Wednesday, February 6, 2008
SocGen Trading Scandal Tax Twist
David Gauthier-Villars, Wall Street Journal, tells us about the ironic hit that Société Générale may face from a tax liability on gains accrued by rogue trader Jérôme Kerviel. As they pore over the trades, financial books and mobile-phone records of Mr. Kerviel, Société Générale officials have discovered that the trader booked a real gain for the bank of €1.4 billion. That profit now "is subject to corporate tax," according to one person close to the bank. The bank said it hadn't noticed the gain because the trader had hidden it by creating a set of fake positions that generated a €1.4 billion loss. At the stock markets' close on Friday, Jan. 18, he had racked up losses of €2.7 billion, according to the people close to the bank. The following Monday, bank officials assigned a single trader to unwind all of Mr. Kerviel's positions. By the time they finished, the loss had climbed to €6.3 billion, these people said. They added that the €4.9 billion loss unveiled on Jan. 24 is a net loss that factors in Mr. Kerviel's €1.4 billion gain in December. The extra tax that Société Générale may have to pay on the €1.4 billion gain booked in 2007 will be more than offset, although at a later date, by tax breaks on the €6.3 billion loss that was recorded last month.
This is what is called a lose-lose situation. Bear you lose and bull the taxman wins. The more this scandal unwinds, the more it looks like this is not just a case of one bad apple. The whole friggin barrel is rotting. They didn't know about it...They turned a blind eye while he was minting money...Culture of risk...They didn't know about the gain...The gain is factored into the net loss...Whatever. SocGen is going down. Bigtime. Because something tells me Kerviel was not the only worm under this rock there's a lot more worms which are going to start crawling out in the coming months. I mean, other traders at the bank with similar positions and cover-ups of these and other irregularities by SocGen just before or after the Kerviel scandal broke in the news.
(May 24th 2008 - Update 1: SocGen publishes report based on internal inquiry into the Kerviel scandal. Reuters update about the report says that Societe Generale trader Jerome Kerviel may have had internal help. The internal report said Kerviel may have been helped by an assistant but added there was no conclusive proof of this. "We have discovered indications of internal collusion involving a trading assistant, a middle office operational agent," said the report.)
Also, the New York Times reports that the Securities and Exchange Commission is investigating whether Robert Day, an American Société Générale board member, violated insider trading rules by selling shares worth 45 million euros before the bank’s audit committee was informed of the subprime loss.
And there's two ways this is going to end. A) Mass resignations and maybe even a couple of sentences handed out at the top. New management, a new board, capital infusion and maybe a breakup. B) A takeover by BNP Paribas and a revamp of the board and trading practices. Either way the top management is toast.
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