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Societe Generale: How Did It Happen?

Investigation continues as French bank and others try to figure out how a junior trader lost $7B

How the heck did Jerome Kerviel, a 31-year-old junior trader at Societe Generale, silently build up a $73 billion position and cause the French bank to lose $7 billion?

That's the question being asked by investigators, bank officials, financial industry experts, and investors this week as world markets attempt to rebound from Kerviel's actions, which caused a negative ripple effect in banking and stock markets all over the globe. Kerviel's actions have been described as "the greatest bank fraud in history," though officially the trader has not yet been charged with anything.

As of this posting, Kerviel is still being held by French police, as an investigation continues of the activities leading up to his discovery. Authorities have seized computer disks and documents from his home and office in an effort to discover the extent of fraud associated with Kerviel's actions, which were designed to improve the bank's position but did not bring him any personal gain.

Under French law, prosecutors must either place Kerviel under formal investigation or release him from custody when the extension expires today.

According to a report by Societe Generale, Kerviel -- who previously worked in the department that secures and controls traders' activities -- navigated some six different levels of controls to build up a $73 billion position in the highly volatile derivatives market.

Using his knowledge of the bank's systems -- and, in some cases, borrowing access codes belonging to other users -- Kerviel created a fictitious portfolio that enabled him to evade day-to-day checks and balances and hide his trades from the bank, Societe Generale alleges. He then used his knowledge of access controls to lift trading limits, allowing him to make much larger transactions than normally allowed.

The bank alleges that Kerviel's disastrous series of trades were the product of a series of considered deceptions and unauthorized actions, including the creation of a false portfolio that was unlikely to be monitored, the theft of other users' passwords, falsification of documents, and deliberate camouflaging of transactions to make them more difficult to detect.

Kerviel's defense attorney says that the junior trader has not had a chance to tell his side of the story, and that he was only trying to do the best job he could for the bank. Some reports indicated that other traders at the bank followed some of the same practices that Kerviel did.

Other derivatives traders expressed astonishment that Kerviel could bypass the system of checks and balances that would normally have exposed trades of such magnitude according to reports. Some expressed suspicion that Kerviel didn't act alone, while a few even alleged that Kerviel was being made a scapegoat for losses incurred by Societe Generale in the U.S. mortgage market.

CEO Daniel Bouton said that anomalies were detected in Kerviel's activity, but the junior trader was successful in convincing auditors that the problems were minor. He called allegations of a bank coverup "stupid," according to reports.

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    Tim Wilson is Editor in Chief and co-founder of Dark Reading.com, UBM Tech's online community for information security professionals. He is responsible for managing the site, assigning and editing content, and writing breaking news stories. Wilson has been recognized as one ... View Full Bio

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