Societe Generale

As pundits and politicians bloviate about retention bonuses and the citizenry storm the citadels of Wall Street and any other place they can find an AIG executive, the financial mice, i.e. Treasury officials, are scurrying about delivering financial plague to the world’s population.

Well not exactly a plague, more of a Madoffian disease that, if detected early enough, could have been cured – sort of like an STD caught early. As the AIG mess plays out, it seems that the American people look to be the odd men (and women) out in this financial scam. They get the cure, we get . . . well, you know what I mean.

What I am speaking of here in real terms is the gargantuan payouts made by AIG using taxpayer money to the recipients of the financial insurance policies AIG has written to banks around the world. These policies, which we all now know as credit default swaps, are being paid in full to the institutions that have screwed up in investing in bad real estate securities.

After considerable cajoling by the U.S. government, on March 15th AIG disclosed the names of counter-parties receiving more than $108 billion in taxpayer funds. Of that amount, $52 billion was used to satisfy or exit credit default swaps, insurance contracts on securities, which are at the heart of the problem with the failing insurer.

A counter-party, it should be noted, is the insurer provided coverage by the insurance company (in this case, AIG) for its losses suffered from its bad investments, like, securitized mortgages.

In other words, AIG provided insurance to protect the best and the brightest on Wall Street and in other capital markets around the world in the event they did something really stupid. Ooopsie! My bad.

“Though it is now known who the counter-parties are, AIG refused to itemize what exactly it is each of them brought to the table. As a result, it’s impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.”  Forbes.com

European banks lead the list with Societe Generale receiving $6.9 billion, Deutsche Bank walked away with $2.8 billion; UBS did a little two-step with $2.5 billion. Back at home, Goldman Sachs received $5.6 billion and Merrill Lynch locked up a paltry $3.1 billion.

Per existing swap agreements, AIG had to post $22.4 billion in collateral where the underlying investments were downgraded. Societe General received $4.1 billion; Deutsche Bank, $2.6 billion; Goldman, $2.5 billion; and Merrill, $1.8 billion. Forbes.com

AIG also had to post $43.7 billion during the quarter to unwind its securities lending business and $12.1 billion to different municipalities that had guaranteed investment policies. California and Virginia received $1 billion each.

Great.

As Elliot Spitzer, former N.Y. Governor and Wall Street pit bull noted yesterday on Slate.com:

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse . . . But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes-income taxes to sales taxes-to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter workweeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden?

Good point Elliot. Everybody is expected to make some sacrifices here. Oh, except for the banks.

It was only a few weeks ago when investors and “concerned” business leaders were condemning the autoworkers union and its members for having the temerity to maintain their collective bargaining agreements with the U.S. automakers. The average autoworker was making a whopping $70 an hour benefits included. Now, the Treasury Department has somehow overlooked the fact that the counterparties are getting paid in full, no questions asked. Take at $70 and hour, slap nine zeros on it and nobody is the wiser.

Apparently contracts only matter when Geithner’s pals over at Goldman need protection. After all, the world is at risk. What about contracts to protect you and me (think taxes, collective bargaining agreements, and so on). Don’t they matter? Not so much.

Popularity: 11% [?]

In the video below a group of European nonprofit organizations asserts that if a bank claims to respect the environment and human rights, then it should not invest in the Kashagan oil project in Kazakhstan. The project is underway in the fragile ecosystem of the Northern Caspian Sea. The groups responsible for the video claim that instead of reducing poverty and bringing development, the project has negatively impacted the health and safety of thousands of local people and species.

Popularity: 6% [?]

Société Générale focuses on three activities: global investment management; retail banking and specialized financial services, including finance, leasing, and insurance; and corporate and investment banking, focusing on European capital markets, derivatives and structured finance. In the US, the company controls asset manager The TCW Group. Société Générale has nearly 2,900 branches in France and more than 1,700 locations worldwide. The Company, which has retail banking operations in more than 25 countries, is looking to boost its international franchise, both through organic growth and through acquisition. Key markets include Central and Eastern Europe, the Mediterranean, and Asia.

