PARIS -- The rogues' gallery of banking has a new candidate for membership: 31-year-old trader J&eacute;r&ocirc;me Kerviel.

In one of the banking world's most unsettling recent disclosures, France's Soci&eacute;t&eacute; G&eacute;n&eacute;rale SA said Mr. Kerviel had cost the bank &euro;4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some &euro;50 billion, or $73 billion.

The loss -- dwarfing the $1.3 billion Nick Leeson cost British bank Barings in 1995 -- has forced Soci&eacute;t&eacute; G&eacute;n&eacute;rale to seek a capital infusion. It is expected to try to raise &euro;5.5 billion, chiefly from its existing shareholders.

The loss exposes the latest breakdown of risk controls at a big international financial institution, along with U.S. banks that have hemorrhaged billions of dollars since the crisis in subprime mortgages developed last summer. Some analysts speculate that the French bank's frantic efforts to unwind the unauthorized trades over 72 hours may have contributed to the volatility and declines that rattled European markets on Monday. (See related article.)

In addition to the billions, Soci&eacute;t&eacute; G&eacute;n&eacute;rale appeared for a time to have lost Mr. Kerviel as well. Executives at the bank, still stunned at the magnitude of the scandal, told reporters yesterday they hadn't kept track of his whereabouts since questioning him on Saturday.

But an attorney at a law firm representing Mr. Kerviel said the trader had spent much of the week with his lawyer. Asked whether Mr. Kerviel rejects the banks' accusations, the lawyer said only: "He is not on the run. He is standing by to answer to justice. He spent the day at our office."

Early details, including accounts from executives at the French bank, paint a picture of an ordinary trader who used extraordinary means to game the bank's own system and hide massive unauthorized trades on stock-index futures. Even as bank executives were scrambling to deal with the trail of destruction, they were at a loss to describe his motivations. Soci&eacute;t&eacute; G&eacute;n&eacute;rale executives said that the early investigation indicated the trader didn't earn a dime on his actions. They also said he appeared to be acting alone.

"He was mentally weak," said the bank's co-chief executive, Philippe Citerne. "I have no idea why he did that." Soci&eacute;t&eacute; G&eacute;n&eacute;rale -- France's second-largest bank after BNP Paribas, founded by a decree signed by Napoleon III -- has lodged a complaint against him with French prosecutors.

Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank's "Delta One" desk in western Paris, earning about &euro;100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.

Dodging Controls

At some point last year, bank executives say, Mr. Kerviel started using futures on the European stock indexes to place huge bets that European markets would continue to rise. He was able to skillfully circumvent controls, they added, because he had worked in the "back office" and had an intimate knowledge of how trades are processed and monitored.

People who know Mr. Kerviel describe him as single and a quiet type, but one who had friends on the trading desk and kept up his friendships in the back office. Indeed, Mr. Citerne speculated that such friendships may have helped him stay on top of the latest risk-control procedures.

Toward the end of 2007, Mr. Citerne said, Mr. Kerviel's trades were winning. But after the holidays, the market turned against him. One index he traded, the CAC-40 in Paris, began to fall sharply. That meant big losses for his positions.

Though he tried to cover his tracks over the past few weeks, the scheme started unraveling last Friday, according to Soci&eacute;t&eacute; G&eacute;n&eacute;rale executives, who said Mr. Kerviel made a false move and red flags were raised by a computer system. He changed a tactic he had been using to conceal his trades and, said Mr. Citerne, "took a position that prompted a possible margin call," or demand for funds. "That triggered some alerts."

Soci&eacute;t&eacute; G&eacute;n&eacute;rale Chairman Daniel Bouton declined to provide details about the positions the trader built up over the past months. But he warned: "Had we not acted swiftly, the loss could have been 10 times worse." The bank said it would dismiss several of Mr. Kerviel's supervisors.

Its evident failure of risk assessment may raise fresh questions about how well banks globally are set up to monitor the market dangers that the U.S. mortgage-market downturn has exposed. The mortgage mess has made clear that many risk systems weren't properly set up to measure the likelihood of defaults and how these would affect debt slices rated as super-safe.

The disclosure of allegedly fraudulent trading overshadowed fourth-quarter write-downs by Soci&eacute;t&eacute; G&eacute;n&eacute;rale totaling &euro;2.05 billion to cover its mortgage exposure.

Concerns that Soci&eacute;t&eacute; G&eacute;n&eacute;rale would take at least a &euro;1 billion write-down had hurt its stock over the past week. Many of the world's biggest banks, including Citigroup Inc., Merrill Lynch & Co. and UBS AG, have struggled to identify the value of these thinly traded mortgage securities.

Derivatives House of the Year

Soci&eacute;t&eacute; G&eacute;n&eacute;rale is known internationally for its expertise in equity derivatives, which has become a big money spinner for it. Risk Magazine awarded the bank its Equity Derivatives House of the Year this month. "With one of the largest exotics books on the Street, one would imagine that Soci&eacute;t&eacute; G&eacute;n&eacute;rale Corporate and Investment Banking (SG CIB) would be licking its wounds and coping with hundreds of millions of euros in losses," the magazine said. "There was some impact, but the losses have been relatively minor and entirely manageable, says Christophe Mianne, SG CIB's head of market activities...."

