SocGen faces takeover or break-up as details emerge of record banking fraud

Speculation about the fate of Société Générale increased yesterday as the financial industry tried to make sense of how it fell foul of the world's biggest banking fraud.

Analysts said the bank's once highly rated management looked vulnerable to a takeover or a possible break-up after announcing €4.9bn (£3.6bn) of losses on Thursday.

Sarah Gentleman, an analyst at Bernstein Research, said: "Before the sub-prime crisis, in the first half of last year, Société Gé*érale was already an attractive acquisition target. At the current price, it is again likely to be a target. Management arguably no longer has the credibility to run a strong standalone entity."

SocGen has a well-run French retail banking business but a key attraction for a bidder looking for growth would be its eastern European operations. The bank entered these markets early and picked up bargains in emerging markets with undeveloped banking sectors. The business would be difficult to recreate through start-ups or individual acquisitions now, analysts said.

The bank's other jewel is the equity derivatives business where the fraud took place. SocGen is a leading player in the market and a buyer could impose tighter controls to prevent fraud without stifling the business's ability to take legitimate risk for profit. Top of the list of bidders would be its bigger rival, BNP Paribas. SocGen lost a bitter bidding war for Paribas to BNP in 1999 which redrew the boundaries for takeovers in France. Barclays, with the backing of its investors from Singapore and China, could also be tempted to mount a bid after losing out on ABN Amro last year.

SocGen shares closed down and have fallen about 45 per cent since early October. Industry sources suggested that the bank's institutional shareholders would be reluctant to sell the business with the share price at rock bottom.

Industry figures continued to debate whether the fraud signalled that the banking world had run out of control.

John Thain, the chief executive of Merrill Lynch, said: "Fraud is the CEO's ultimate nightmare. You can have all the systems in the world but you can't prevent fraud."

But NYSE Euronext's deputy chief executive, Jean-Francois Theodore, told Bloomberg that events at SocGen showed markets had become difficult to control.

The version emerging from SocGen is that the trader, Jérôme Kerviel, deployed a huge array of deceptions to cover €40bn of bets on share indexes rising. After taking short positions in December that made a small profit at the end of 2007, he is said to have backed stock markets to rise from 7 January until his trades were discovered 12 days later. The short timeframe could explain how counterparties did not spot that SocGen had amassed its long positions.

Bankers also said that those on the other side of trades might have assumed that the bank had made other bets to balance its trading. M. Kerviel is indeed alleged to have used other trades to offset his losses. But these were phantom deals entered into SocGen's system to help stop his losses being detected.

He is also alleged to have created phantom clients so that counterparties thought they were trading with SocGen's proprietary trading desk while the bank thought the trades were on behalf of a client. He was able to do so undetected by staying late into the night. Senior managers who did not spot his behaviour have already been fired.

M. Kerviel was able to get round the bank's risk controls because he had worked for three years on its computer systems and was able to override blocks. Banking bosses around the world will now be ordering checks to make sure the same thing cannot happen at their company.