The Wall Street Journal-20080129-The Fallout at Societe Generale- Tasks Mount for a Point Man- Explaining Scandal Is Latest Challenge On Mustier-s Plate
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The Fallout at Societe Generale: Tasks Mount for a Point Man; Explaining Scandal Is Latest Challenge On Mustier's Plate
Full Text (1116 words)As French bank Societe Generale seeks a way out of the most expensive trading scandal ever, it's betting heavily on one man: Jean- Pierre Mustier.
The head of the bank's corporate and investment-banking division, Mr. Mustier has become the point man for a number of daunting tasks. They include explaining how a low-level trader could outmaneuver the bank's controls to rack up 4.9 billion euros (more than $7 billion) in losses; answering for another 2.05 billion euros in write-downs on mortgage securities or credit exposure; and bolstering morale and revenue at a time when bonuses could be slashed and several of his immediate subordinates have left.
How he fares will play a large role in defining the future of France's third-largest bank by market value after BNP Paribas SA and Credit Agricole SA, in part because Mr. Mustier has been seen as a leading candidate to run the bank. If Mr. Mustier's position becomes untenable, the bank could be left with a management vacuum at a time when good bank executives -- particularly ones schooled in the bank's complex equity-derivatives business -- are hard to find.
Mr. Mustier said in a recent interview that he had submitted his resignation but it wasn't accepted. His goal now, he said, is to put Societe Generale's investment banking back on the rails.
"At the moment, that is my only concern," he said.
Despite the obstacles, some analysts think the 46-year-old executive, who started as an options trader at the bank two decades ago, has staying power. "I respect Jean-Pierre Mustier enough to believe that he is able to sort out the mess," says Guillaume Tiberghien, a banking analyst at Credit Suisse in London. But he says the scandal and related losses are a "big blow for the credibility of the bank."
The blow to Societe Generale -- its stock price has fallen 17% since the trading scandal broke on Jan. 18 -- has led to speculation that the bank could become a takeover target. Executives at rival BNP Paribas are closely monitoring the situation and having internal discussions about a possible bid, says a person familiar with the matter. British banks Barclays PLC and HSBC Holdings PLC have also been mentioned by analysts as potential suitors for all or part of the bank. Representatives for BNP, Barclays and HSBC declined to comment.
Considering the number of French finance jobs that could be eliminated, any acquisition is likely to face political obstacles, particularly if the acquiring bank isn't French. Despite the losses, most analysts see Societe Generale as financially strong enough to go it alone. To raise 5.5 billion euros to shore up its capital, the bank is preparing to sell new shares to existing shareholders in what is known as a rights issue.
Barring any takeover, Mr. Mustier's position is still delicate. The trading scandal strikes at the core of a business he has been learning and building for much of his life. The son of a surgeon, Mr. Mustier joined Societe Generale in 1987 after a stint as a paratrooper. In 2003, he took over as head of the corporate and investment bank after the death in a road accident of predecessor Xavier Debonneuil.
Mr. Mustier led a push to make Societe Generale a top player in the cutting-edge niche of equity derivatives and certain areas of fixed income, rather than competing across the board with large investment banks such as Switzerland's UBS AG, Citigroup Inc. and Goldman Sachs Group Inc. He operates in a world of brainy bankers, known as quants, who are skilled in applying complex mathematics to finance. Many studied at Mr. Mustier's elite alma mater, the Ecole Polytechnique.
Until this year, Mr. Mustier's strategy was paying off. Corporate and investment banking pre-tax profit rose 29% in 2006 to 3.26 billion euros. Under a plan called Step Up 2010, Mr. Mustier was aiming to generate more revenue from businesses such as providing merger advice and coordinating debt and equity products.
"This event is a massive shock for us," Mr. Mustier said in a conference call Sunday, speaking of the trading scandal. Adds a top Societe Generale executive: "Everything he believed in collapsed in one day."
Several top executives key to Mr. Mustier's plans have left the bank or their previous posts there in recent weeks. Fixed-income executives Marc Breillout and Gregoire Varenne exited their posts amid mounting losses on mortgage investments. Also gone from their previous posts are Luc Francois, head of global equities and derivatives solutions, and Pierre-Yves Morlat, who oversaw equity trading. Mr. Breillout declined to comment. Mr. Varenne didn't return calls for comment. Messrs. Francois and Morlat couldn't be reached.
Meanwhile, those who remain are worried about whether significant portions of the bonuses they were hoping to receive for 2007 could be wiped out. That will make it all the more difficult for Mr. Mustier to retain talent at a crucial juncture for the bank.
In a conference call Sunday, the bank said it intends to pay employees at a level that will retain them. For areas affected by the fraud, there will be adjustments in compensation.
Aside from explaining to a skeptical public how a lone trader, Jerome Kerviel, could have snookered France's brightest financial mathematicians, Mr. Mustier and other executives will also have to defend the way the bank unwound Mr. Kerviel's trades. Some of the damage control -- undertaken by a single trader -- was done on Monday, Jan. 21, a day when sharp drops on European exchanges helped boost the bank's losses to 4.8 billion euros from an initial 2 billion euros. Mr. Mustier and others have said they acted in the best interest of the bank.
Societe Generale said "conditions in the market were very unfavorable." The bank said that in getting rid of its stock-index futures positions, it accounted for 8.1% of all trading volume on the Dow Jones Euro Stoxx 50 index Jan. 21 and 7.8% of the DAX Index in Germany. The following two days, the bank accounted for between 5.7% to 6.8% of trading on the two indexes.
Even before the trading scandal, the bank was preparing to detail fresh losses on mortgage-related investments. For the fourth quarter, in a report overshadowed by the 4.8 billion euros trading loss, Societe Generale said it would take 2.05 billion euros in write-downs, up from only 230 million euros in the third quarter. More could be coming: In a recent report, Citigroup bank analyst Kimon Kalamboussis estimated that Societe Generale might have to take an additional markdown of 1.5 billion euros.
Mr. Kalamboussis downgraded Societe Generale to a "sell" from "buy." "As a standalone entity, we see SG's leading European equities franchise gradually deteriorating," he wrote.
