Société Générale is one of the oldest banks in France dating back to 4 May 1864 and the date of the authorisation decree was signed by Napoleon III. The original name was Société Générale pour favoriser le développement du commerce et de l'industrie en France (English: General Society to Support the Development of Commerce and Industry in France). Société Générale is often given the nickname of SocGen in the international financial world.
It is one of the main European financial services companies and also maintains extensive activities in others parts of the world. It has its headquarters in France with the main head office in Tours Société Générale in the business district of La Défense west of Paris.
The three main divisions are Retail Banking & Specialized Financial Services (particularly in France and Eastern Europe), Corporate and Investment Banking (Derivatives, Structured Finance and Euro Capital Markets), and Global Investment Management & Services.
By 1870, the bank had 15 branches in Paris and 32 in the French provinces. It set up a permanent office in London in 1871. The network started to attract customers -- small outfits, or smaller companies as they would be known later, and capitalists, the name for private customers at that time -- while the big companies were serviced by the head office. At first, the bank used its own resources almost entirely for both financial and banking operations. In 1871, it moved into the public French issues market with a national debenture loan launched to cover the war indemnity stipulated in the Treaty of Frankfurt.
Although, between the periods 1871 to 1893 the country went through a period of economic gloom with marked failures of several banking establishments, the network continued to grow at and in 1889, there were 148 banking outlets.
In 1894, its branches started to provide short-term operating credits for industrialists and traders, to complement the collection of deposits. It also moved into placing shares with the general public, issuing private debenture loans in France and also in Russia. Acquisition of equity stakes became more of a secondary activity.
The company's excellent financial health allowed it to expand its shareholding structure and in 1895, Société Générale had 14,000 shareholders and had grown to 122,000 in 1913. The war years were difficult and had serious consequences with the loss of Russian business. However, during the 1920s, Société Générale became France's leading bank: its network had grown sharply since the 1890s, with a huge number of branches and seasonal offices allowing in-depth penetration of the provincial market (260 seasonal offices in 1910 and 864 in 1930). The number of sales outlets rose from 1,005 in 1913 to 1,457 in 1933 (including those operated by Sogenal) and in 1928, Société Générale through a subsidiary, CALIF, specialised in medium-term credit.
The 1930s were another difficult period with the decline in international and French business. The bank was forced to rationalise its network by closing down local branches. On the eve of the Second World War, the number of sales outlets was not much greater than in 1922. However, Société Générale was active in placing numerous public loans launched during this period by the State or the colonies. The war and the German Occupation interrupted its advance, but the bank moved into Africa and America.
The year 1966 saw acceleration in growth following elimination of prior authorisation for opening branch offices. International expansion was just as vigorous. It was no longer limited, as before, to the main financial centres (London, New York), neighbouring countries (Belgium, Spain) and the former colonies, with the primary aim of facilitating the business of French firms, but was also aimed at guaranteeing the bank's presence where new markets were developing, either to export the technical expertise it had acquired in certain fields, or to keep up its contact with the multi-nationals. This year and the following represented a fundamental turning point in banking regulations, the main development being attenuation of the distinction between deposit and investment banking, and creation of the home mortgage market. Société Générale took advantage of this by setting up specialised credit subsidiaries for this purpose and acquired leading positions in some new financing techniques designed primarily for companies, such as finance leasing.
Two major developments characterised the 1970s, which are the expansion of the international network and across-the-board introduction of IT facilities to cope with extension of the customer base and the development of deposit money. In 1971, the appearance of automatic cash machines crowned the success and development of the credit card.
Subsequently in the 1980s, Société Générale set itself two commercial objectives. It focused increasingly on private customers via its network of branches and by acquiring specialised subsidiaries. It pursued and expanded its activities in the capital markets in France, and then, on a selective basis, in the different international financial centres. This against a backdrop of deregulation and technological change, internationalisation of the markets and the emergence of new financial instruments,
On 29 July 1987, Société Générale was privatised. It had been chosen from among the three leading French commercial banks nationalised in 1945 for its excellent risk-coverage, equity and productivity ratios.
