Traders puzzle over SocGen fraud explanation

HONG KONG (Reuters) - Incredulous equity traders said on Monday they wanted a better explanation from Societe Generale for how a single rogue trader managed to build up a $73 billion position and cause the French bank to lose $7 billion.

"I think most people are just astonished that someone could get away with that kind of trade for so long without being noticed," said Matt McKeith, head of equity dealing at First State Investments in Hong Kong. "I'd always be slightly suspicious of the company line in these circumstances."

Societe Generale said the trader, 31-year-old Jerome Kerviel, created fictitious accounts to make it look as though his positions had been covered, when in fact they remained unhedged, and falsified documents to justify his actions.

Equity traders were foxed by the explanation, especially since the relatively lowly Kerviel appeared to make no personal profit from his gamble, and were flummoxed as to his motives.

McKeith speculated Kerviel could have had a grudge against the bank which made him want to cause losses or perhaps to show off by making a huge profit under his bosses' noses.

"Or he could have been the fall guy for something systematic in the bank. I think more is going to come out. Perhaps he's been hung out to dry. Perhaps they were legitimate positions."

A trader at a foreign bank in Seoul, who was not authorized to speak to the media about the matter, agreed.

"It's just mysterious. It's unbelievable that this could happen and I want to know how. Even a very small deal cannot go undetected for more than two days if it was not reconciled. It's not a matter of one trader's methods," said the trader.

"There must have been some inside help."

LEESON'S LESSON

The bank said Kerviel set up fictitious trades that cancelled out the risk from his huge bets on European stock market futures, thereby covering up his true exposure to market movements.

One trader said the top market players might have up to $100 million of exposure limits while less experienced players like Kerviel might be allowed $2-$10 million.

But he scoffed at the claim that Kerviel could have hidden a $73 billion position, even if it appeared to be cancelled out by his fictitious hedges.

"What is the trading limit for this guy?," he asked. "What they are saying is the risk profile was very low because he created fictitious trades. But this is not arbitrage risk.

"If I'm doing arbitrage, I'm playing the difference. A lot of these sophisticated arbitrage desks do that but SocGen isn't: they're just betting on the index. There must be something else going on here."

Traders also said they could not understand why Kerviel had not been tripped up by the requirement to put up margin payments -- a deposit on his positions, collected on a weekly basis.

"The margin calls would be at least the amount of loss," said Francis Lun, general manager at Fulbright Securities in Hong Kong. "The long position was 50 billion euros and if you need 5 percent coverage, that's 2.5 billion euros."

SocGen, which released an explanatory note on the case during the weekend, said it covered margin calls for Kerviel's portfolio.

"Insofar as these instruments were actually purchased and considered as such by Societe Generale, the margin calls were checked and settled by or paid to the bank," SocGen said.

It said the financial instruments in the portfolio were consistent with the volumes traded by a large investment bank.

One trader said SocGen's trading system was similar to that of other banks and the same problems could occur elsewhere. Several compliance officers in major banks declined to comment, saying they had been told not to discuss the Kerviel case.

SocGen's rogue trader has drawn parallels with Nick Leeson, who brought down Britain's Barings bank in 1995. But several traders said Kerviel's losses were even more astonishing, since the bank kept them secret until it had tidied up the huge mess.

"With Nick Leeson, other traders knew he was in trouble. They just didn't square up his position and waited until he died. With Kerviel, he just made the wrong bet," said one.

(Additional reporting by Rhee So-eui in SEOUL; Editing by Ian Geoghegan)