SocGen style fraud could strike again, but bigger

By Andrew Hurst, European Banking Correspondent

ZURICH (Reuters) - French bank Societe Generale's 4.9 billion euro ($7.1 billion) loss, blamed on a single employee, is a stark reminder that rogue traders can elude the most sophisticated security systems until it is too late.

Many other banks could be exposed, no matter how much they have invested in security dragnets and advanced fail-safe procedures, and fraudulent losses are likely to grow in size.

"Banks are making a lot more money and taking much bigger trading positions, so you can expect the size of scandals to get bigger," said Simon Maughan at MF Global.

The CEO and Chairman of Lehman, Richard Fuld, told Reuters at the annual gathering of the World Economic Forum in Davos that the loss uncovered at SocGen was "everyone's worst nightmare" -- tacit admission that no bank should consider itself entirely immune from such a calamity.

SocGen's trader -- who like Nick Leeson, the rogue trader who brought down British bank Barings in 1995, made investments by betting on the future direction of stock market indexes -- appears to have gone undetected because of intimate knowledge of his employer's risk-control systems.

Sources at Societe Generale, who declined to be named, later identified the trader as Jerome Kerviel. The company had earlier described him as a junior trader in his thirties who had joined the bank in 2002.

"Somebody with in-depth knowledge of how to do something has the power to break those systems," said Janine Dow, senior director in Fitch's financial institutions group.

Nearly 13 years after Leeson ran up a $1.4 billion loss with bets on Tokyo's stock exchange index, SocGen was sent reeling by a similar tale of bad trades blowing up in the face of a dealer able to cover his tracks until he got found out.