EuroZone Profiteers: Société Générale

What:Société Générale. Founded in 1864, it was nationalized in 1945 and had assets worth €1.53 trillion in 2011.

Where: Paris, France.

Why: After privatizing in 1987, it expanded into derivatives, and bought banks in Central and Southern Europe. It lost over €1 billion on Geniki bank in Greece and another €4.9 billion in derivative trading.

Outcome:It took €3.4 billion in bailout funds from the French government in 2008, and sold Geniki in October 2012 to Piraeus bank for €1 million.

Daniel Bouton, an old school French banker, took over as CEO of Société Générale in 1993 after an illustrious career in the Inspection Générale des Finances. “Mr. Bouton arrived at SocGen with a swagger,” wrote Adam Jones in the Financial Times. “The French like to call it entering “par la grande porte,”or “through the main door.”[106]

“Golf and opera are among his passions; he is said to have an encyclopedic knowledge of Burgundy [wines] and owns a highly regarded cellar of grands crus,” wrote James Stewart in the New Yorker magazine. “He is a member of what may be France's most exclusive group, the secretive Club des Cents, which meets weekly to savor haute cuisine and fine wines.”[107]

Under Bouton, Société Générale rose to dizzying heights by building up an equity derivatives business with a staff of 12,000 working in 45 countries.[108] So when the news broke in January 2008 that a 31-year-old trader had secretly bet €50 billion, and stood to lose the bank almost €5 billion, Bouton was very, very angry. He called Jerome Kerviel, the unfortunate trader, a “financial terrorist.”[109]

Investigators would later prove that Kerviel—who lived in a one-bedroom apartment, and did not even own a car—had not taken a penny from the bank, and that had he won his bet (as he often had in the past), he would have been given a generous bonus.[110]

Unable to take “repeated attacks against me personally” for the huge losses caused by Kerviel, Bouton resigned as CEO a few months later, and then as chairman the following year.[111] The French media took delight in his fall, pointing out the class differences between him and Kerviel. Bouton had studied at all the right schools and knew all the right people while Kerviel was the son of a blacksmith from rural Brittany.[112]

Yet Bouton was just as guilty of spearheading another strategy that consistently lost money at the billion-euro scale for Société Générale: betting on Greek bonds and banks. Like the derivative betting business that he built by hiring traders such as Kerviel, Bouton attempted to profit from countries like Greece by spending heavily to impose his own brand of French banking management.

Initially, Bouton bought up small Central European banks.[113] But in 2004, he sent one of his trusted lieutenants, Jacques Tournebize, on a shopping mission to Athens.[114] Société Générale owned some shares in the General Bank of Greece, and Tournebize arranged to buy a significant minority stake from the Greek Army Pension Fund, and renamed the bank Geniki.[115]

As part of an ambitious expansion plan, Société Générale established a network in the region, and Tournebize moved to Athens with a team of more than a dozen senior managers. “The Balkans are not very far,” Tournebize told La Tribune, a French newspaper, in April 2006. “They constitute a natural opening for the Greek markets, and Greece wants to play its role in the banking network of the region."[116]

This regional fantasy was soon dashed. By 2007, Société Générale was forced to admit that the Greek purchase was doing badly.[117] That year Geniki posted relatively modest losses of €43.6 million, followed by another €37.5 million in losses in 2008.[118] Then in 2009, Geniki lost €109.5 million.[119] Finally came the crash: In 2010 Geniki lost €411 million, and in 2011 it lost €795.6 million euros.[120]

Until the bitter end, Société Générale tried to promote the idea that its investments in Greece were sound. “Much silly talk on Greece,” wrote the bank in an analytical statement issued December 8, 2009. “Of course anything is possible. Pigs can fly and Armageddon could be for tomorrow. Just silly talk.” [121] (Bold in original.)

Bouton was the first French banker to buy a major Greek bank, but not the only one to make this mistake. A few miles from Société Générale’s gleaming skyscraper offices in the western suburbs of Paris, Georges Pauget worked out of the more modest offices of Crédit Agricole in Montparnasse. A former paratrooper with none of Bouton’s elite education, Pauget fell into the very same trap.

Adam Jones, “Man in the News: Daniel Bouton,” Financial Times, January 2008. http://www.ft.com/intl/cms/s/0/00d5a556-cb61-11dc-97ff-000077b07658.html

[107] James Stewart, “Annals of Finance: The Omen: How an Obscure Breton Trader Gamed Oversight Weakness in the Banking System,” New Yorker, October 20, 2008. http://www.newyorker.com/reporting/2008/10/20/081020fa_fact_stewart

[108] Ibid.

[109] Independent (UK), “Capitalism in the Dock as Kerviel Goes on Trial,” Independent (UK), June 8, 2010. http://www.independent.co.uk/news/world/europe/capitalism-in-the-dock-as-kerviel-goes-on-trial-1994133.html

[110] Stewart, Op. Cit.

[111] Heather Smith and Fabio Benedetti-Valentini, “Bouton Won’t Apologize for Calling Kerviel a ‘Terrorist,’” Bloomberg, June 21, 2012. http://www.bloomberg.com/news/2012-06-21/bouton-won-t-apologize-for-calling-kerviel-a-terrorist-.html

[112] Stewart, Op. Cit.

[113] Emma Thelwell, "Société Générale: A history," Daily Telegraph (UK), January 24, 2008. http://www.telegraph.co.uk/finance/markets/4667708/Societe-Generale-A-history.html

[114] Florent Celhay, “Athéns Jacques Tournebize, Directeur Général de la Geniki Bank,” Lepetit Journal, April 27, 2006. http://www.lepetitjournal.com/international/vous/867-vousinter/15482-athes-jacques-tournebize-directeur-gral-de-la-geniki-bank.html

[115] “Société Générale becomes majority shareholder of General Bank of Greece,” Op. Cit.

[116] Hellenic Ministry of Economy and Finance, "Fact Sheet on the Greek Economy, November 2006," Hellenic Ministry of Economy and Finance, November 14, 2006. http://web.archive.org/web/20120911103232/http://www3.mnec.gr/FILES_PDF/FactSheet_November06_Eng.pdf

[117] Financial Times, “Rewards for Dutch Masters Stir the Pot,” Financial Times, July 10, 2007. http://www.ft.com/intl/cms/s/0/89ac5d58-2f11-11dc-b9b7-0000779fd2ac.html

[118] Reuters, “SocGen’s Geniki Bank Posts 2008 Loss,” Reuters, March 27, 2009. http://in.reuters.com/article/2009/03/27/geniki-results-idINLR96740520090327

[119] Reuters, “SocGen’s Greek Unit Geniki Says 2010 Loss Widens,” Reuters, February 15, 2011. http://www.reuters.com/article/2011/02/15/geniki-results-idUKLDE71E24L20110215

[120] Reuters, “SocGen’s Greek Geniki Bank Makes Smaller Q1 Loss,” Reuters, May 30, 2012. http://uk.reuters.com/article/2012/05/30/greece-geniki-idUKL5E8GUI8R20120530

[121] Quoted in Jason Manolopoulus, “Greece’s Odious Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community,” Anthem Press, May 2011