduction of new rules to regulate dealing.

"The important point to remember on this is that it was fraud. These things happen. They happened before and unfortunately they will happen again," European Internal Market Commissioner Charlie McCreevy told Reuters in Davos.

"But we note that the management has put in some further risk controls and reviewed all their procedures and I am sure the supervisory authorities of France will be looking at the situation," he said.

In the corridors of the Davos meeting, some veteran bankers embarked on a round of soul-searching.

"Is there something wrong with banking? I think so," said an investment banking head at a major European group. "There is no longer a culture of banking. There's a culture of prima donnas. They all just want the power, they want it bigger and faster."

"It's all about these big giants who've gotten ahead of themselves," the banker said.

For full coverage, blogs and TV from Davos see: here

(Writing by Natsuko Waki and Ralph Boulton)