Noyer, AMF detail SocGen action

PARIS (Reuters) - Following are highlights of testimony by Bank of France governor Christian Noyer and Michel Prada, president of France's market regulator, the Autorite des Marches Financiers (AMF), to the Senate finance committee about the troubles at French bank Societe Generale.

NOYER:

On conclusions:

"I cannot draw conclusions from an investigation that has only just begun."

"The first observations appear to tell me, and I speak with prudence, that all the permanent controls at Societe Generale do not seem to have worked as they should have. And those that did work were not followed in an appropriate fashion.

"At this point, until I have received a complete report, I cannot confirm or put into question the way in which the operations in questions were identified by management. But it is clear that we should concentrate on the reasons why these anomalies, the malfunctioning have not been spotted, analyzed ... treated or followed during this period. So this will be at the heart of our enquiry.

"What remains to be explained is how these illicit operations could have passed unnoticed by all the control systems and why and how there have been alerts that worked on these operations and yet they did not trigger a follow-up, an enquiry or any action."

On timing:

"I was alerted Sunday afternoon, as you have indicated, and I had a complete account of what happened Monday evening.

"I accepted on Sunday afternoon the principle of a rapid unwinding. It was already the decision of the chairman of Societe Generale"

"The objective of financial stability is clearly to protect the deposits of clients. This is the reason why I accepted what was decided by the chairman of Societe Generale, that is to say the rapid and secret unwinding of this operation."

On the potential risks

"The risk we faced was a colossal risk from the bank's point of view (he said if information about the rogue trades had been abruptly released it might have "panicked" the market and the bank's retail clients). Very precisely, this is the risk of sparking a systemic crisis.

"The mandate given to me is to protect above all savers and depositors. That is the objective of bank supervision, to avoid the risk of panic."

On bank inspections:

"We conduct inspections which are either inspections with a general objective, in more modest establishments, or inspections which focus on certain themes or certain sectors of the bank, which are taken, I wouldn't say randomly, but carefully and which allow (us) to conduct surveys."

"What have we done about Societe Generale? Between 2006 and 2007, we have done I think 17 inspections, some starting even a bit before actually and some which are not totally completed. If you look at the figures, it is a large, complex group.

"We have selected themes that are related to the biggest risk zones, to the most urgent areas. We have for example over this period (btwn. 2006-07), conducted 7 enquiries to verify the models of Basel II (on capital requirements).

"We have conducted four enquiries on specific risks such as LBOs (leveraged buy-outs), certain market activities and the activity plan of the bank. We have conducted two specific enquiries to verify respectively the risk related to subprimes and the risk ... on the famous American monolines.

"With regards to market activities, we have given priority to the most complex products, which, with regards to Societe Generale, means structured derivatives, while what we are talking about here (the products involved in SocGen losses) are more simple products which for the most part are futures products, which as Michel Prada was saying have been dealt with for the past two decades.

"Of course I was in contact with (market regulator) AMF. In my point of view we were totally connected during this period. And I made sure that we followed the liquidity positions of all French banks, and in particular Societe Generale, very closely during all of this period."

On informing government, Fed et al:

"The government was informed early Wednesday morning. That's to say at a moment when the unwinding was well advanced but not yet finished and 24 hours before the Societe Generale statement. It was a moment when I judged that the information was pertinent, useful and that I wasn't bringing the government only a problem but also the makings of a solution ...

"As far as the other authorities, I informed them afterwards, that's to say Wednesday afternoon, ... namely the main supervisory bodies in one way or another for the Societe General group. In first place, the Federal Reserve of New York, because the Federal Reserve of New York was the supervisor of Societe Generale in the United States ....

On a framework letter sent to Societe Generale:

"I would like to summarize the framework letter that we sent in March 2007 to the chairman of Societe Generale, and the letter that followed, which we sent around the same time, on structured derivative equity products, which were the most sophisticated products and which aren't exactly those which are of concern today. To summarize, in the framework letter that was sent to the chairman of Societe Generale, which was transmitted to the board, we said that the permanent adoption of market risk control should be a priority for the group. Back-office functions must be adapted to the very rapid development of activities, and an extreme attention to all operational risk must be maintained.

"This framework letter ... It is something new for the large establishments. I had hoped that each year we could send a letter to summarize the main risks we had identified, if there were any ... and point out where they should pay attention.

"In the next letter, which was about structured derivative equity products -- not exactly the same department (as that in question) -- we said that technical and human means for market control must be increased. We really put emphasis on that."

PRADA:

"When the interest of a company is in danger and one undertakes to deal with the problem promptly and that everyone undertakes above all to do so in total confidentiality, it is possible to let operators take measures which avoid a dramatic strategic situation for them. We considered we were in this sort of a situation. We considered that is was extraordinarily dangerous for Societe General and the Paris market to announce the fraud which had been identified without having resolved the issue."

"Daniel Bouton (acted) with our agreement and in three days unwound these positions and succeeded in reinforcing the capital of Societe Generale ... So when he unveiled the whole situation the reaction of the market was moderate ... We did not witness what we could have seen, a veritable earthquake. I believe that we reacted well and I believe the director general of Societe Generale reacted well."

(Reporting by Brian Rohan, Astrid Wendlandt and Crispian Balmer; Editing by Quentin Bryar)