The group successfully traversed numerous crises -- economic and political, domestic and international -- that claimed many victims in the banking world. The size achieved by Société Générale, allied with its very healthy balance sheet, reflects its capacity for anticipation and adaptation. In recent years, the Société Générale Group has focused on developing its activities around three core businesses through a combination of organic growth and acquisitions. Retail Banking was strengthened in 1997 through the acquisition of Crédit du Nord, highlighting the Group's determination to capitalise on the restructuring of the French banking system. At the same time, Société Générale has looked to secure the long-term loyalty of its customers (launch of "one account number for life" and introduction of Jazz, a package of service offers).
In 1998, Société Générale set up Retail Banking outside France as a separate division. This activity was also strengthened in 1999 through the acquisitions made in Rumania, Bulgaria and Madagascar manifested through acquisitions in Central Europe (Komercni Banka in the Czech Republic and SKB Banka in Slovenia) in 2001. The 2002 purchase of Eqdom in Morocco (the market leader in consumer lending) and Union International de Banque in Tunisia show the Bank's interest in Africa. In addition, 48% of SBB Bank in Ghana was acquired in 2003. In terms of specialised financial services, a department created in mid-2001, the purchase of two Deutsche Bank subsidiaries-ALD for multi-brand auto leasing and financing and GEFA for corporate sales financing enabled Société Générale to increase its European presence in these sectors. In 2002, it continued to pursue its external growth strategy by purchasing Hertz Lease, a European subsidiary specialising in long-term leasing and fleet management for Ford vehicles.
With a track record as leader in France for financial savings products (mutual funds, investment funds, company savings plans), the Group has developed its Asset Management and Private Banking activities: in 1999, its subsidiary, Société Générale Asset Management, pursued the strategy of developing both its mutual fund management business in France and its activities aimed at major institutional investors at an international level. With the launch of Société Générale AM UK in London and the acquisition of Yamaichi in Japan, Société Générale Asset Management has taken a decisive step in establishing its international presence and is now able to offer its customers truly global fund management capabilities.
In February 2004, Société Générale set up a new division named SG GSSI, Global Securities Services for Investors, which provides full investor services on securities and listed derivatives covered by the group around the world.
SG GSSI is attached to the GIMS which regroups SG Asset Management, SG Private Banking and SG Global Securities Services for Investors. GIMS employs 7,600 people. The Bank is developing its Corporate and Investment Banking businesses under the SG CIB brand name, which was introduced by the Group in 1998. Bolstered by a sound client base and a recognised capacity for innovation borne out by the league tables (the Group is ranked among the global leaders in equity derivatives, convertible bonds, export finance, etc.), Société Générale is looking to develop its M&A, advisory and IPO activities through the acquisition of specialised firms (Hambros in the United Kingdom, Barr Devlin and Cowen in the United States).
S&P
Moody's
Fitch
Last rating action
15/02/2008
24/01/2008
24/01/2008
Long-term senior unsecured debt
AA-
Aa2
AA-
T II subordinated debt
A+
Aa3
A+
Hybrid Tier I
A
A1
A+
Outlook
negative
stable
stable
Short-term senior unsecured debt
A-1+
Prime-1
F1+
Table 19. Key Figures and Ratings (http://www.investor.socgen.com/phoenix.zhtml?c=69575&p=irol-debt)
2003: French standards
2004: IFRS (excl. IAS 32-39 et IFRS 4) and after reclassification of Sogécap's capitalization reserve
2005-2007: IFRS (incl. IAS 32-39 et IFRS 4)
The 2003 figure to be restated as per the 2006 Registration Document
The 2004,2005 figures to be restated as per the 2007 Registration Document
2003: French standards
2004: IFRS (excl. IAS 32-39 et IFRS 4) and after reclassification of Sogécap's capitalization reserve
2005-2007: IFRS (incl. IAS 32-39 et IFRS 4)
The 2003 figure to be restated as per the 2006 Registration Document
The 2004,2005 figures to be restated as per the 2007 Registration Document
2003: French standards
2004: IFRS (excl. IAS 32-39 et IFRS 4) and after reclassification of Sogécap's capitalization reserve
2005-2007: IFRS (incl. IAS 32-39 et IFRS 4)
The 2003 figure to be restated as per the 2006 Registration Document
The 2004,2005 figures to be restated as per the 2007 Registration Document
The company was led by two persons since the year 1997. From the year 1997, the Chairman of Société Générale has been Daniel Bouton, a former cabinet director under Alain Juppé. In May 2008, the Chief Executive Officer was Frederic Oudea.