Soci&eacute;t&eacute; G&eacute;n&eacute;rale says it first learned of problems on its trading desk a week ago and on Saturday uncovered what it termed "massive fraudulent directional positions." It says it waited six days to go public with the news, giving itself time to unwind the positions and avoid greater losses. But a top bank executive also said officials kept mum to avoid leaks that would disrupt the markets.

Grinding Out Transactions

Mr. Kerviel joined Soci&eacute;t&eacute; G&eacute;n&eacute;rale's investment banking unit in mid-2000, according to bank officials, after earning an advanced degree in trading from the University of Lyon in central France. He was assigned to units that handled core trading operations where bankers and support staff grind out transactions. In 2005, he moved to the trading desk.

Mr. Kerviel essentially made bets on which way large European stocks would move, in one of the most liquid markets linked to equities globally. His expertise was trading futures tied to baskets of stocks such as the Euro Stoxx 50. In normal markets, some $40 billion to $50 billion of the futures of that index trade daily. The index gives traders such as pension and hedge funds quick access to a large swath of the European economy, by investing on the belief the index will rise or fall to a certain point in the future. Mr. Kerviel also made trades in Germany's DAX Index and France's CAC-40.

According to Mr. Bouton, the Soci&eacute;t&eacute; G&eacute;n&eacute;rale chairman, Mr. Kerviel began conducting fraudulent trades sometime in 2007. People familiar with Mr. Kerviel's behavior believe he worked late into the night, essentially burrowing into Soci&eacute;t&eacute; G&eacute;n&eacute;rale's computers, as he allegedly built a multilayered way to hide his trades by hacking into the computer systems.


Mr. Citerne said the bank didn't notice the unauthorized trading until last week because the trader had "intimate and malicious" knowledge of its procedures and knew at what dates checks were conducted. "Each time he took a position one way, he would enter a fictitious trade in the opposite direction to mask the real one," Mr. Citerne said. According to one person familiar with the situation, Mr. Kerviel used the computer log-in and passwords of colleagues both in the trading unit and the technology section.

According to one person familiar with events, the bank's controls did red-flag an outside trading partner of the bank, whose account showed unusually high finance levels. The client, when asked by the bank about the account's finances, denied knowing of it. Pursuing this matter ultimately led to Mr. Kerviel.

Executives called him in for questioning on Saturday, said Mr. Bouton. The interrogation took a good part of the day because Mr. Kerviel had convinced himself that he had mastered a new way to trade stock-index futures, according to a person familiar with the situation. For a while, he went in circles while justifying the trading strategy, this person said, but finally on Saturday night he broke down and admitted the trades.

Now the question for the bank became how to dump the trades without tipping off rivals, which could take advantage of the mass selling. On Monday the bank began unwinding the positions in small trades.

Market Selloff

But its traders, who had worked alongside Mr. Kerviel, soon began dealing with a market selloff that had begun in Asia. While some index traders suspect that Soci&eacute;t&eacute; G&eacute;n&eacute;rale's steady selling kept the European markets from shaking off the sharp downturn on Monday, Soci&eacute;t&eacute; G&eacute;n&eacute;rale says its trades were typically in range of current market prices and wouldn't have exacerbated the down market.

The day after that turmoil, the U.S. Federal Reserve slashed short-term interest rates three-quarters of a point. According to people familiar with the matter, the Fed hadn't been told of the selling by Soci&eacute;t&eacute; G&eacute;n&eacute;rale that conceivably was helping cause the Monday market volatility.

Of its overall &euro;4.9 billion losses from the alleged scheme, &euro;2 billion was tied directly to Mr. Kerviel's trades and the rest resulted from the bank's program of dumping the portfolio this week in a rocky market.

By Wednesday, Soci&eacute;t&eacute; G&eacute;n&eacute;rale officials had reached out to J.P. Morgan Chase & Co. and Morgan Stanley saying the French bank needed to raise money and fast. People familiar with the situation say it wasn't feasible to go to cash-rich nations' so-called sovereign-wealth funds, which have provided some $60 billion in capital to global financial firms in recent months; there wasn't time to negotiate such a deal, and bankers believed that French President Nicolas Sarkozy might object. (Mr. Sarkozy was informed about the problems Wednesday, said a person familiar with the situation.)

Instead, the plan is to raise &euro;5.5 billion in a rights issue, an arrangement in which new shares are sold, typically at a discount, with priority going to existing investors. J.P. Morgan and Morgan Stanley are underwriting it.

Soci&eacute;t&eacute; G&eacute;n&eacute;rale and the U.S. bankers feared on Wednesday that shares of the French bank would fall sharply when it disclosed the huge loss from the alleged rogue trader. Then, the French bank got a break.

Late Wednesday afternoon in the U.S., news broke that insurance regulators had met with banks to discuss a plan to provide financial support to bond insurers that back billions of dollars in debt. That news caused financial-company stocks in the U.S. to rise. This rise carried over to European trading yesterday morning and limited the fall in Soci&eacute;t&eacute; G&eacute;n&eacute;rale's stock.

The capital raising is expected to kick off after Soci&eacute;t&eacute; G&eacute;n&eacute;rale reports its 2007 results on Feb. 21.

Write to Alistair MacDonald at