Developing Economies Face
Reckoning as U.S. Stumbles

By PATRICK BARTA and MARCUS WALKER
January 24, 2008; Page A1

Today’s global economic crunch was made in America. But despite hopes to the contrary, the pain will be shared by developing nations from Turkey to Thailand.

Developing economies — where 85% of the world’s population lives — are maturing and are far less fragile than they were a decade ago. But they aren’t strong enough to escape the pain of a slowdown in the industrialized world or self-sufficient enough to hold up global growth on their own.

Those realities were underscored this week, as stocks in China, India and other parts of developing Asia swooned amid fears of a global recession. Hong Kong’s Hang Seng Index suffered its biggest point decline ever on Tuesday, and Indonesian shares dropped more than 7%. While many Asian markets rebounded strongly yesterday, worries persist that developing-world markets remain at risk to the gathering economic storm.

Many emerging markets are reliant on exports to rich countries. And while local sources of economic growth, including consumer spending, have taken root in China and elsewhere, they aren’t enough to keep developing countries from slowing if their export engines sputter.

Economists have been debating for years whether the developing world is robust enough to motor ahead should the mammoth U.S. economy soften. That theory of “decoupling” now faces a real-world test, and is a major topic at this week’s gathering of the world business and political elite at Davos, Switzerland.

“No country can decouple from the U.S.,” said Kamal Nath, India’s trade minister, at Davos. “The question is the impact.”

American consumers hold far greater sway over the world economy’s fate than do their counterparts in the big emerging markets: They spent about $9.5 trillion last year — nearly six times as much as Chinese and Indian consumers between them, said Stephen Roach, chairman of Morgan Stanley in Asia.

In Thailand, shoe exports are already cooling and some apparel factories have closed. In China, furniture makers are facing weaker sales. Hua Chao Art & Furniture in Zhongshan says exports to the U.S. fell about 17% in 2007 compared with the previous year, in part because of the U.S. housing bust. “Production may shrink and jobs may be cut accordingly,” said a sales manager at the company.

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Bank Says Trader’s Fraud
Caused $7.2 Billion Loss

Société Générale
Cites Elaborate Means
Used to Elude Controls

By DAVID GAUTHIER-VILLARS and NICOLAS PARASIE
January 24, 2008 1:08 p.m.

PARIS — Jérôme Kerviel, a 31-year-old trading in “plain vanilla” futures at Société Générale SA, pulled off what appears to be a singular feat in the world of finance: putting together what the bank termed a string of “elaborate fictitious transactions” that amounted to a €4.9 billion ($7.2 billion) loss.

Now the bank appears to have lost Mr. Kerviel as well.

Jerome Kerviel

Société Générale Chairman and Chief Executive Daniel Bouton said Thursday that the bank didn’t know Mr. Kerviel’s whereabouts, though it was still trying to mop up the path of destruction he had left behind.

Using what Société Générale co-Chief Executive Philippe Citerne described as “pure fraud,” Mr. Kerviel dodged myriad elaborate computer-control systems and an army of 2,000 back-office supervisors to make huge bets on stock-index futures.

Société Générale said it lodged a legal complaint with French prosecutors against the trader. The complaint alleges Mr. Kerviel committed fraudulent falsification of banking records, fraudulent use of such records and computer fraud.

Former Barings futures trader Nick Leeson in November 1995.

Here’s a look at stories in the Journal over the past decade on trades gone bad, and an accompanying photo gallery above.

• Behind a $550 Million Bad Bet: A Mystical Man With Ambition(CAO Singapore, 2004)

• Junior Staffers Cited for Stopping National Australia Bank Scandal(2003)

• Allied Irish Banks Say a Rogue Trader Lost $750 Million in Unauthorized Deals(2001-2002)

• Sumitomo Trading Scandal Still Haunts Copper Market(1996)

MORE

• Deal Journal:Who Are You, Jerome Kerviel?

• Daily Davos:Massive Trading Loss Is Talk of the Town

Mr. Citerne said the bank failed to notice the unauthorized trades until last week because the “smart” trader had an “intimate and malicious” knowledge of Société Générale’s procedures and also knew the days in which they 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. He said he was at a loss to explain the motivation of the trader, who didn’t benefit from the alleged fraudulent trade. “He was mentally weak,” Mr. Citerne said. “I have no idea why he did that.”

Mr. Kerviel, 31, joined Société Générale in August 2000 and was working as a trader on the futures desk at the bank’s headquarters near Paris. He was in charge of futures hedging on European equity-market indexes, known as “plain vanilla” futures.

Though Société Générale says it first learned of what it termed “massive fraudulent directional positions” last Saturday, it waited until it could close out those trades before going public with the problem. Winding down the trades, the bank said, resulted in a €4.9 billion charge, making it potentially the largest loss ever from an alleged rogue trader.

The size of the loss also raised questions as to what role regulators are playing, and even whether they would ever be able to detect such a fraud.

Christian Noyer, the governor of the Bank of France, said an investigation was to begin immediately at Société Générale to figure out the origins and methods behind the fraud. “We will closely examine how the process malfunctioned and look into whether the internal controls were sufficient,” he said at a news conference. Once the investigation is completed and the bank had “a complete vision of the methods used by the trader” it would decide whether any regulations or oversight needed to be tightened at France’s banks. “We need to learn what happened at Société Générale to make sure this cannot happen again,” he added.

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French bank to seek $8 billion in new capital after it discovers trader’s fraud, takes subprime-related writedown.

PARIS (AP) — French bank Societe Generale said Thursday it has uncovered a $7.14 billion fraud - one of history’s biggest - by a single futures trader who fooled investors and overstepped his authority.

The fraud destabilized a major bank already exposed to the subprime crisis. France’s second- largest bank by market value said it would be forced to seek $8.02 billion in new capital.

Trading in Societe Generale’s shares, which have lost nearly half their value over the past six months, was suspended on the Paris bourse. It was unclear when trading would resume.

The bank said it detected the fraud at its French markets division the weekend of Jan. 19-20. In a statement announcing the discovery, it called the fraud “exceptional in its size and nature.”

It said a trader at the futures desk had misled investors in 2007 and 2008 through a “scheme of elaborate fictitious transactions.”

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