The focus of the company rests on three strategic priorities: balanced business mix, long-term growth and operating efficiency. In maintaining a balanced business mix, the company endeavoured to take several steps and, at the end of the 1990's, the Group began a strategic realignment of its business mix, shifting a portion of its capital allocation from Corporate and Investment Banking to its other target activities. Going forward, Société Générale aims to continue to pursue a policy of balanced growth, maintaining an even weight in the contributions of the French Networks, Corporate and Investment Banking and the growth drivers: Financial Services, Retail Banking outside France and Global Investment Management and Services. This balanced business mix and risk profile will enable the Group to deliver strong growth and profitability.
As for their operational efficiency the company acts in renewing efforts to enhance operating efficiency, reducing its operating costs and generating productivity gains. In line with this, their long-term growth is achieved through targeting of high-growth geographical regions and businesses with the intention of reinforcing its positions in geographical regions and businesses offering the best long-term growth prospects. The Group will achieve this through organic growth based on the transfer of its domestic expertise (among the projects already underway: Retail Banking in Russia, Corporate and Investment Banking in Asia), through partnerships (for example, in asset management) or through acquisitions, if any opportunities arise that meet our strict criteria for value creation.
Trading Losses
Shares in Société Générale swooned nearly 4% in Paris trading on January 28, 2008 to €71 ($104.35)Ö½ as speculation mounted over а possible breakup of the battered French bankÖ½ while the Paris prosecutor cited evidence that SocGen had received multiple warnings about unauthorised transactions by rogue trader Jérôme Kerviel that ultimately cost the Bank $7.1 Billion (BusinessWeek.com 2008).
Prosecutor Jean-Claude MarinÖ½ who announced the filing of the attempted-fraud charges against KervielÖ½ told reporters that the derivatives exchange Eurex had alerted SocGen last November about questionable trades carried out by Kerviel. SeparatelyÖ½ Marin said that several of the bank's internal control units also had flagged some of his trades in recent months. However, in each instanceÖ½ he said thatÖ½ Kerviel was able to produce "fake documents" making it appear that the trades were hedged and therefore not risky.
Marin said that Kerviel had admitted to falsifying documents and hacking into the bank's computer system to cover up unauthorised trades that he began making in 2005ֽ when he first moved from SocGen's back office to the trading floor. His motivationֽ the prosecutor saidֽ was to "seem like an exceptional traderֽ" and he had been expecting а bonus of almost $450ֽ000-far above his base salary of about $147ֽ000-based on profitable trades he made in 2007ֽ before he began running up huge losses. Marin also said that Kerviel also told investigators that other traders routinely made unauthorised trades.
In its most detailed public explanation of the scandal to dateÖ½ SocGen acknowledged on January 27, 2008 that the trading positions taken by Kerviel had reached more than $73 billionÖ½ far exceeding the bank's roughly $50 billion market capitalisation, by the time the bank learned of the problem over the weekend of January 19-20, 2008. The bank said Kerviel took advantage of his knowledge of the bank's internal control systems that were gained during his five years in back-office jobs.
The bank's explanationÖ½ howeverÖ½ did not mention the warning flags raised earlier. According to prosecutor MarinÖ½ SocGen's middle officeÖ½ accounting departmentÖ½ and risk department had raised questions about Kerviel's trades as had EurexÖ½ which are the derivatives exchange operated jointly by Deutsche Borse (DB1GN.DE) along with the SWX Swiss Exchange stock markets.
