An analysis (ppt) of SocGen's loss in 2008- by students of Era Business School, New Delhi (PGDM 2012-14)

1. Era Business School, New
AJ; Ajay K Raina
By Aman Chauhan (0121pg023) & Col Ajay K Raina, SM (0121pg014)

2. Actors and the Storyline
• Société Générale is one of
the oldest banks in France.
• Founded in 1864.
• Nicknamed SocGen (pron
ounced "sock jenn").
• HQ in Paris.
• France's third largest bank
by total assets.
• A universal bank split into three main divisions:– Retail Banking and Specialized Financial Services
– Corporate and Investment Banking (Derivatives, Structured
Finance and Euro Capital Markets); and
– Global Investment ManagementNew Services Ajay K Raina
Era Business School, and
AJ;

3. Era Business School, New
AJ; Ajay K Raina

4. Theme : Overstepping the Brief
• 3 categories of traders,
each with her own motive.
• Lines crossed if a trader
who has been mandated
to churn in one category,
steps into any of the other
categories.
• Intrude, from the absolute safety of one into costly
affairs of second and worse into dangerous arena of
third, and spell disaster!
Era Business School, New
AJ; Ajay K Raina

5. What Happened?
• J Kerviel joined SocGen in 2000.
• 2005- Mandated to look for arbitrage opportunities
between DAX, CAC 40 and Euro Stoxx 50 indices.
• To err is human especially when temptations are
huge.
• Creativity at work – fictitious trades. Portfolios A&B.
• Unhedged positions in tens of billions of Euros.
• Remember 2007/2008… fishing in troubled water!
• 2008 – over a period of three days, bank unwound
his positions for a loss of €4.9 billion (or US$7.2
billion).
Era Business School, New
AJ; Ajay K Raina
• The biggest till then.

6. Going Gets Tough
• It had happened in Jan 2008.
• Credit rating brought down; CEO resigned.
• March 2008 – SocGen lost a case against a Turkish
Company who had acknowledged a consignment of
3250 Kg of gold instead of 15000 Kg as claimed by
SocGen.
• March 2009 – AIG starts to sink, taking SocGen along
with payment obligations of $ 11 Billion.
• October 2010 – Jerome Kerviel sentenced to 05 years
imprisonment and obligation to pay €4.9 billion to
SocGen (3 yrs; appeal pending+ reverse suit failed)
• Euro crisis 0f 2011 saw share falling by 57% after a
Era
AJ; Ajay K Raina
wrong media news. Business School, New

7. The Tough Gets Going
• SocGen sought €5 billion finance to tide over 2008
crisis.
• US govt’s bailout for AIG in 2008, averted $11 Billion
loss.
• Successfully sued The Mail for the news article.
• Huge transformations in functioning.
• Posted profits in 2010 after two years.
• Was one of the four (out of 91) European banks to
clear stress test in 2010.
• Stock rose to new high of € 52 in 2011-12, after
touching low of € 18 in 2009 (now = €42).
Era Business School, New
AJ; Ajay K Raina

8. Era Business School, New
AJ; Ajay K Raina

9. No Lesson Too Small
• Utmost important to
define unambiguous
risk limits for traders.
• Monitor the traders
once risk and limits
defined.
Era Business School, New
AJ; Ajay K Raina

10. From The Economist
SIR,
• Jérôme Kerviel is in trouble because without
authorisation he used Société Générale’s money to bet
on European markets, losing his employer some $7
billion.
• But imagine the embarrassment had Mr Kerviel made a
profit of $7 billion, or possibly double that, if the
markets had moved differently?
• The bank would have had to discipline, dismiss and
pursue for fraud an individual responsible for a huge
increase in net profits and a concomitant leap up the
banking league table. ……….Michael Acott
(Johannesburg The Economist Letters, February 2nd,
Era Business School, New
AJ; Ajay K Raina
2008)

11. Era Business School, New
AJ; Ajay K Raina