Recent Events

On January 24, 2008 the bank uncovered a fraud by one of its traders in what may be the world’s largest trading fraud to date. According to the AFP, Jerome Kerviel, a 31-year-old trader has been charged with breach of trust, fabricating documents and illegally accessing computers. Although he was initially allowed out on bail, a Paris appeals court upheld a plea from the state prosecutor that Kerviel be held in custody “to avoid any consultation with possible accomplices or conspirators.”  The French government has blamed Société Générale’s risk control mechanisms for failing to detect Kerviel’s activities. Prosecutors have said Kerviel sought huge profits to get a better bonus and to improve his own reputation in the hard-driving culture. Société Générale began raising funds to help cover the estimated $7.1 billion cost of the fraud. Additionally, chairman and co-CEO Daniel Bouton and co-CEO Philippe Citerne each gave up nearly six months’ salary to take responsibility for the company’s losses. The event has sparked talk that Société Générale will be taken over by another banking institution.

In February 2008 Agence France Presse reported that the embattled bank is facing other woes for alleged involvement in a vast money laundering scam between France and Israel. The trial is expected to last until July.   

According to the Financial TImes, Frédéric Oudéa, Société Générale’s chief executive, said France’s second-biggest bank would become stronger than before the rogue trading scandal that cost it €4.9bn ($7.6bn) of losses.

Presenting second-quarter results that were better than expected, Mr Oudéa said the results showed “the impact of the Kerviel case is largely behind us”.

SocGen was fined €4m last month by the Banking Commission after the French regulator identified “serious shortcomings” in internal controls that had paved the way for Mr Kerviel to accumulate €50bn of allegedly unauthorised bets on futures markets under the noses of his managers.

“We will be stronger after Kerviel,” said Mr Oudéa, adding that the bank’s franchise had not been affected.

French private customers opened 23,100 current accounts in the three months to the end of June, but this was almost half the 45,400 opened in the same quarter last year.

Global Risk Factors

The company operates in China, Kazakhstan, Vietnam and The United Arab Emirates. These countries are either lacking labor legislation that recognizes fundamental worker rights or they have labor legislation, but it is not enforced.

Labor Relations

Société Générale workers in France are represented by Syndicat national des banques (SNB), Confédération Française des Travailleurs Chrétiens (CFTC) and Confédération générale du travail-Force ouvrière (CGT-FO). No labor issues have been noted.

Risk Assessment

Due to what recent events that may represent the world’s largest trading fraud to date, its status as a responsible comnpany is of concern. On a positive note, the company has robust unionization and its recent adoption of the Equator Principles bolsters its corporate responsibility practices. How the events related to the trading fraud play out at the company will ultimately determine whether the company remains a responsible company from a social responsibility perspective.

Popularity: 14% [?]

Several newspapers reported this week that Jerome Kerviel, the maverick trader at Societe Generale, was released from pretrial detention by a French court this week. Mr. Kerviel had been jailed because of prosecutors’ fears that he might jeopardize the state’s case should he talk to other individuals associated with the investigation.

To refresh readers’ memory, Mr. Kerviel, seeking to impress his superiors at SocGen, undertook risky derivatives trading. At one point last year, Mr. Kerviel had put the Company at more than 50B Euros in risk – more than the market capitalization of the whole company. Interestingly, Mr. Kerviel made the Company more than 1.5B euros in profits in 2007. But that was then and today is a different story. It was only when Mr. Kerviel started to really try to outdo himself did bank officials start to take notice. Now 5B euros poorer, SocGen wants revenge against its hapless trader.

Anyway, while all of France is watching banking officials wail and moan of the crisis created by this event, nary a similar peep can be heard from the banking counterparts in the U.S. in regard to the sub-prime loan scandal.

Oh sure, the recession (the “R” word, as this Administration prefers to call it) and the scandal of borrowers taking loans out on risky investments is all the talk here.  But little is said of the lenders making risky loans to people who were high credit risks; issuing loans for 100% of property values at interest only. Then, securitizing the loans, selling them on the market and investment houses buying them up and fobbing them off on investors. At each step in this labyrinth process, questions should have been asked, red flags should have shot up, intelligent people should have asked questions.

But none of that apparently happened.

Instead, one of the biggest culprits, Countrywide, just retired its CEO, granting him 100s of millions in retirement compensation.  Another, Bear Stearns, just got the get out of jail free card from the U.S. government. The list of free passes is already getting long. 

When is the U.S. banking industry going to be held accountable? If recent history is any indicator, never.

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