The fact that even а relatively junior trader could wreak such mayhem has spurred urgent calls for banks to toughen their internal controls. "Every bank in this area will be overhauling their compliance arrangementsֽ their IT security…all of the nuts and bolts stuffֽ" said Howard Daviesֽ the Dean of the London School of Economics who formerly headed Britain's Financial Services Authority. Some relatively simple measures might have prevented the debacleֽ Davies saidֽ such as changing computer passwords more frequently or requiring traders to take two-week vacations during which other employees handle their trading portfolios.
Nowֽ the stain on SocGen's reputation is so great some industry watchers think it can't survive as an independent bank. "SocGen may have been mortally suffered by the [$7.1 billion] lossֽ and its investment banking/equity derivative franchise may be irreparably damagedֽ" says Jean-Pierre Lambertֽ а London-based analyst with Keefeֽ Bruyette & Woods (KBW). Until nowֽ SocGen has been the leading global player in the highly profitable business of equity-derivatives trading.
With the French government eager to keep the country's No. 2 bank in French handsÖ½ а possible solution would be to break up SocGenÖ½ dividing its holdings between its crosstown rivals BNP Paribas (BNPP.PA) and Crédit Agricole. BNP has long coveted SocGen's network of bank branches.
Other European banks such as Italy's Unicredito (CRDI.MI) have in the past eyed SocGen as а possible takeover target. But according to analysts, most potential acquirers have been weakened by the U.S. subprime crisis and other problemsֽ making а non-French bid less likely.
It is no surprise that other banks have coveted SocGen. However, it remains that in the experience of the company, derivatives remain to be the stone that weakened the foundation of the organization and resulted to its failure (Matlack 2008). The company claims that SG CIB is "widely recognised for its world leading franchise in equity derivatives, as well as for other types of derivative products such as interest rate derivatives, credit derivatives, foreign exchange derivatives, and commodity derivatives" (Derivatives, n.d.). Not knowingly, the risks of misuse in terms of derivatives are the ones which had brought the company down as these are rested on mismanagement and misuse.
The bank's general inspection department released а 71-page report on the incidentֽ following а 27-page preliminary report released in February, 2008. The reportֽ called "Mission Greenֽ" highlighted five reasons the bank failed to detect Kerviel's activities despite several signs thatֽ in retrospectֽ should have been obvious.
It is also apparent that supervision was lacking. Despite several internal alerts that should have triggered а closer look at his activitiesֽ Kerviel remained largely unsupervisedֽ especially in the early part of 2007ֽ when the bulk of his illegal activity took place. Between September 2004 and January 2007, his direct managers completely failed to detect any fraudulent activityֽ though there were several internal alerts. Kerviel's direct manager resigned in January 2007 and Kerviel did not have another manager until April. During this periodֽ Kerviel was largely unsupervised and validated the earnings of his operational centre himself.
A new desk manager assigned to Kerviel in April 2007 was ineffective, weak, and did not have enough support from his superiors. Kerviel's direct manager had no specific knowledge of trading practices and no attempts were made to verify his supervisory abilities. During the second half of 2007ֽ the desk manager and his immediate superior were caught up with other projects and in dealing with high employee turnover rates; thus distractedֽ they missed Kerviel's activities. The manager did not carry out an analysis of the earnings generated by his tradersֽ which was а task that was supposed to be one of his primary responsibilities.
More than a few alerts by the front office got less attention and few responses. Long before Kerviel's activities were unearthed in January 2008Ö½ there were several signals that were either simply ignored or not properly responded to. For instanceÖ½ despite the suspiciously high value amount (59 percent of his group's earnings) and growth in Kerviel's declared earnings in 2007Ö½ no investigation or analysis was ever done. SimilarlyÖ½ between December 28Ö½ 2007 and January 1Ö½2008, there was an unusually high level of cash flow for Kerviel's primary operations center where he traded from but no one observed. Even two queries related to Kerviel by Europe's Eurex securities exchange did not receive much attention from Kerviel's direct manager. Neither did two alerts from SocGen's middle office informing Kerviel's manager of anomalies concerning Kerviel that were unearthed during routine reviews.
