The cash may even help SocGen avoid a takeover, but investors in the offer werenÆt betting on it. The deal, led by JPMorgan and Morgan Stanley, generated $16.1 billion of orders as speculators took advantage of a one-third discount to the stockÆs market price in the hope that a bidder would emerge to buy the French bank and pay them a tidy margin. Alas, those hopes died in mid-March when BNP Paribas, the leading contender to buy its French rival, pulled out of the race. It had been considering a takeover since late January, soon after the disclosure of Jerome KervielÆs loss-making trades, but officially withdrew its interest on March 19.
ôGiven the persistent rumours, BNP Paribas clarifies that it has ceased to consider a potential tie-up with Societe Generale,ö it said in a statement.
ôIt believes that the conditions, which would have allowed it to realise a shareholder value-creating merger, are not met.ö
The tie-up always seemed problematic. The two banksÆ investment banking businesses are far too similar for BNP to have gained much benefit from a takeover û SocGen pretty much invented equity derivatives and BNP has followed its model, which means there are huge overlaps and little opportunity for BNP to really profit. Perhaps more important, any merger would undoubtedly have resulted in significant job losses, which neither BNP nor the French government would have had much appetite for.
The French like to characterise the national specialisation in financial wizardry as a natural consequence of their intellectual tradition: the rationalism that gave the world metres and kilograms, and which today continues to favour mathematicians and engineers over business and marketing graduates. American bankers, on the other hand, say the French are communists who were discouraged from adopting aggressive US-style investment banking models in the 1980s, forcing them to skulk around in the arcane backwaters of derivatives. The truth is probably somewhere in between.
BNPÆs withdrawal means that under French market rules it cannot launch another bid for SocGen during the next six months, which throws the bankÆs future into question.
The French government remains hostile to a foreign takeover of a national treasure, but as a compromise it might consider tearing off the investment banking arm to save the French retail bank, according to some rival bankers. Certainly SocGenÆs stock price makes it an attractive target for the European rivals now circling it, including Barclays, which lost out in its bid for ABN AMRO, and HSBC. At the start of 2008 SocGen stock was trading at around ñ90 and has lost about one-third of its value since then, trading down into the low 60s.
According to Nicolas Reille, SocGenÆs Asia head of sales and marketing for equity derivatives, the bank is bent on restoring its reputation and growing its business. The successful rights issue has strengthened the bankÆs capital position, he says, and it now has a solid tier-1 capital ratio of 8%.
ôI think that very clearly puts this whole story behind us,ö he says. ôNow we can move forward with our growth and try to provide clients with the best answers to the current financial crisis.ö
Speaking at a Morgan Stanley conference in London on April 1, SocGenÆs deputy chief executive Frederic Oudea gave an overview of the bankÆs performance in the first quarter of 2008, describing ôsatisfactory client business in mixed market conditionsö in equity structured products and good performance in both equity and fixed income flow products. He also outlined a structural plan, to be supervised by a special committee and PricewaterhouseCoopers, to further tighten control procedures.
Reille in Hong Kong agrees that the bankÆs global reputation has taken a bad knock and is keen to stress how hard it is working to fix things. ôWe have been very transparent in our communication and we have been very proactive in explaining to our clients all the details to reassure them that there is no problem with the business model û itÆs a fraud issue,ö he says. ôWe have had an experience with this horror story that is absolutely unique and we will definitely use it as much as possible to make sure that this never happens again.ö
The story of what is alleged to have happened has been well told, but many rival bankers have a hard time understanding how a trader could have held such large positions without anybody noticing. By the time the French regulator alerted SocGen to the problem, his market exposure was $78 billion. SocGen itself says that KervielÆs trades triggered 72 internal signals that should have told his supervisors something was amiss. Of course, it is often said that banks never seem to discover rogue traders while they are making extraordinary gains, and Kerviel was certainly doing that before equity markets tanked in January. At the end of 2007 his trades were up massively but his official, declared profit was just ñ55 million ($86 million), which was reasonable given his risk limits û the real figure, ñ1.5 billion, was off the charts.
SocGenÆs well documented and widely reported position is that Kerviel is a criminal genius who perpetrated, from the bottom rung of the trading floor, an extraordinary fraud on an otherwise innocent bank. The criminal case against him may get to the bottom of that, but it seems more plausible to rival derivatives traders that there was a failure on the part of his supervisors.
Reille says that the bank has already put in place stricter controls and tighter limits, and is introducing technology such as fingerprint recognition to control access to computer systems. ôAt the end of the process weÆll be at the cutting edge in terms of making sure we donÆt face this kind of risk in the future,ö he says.
Back to business
For now, Reille is concentrating on the job at hand: coming up with structured products that help clients to make money in todayÆs horrible market conditions. ReilleÆs Asia team had a strong year in 2007 on the back of bullish equity markets, selling share accumulators and range accruals by the bucket load to private banks. Now, volumes are way down and banks are having to work hard to convince clients to consider more innovative products.
ôCurrently, we are offering strategies which are basically market neutral,ö he says. ôFor example, products linked to funds of hedge funds, either through our Sharpe notes or through products which basically leverage the out-performance generated by those funds of funds compared to Libor. Or you can also have products which play the dispersion between stocks, but with risk that is controlled by a 100% capital guarantee.ö
That is not an easy sell in Asia, he says. Clients who have been used to riding the bull market to make quick, leveraged returns are not so interested in seven-year products with capital guarantees û they tend only to see the possibility that their cash will be tied up for seven years and could make no money at all. And negative real returns.
ôThis is very typical, itÆs what we always face,ö says Reille. ôThe way I see it is that if you have a seven-year capital-guaranteed product, itÆs a buy-and-hold only in the worst-case scenario û when markets tank and you want to stay in to get back your capital, but the reality is thatÆs the truth for everybody. If you buy a stock tomorrow and it goes down, you will hold it until it recovers. But if it performs very well over one-year, you can take the profit. It is the same with a capital-guaranteed product.ö
SocGen may well be wishing that it had a capital guarantee on the trades Kerviel made in its name. Whether the bank succeeds in maintaining its independence or is taken over by one of its rivals, few doubt the calibre of its structurers, traders and sales team û which only makes it more attractive as a takeover target.
This article was originally published in the April issue of FinanceAsia magazine.