Kerviel's manager had an overly tolerant attitude toward intraday trading activities. Such trading by Kerviel was "unjustified" given his assignment and lack of seniority as а traderֽ the report noted. It was this intraday trading that gave Kerviel а context for carrying out his illegal trading activities.
The operations environment was seriously disordered. A "chronically" understaffed middle-office operation groupֽ combined with fast growth and а rapid multiplication in the number of productsֽ contributed to а chaotic operations environmentֽ which made it easier for Kerviel to conceal his activities.
In additionֽ the report indicated that Kerviel may well have had an accomplice in-house - an assistant who helped enter the hinky transactions. Kerviel has said repeatedly that other traders at SocGen followed the same practicesֽ and that he has been made а scapegoat for others' failings in addition to his own (Computerworld.com, 2008)
The fraud and the factors which facilitated it or delayed its detection
The Bank's General Inspection department report describes the mechanisms and the timetable of the fraud as follows:
The fraud consisted the trader taking unauthorised directional positions on equities or futures traded on regulated markets, which he concealed by a series of fictitious transactions. These fictitious transactions consisted of the purchase or sale of equities or warrants with different start dates, futures transactions with a pending counterparty, or forwards with an internal Group counterparty.
Three categories of concealment techniques were used:
Entry and subsequent cancellation prior to market transaction control measures, concealing the positions' market risks and latent earnings;
Entry of pairs of fictitious reverse trades concerning equal quantities of the same underlying asset for different off-market prices, hiding earnings generated following the unwinding of positions; and
Booking of intra-monthly provisions that temporarily cancel the latent or realised earnings.
Moreover, the trader gave untruthful replies to the questions asked by controllers, occasionally also supported by forged e-mails. The trader's manoeuvres and skill in concealing his positions, risks and earnings allowed him to evade detection of his massive directional positions by his superiors. However, the detection of the fraud was also facilitated by the weaknesses in the supervision (the first level of control) of the trader and in the controls over market activities. His direct supervisor lacked trading experience and was not given a sufficient degree of support in his new role. The control services (in particular, Back and Middle Offices, the risk control department, the financial and accounts departments, and the compliance department) although they generally carried out their assignments in accordance with procedures did not identify the fraud. This was not only because of the efficiency and diversity of the fraudulent concealment techniques used by the trader, but also because of certain weaknesses as highlighted below:
The discrepancy between the growth in the means (including information systems) available to control and support services and the very strong growth in transaction volumes within the equities division;
The lack of certain controls liable to identify the fraudulent mechanisms, such as the control of the positions' nominal value or of the transactions used by the perpetrator of the fraud in order to conceal his positions;
The fragmentation of controls between several units, with an insufficiently precise division of tasks, lack of a systematic centralisation of reports and of feedback to the appropriate hierarchical level;
The priority given to the correct execution of trades, which appears to be the primary concern of Back and Middle Offices, in the absence of an adequate degree of sensitivity to fraud risks; and
The insufficient level of responsiveness for the implementation of the corrective actions identified as necessary by internal audit bodies.
Aftermath
On January 30, 2008, the Board of Directors decided to form a Special Committee
composed of independent directors to ensure :
that the causes and sizes of the trading losses discovered in January 2008 have been completely identified,
that adequate measures are put in place to prevent the occurrence of further incidents of the same type,
that the information disclosed by the Bank faithfully reflects the findings of the inquiries, and
that management of the situation is conducted in the best interests of the company, its shareholders, clients and employees.
The Special Committee was assisted by PricewaterhouseCoopers Audit (hereinafter, PwC). PwC was entrusted with the assignment, based on the work of the Bank's General Inspection department, of:
drawing up a diagnosis of the weaknesses in the internal control system which made the fraud possible,
analysing the consistency and relevance of the action plans adopted by the Bank in order to remedy the weaknesses identified, and
of making all appropriate recommendations.
Other inquiries were carried out alongside these investigations and the Banking Commission conducted an audit. Criminal proceedings were launched on January 28, 2008. The Financial Markets Authority opened an inquiry on February 2008 into the financial information and the market for Société Générale shares since December 31, 2006. On February 4, 2008, the Minister of the Economy, Finance and Employment presented a report on these events to the Prime Minister.
The Special Committee addressed to the Board of Directors its assessment of the final conclusions of the internal audit, delivered to the Committee on May 20, as well as of PwC's report delivered on May 21.
Since the discovery of the fraud, senior management have ensured considerable mobilization of the Group's teams at all levels and to the trust of its shareholders and clients, the majority of the negative effects of the fraud on the Bank's business situation have been overcome. Above and beyond the control reinforcement measures currently being deployed, the Board is convinced that SG CIB and the Société Générale Group can and must succeed with the plan undertaken for the transformation of control methods for market activities, without compromising the factors that have assured their success and profitability and that they will be able to find a new balance between the objectives of profitable growth and risk management.
The strength of the businesses, the relevance of the strategy and its ability to bounce back in a difficult environment affected by the financial crisis has been confirmed by the 2008 first quarter results. The Board considers that, with the measures described in the Special Committee's report (drawn up by a Committee formed by the Board on January 30, 2008 subsequent to the trading losses), the Group will come out of the ordeal undergone as a consequence of the fraud stronger and better prepared to meet the challenges of the future (Special Committee Report, 2008).
Measures aimed at reinforcing the range of controls over market activities in order to prevent the occurrence of any new fraud
The Special Committee report highlights the following plans to reinforce the range of controls over market-related activities. The plans include short-term measures aimed at remedying the weaknesses identified, and structural measures aimed at transforming the control environment of market activities.
Short-term measures include:-
The implementation of controls and limits on the nominal value of positions and transactions, and the reintroduction of the review of nominal values into the analysis of daily earnings by the operational hierarchy;
The reinforcement of processes for the confirmation of transactions with deferred start dates and transactions with internal counterparties;
The improvement of procedures for controlling the use of counterparties and of technical transactions liable to be used for the concealment of positions, risks or earnings;
The implementation of controls over cancelled or modified trades; and
The reinforcement of the monitoring and handling of anomalies and alerts.
These actions are integrated into a series of cross-departmental remediation projects, led by SG CIB Management and aimed at covering all market activities worldwide. Additional actions are being added to the above priority measures. These are based on the reinforcement of the analysis of a typical behaviour or situations (size of brokerage fees, transactions at off-market prices) and on improvements to the operational control environment via the optimization of certain processes, such as the handling of suspense items or the reconciliation of positions with depositaries.
Structural measures include:
The redesigning of the organisation of transaction handling, inspired by the principle of the product control model with the aim of reinforcing the integration and cross-departmental cooperation of key procedures relating to the processing and accounting treatment of transactions;
The creation of an inter-departmental body responsible for trading security whose assignment will consist, notably, of ensuring the quality of all control measures as a whole, both in terms of design and day-to-day functioning. Within this department, one team will be particularly dedicated to the prevention of fraud;
Significant investments in security for information technology, both in terms of securing applications and technical infrastructure and in the management of accounts and authorisations, reinforced authentication systems and detection of anomalies; and
A campaign to raise staff consciousness, focused on a more formal definition of the roles and responsibilities of each person, in addition to training programs on the subject of fraud prevention and rogue trading.
The relevance of these projects is strengthened by the inclusion of processes dealing with weaknesses which existed within the organisation in the area of information technology security, suspense items, unreconciled transactions and operations carried out manually. In addition a project for changing attitudes is underway, intended to re-establish a better balance between front offices, support and control services, strengthened by the provision of greater resources, improved independence and authority.
