The Wall Street Journal-20080130-France Pressures Bank To Dump Besieged Chief- Societe Generale Board To Weigh Bouton-s Fate- Foreign Suitors at Bay
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France Pressures Bank To Dump Besieged Chief; Societe Generale Board To Weigh Bouton's Fate; Foreign Suitors at Bay
Full Text (1620 words)As Societe Generale charts its way through crisis, political calculations, not business ones, are likely to determine the course.
Six days after the French bank disclosed a 4.9 billion euros ($7.2 billion) trading loss, its board is expected to discuss today the possible ouster of Chairman and co-Chief Executive Daniel Bouton, people familiar with the matter say. Foreign and domestic predators are circling the stricken bank -- but France is likely to rebuff any overtures from abroad.
The French government yesterday tried to set the agenda, all but demanding the resignation of Mr. Bouton. Board members should "consider whether the person in place is the best to steer the ship when she is pitching, or whether the captain should be changed," said Christine Lagarde, the country's finance minister.
While seemingly ready to throw Mr. Bouton overboard, Paris is making clear it doesn't want foreigners to benefit from the bank's distress.
"Societe Generale is a large French bank, and the government is intent on preserving it as a large French bank," Prime Minister Francois Fillon told Parliament.
The man at the center of the scandal, meanwhile, is seeking to shift part of the blame for the colossal losses to his supervisors. Jerome Kerviel, a 31-year-old stock-futures trader, told investigators over the weekend: "As long as we were winning, and this wasn't too visible and suited everybody, nobody said anything." A transcript of his statement to investigators was confirmed yesterday by the Paris prosecutor's office and one of Mr. Kerviel's lawyers.
France's apparent move to ring-fence Societe Generale from a foreign takeover contrasts sharply with the U.S. government's recent stance on big overseas investments in American banks. Washington has largely welcomed the billions of dollars of capital that have poured into battered Wall Street firms from deep-pocketed government investors in the Persian Gulf and Asia.
Fending off non-French bidders for Societe Generale would be in line with France's long tradition of protecting "national champions" from falling into foreign hands. President Nicolas Sarkozy himself has often stepped in to prevent takeovers of big companies from abroad. When he was finance minister in 2004, for example, Mr. Sarkozy worked to dissuade Swiss drug maker Novartis AG from launching a bid for French rival Aventis SA. The government then helped broker a deal between Aventis and smaller French rival Sanofi-Synthelabo.
An adviser to Mr. Sarkozy said yesterday that the banking industry clearly falls into the category of strategic sectors that France has long vowed to protect from foreign predators. The nuclear, pharmaceutical, power and aerospace industries also enjoy French state protection.
Yesterday's comments by Prime Minister Fillon could cool the interest of banks such as the United Kingdom's HSBC Holdings PLC and Barclays PLC, Germany's Deutsche Bank AG, Spain's Banco Santander SA and Italy's UniCredit SpA -- all players that analysts say could bid.
Many of these institutions are busy integrating recent mergers or dealing with fallout from the U.S. subprime-mortgage crisis. But Societe Generale's stock provides an attractive opportunity. The bank's stock is trading 40% below its price a year ago. Its shares have fallen 8% since Jan. 18, when the bank first learned of irregular trading. Yesterday, its stock rose 10% to 78.45 euros, amid increased speculation the bank might be sold. Spokesmen for UniCredit, HSBC, Deutsche and Barclays declined to comment. A spokesman for Santander said the bank isn't interested.
While a foreigner would be unwelcome, the French political establishment seems less hostile to a domestic partner for Societe Generale. Successive French governments have believed that France deserves two big financial institutions -- partly as a way to keep jobs, says one Paris banker. But with the scandal engulfing Societe Generale, Mr. Sarkozy is reconsidering that approach.
BNP Paribas, France's largest bank, is considering whether to make a bid, and a decision on whether to hire advisers could come within days, people familiar with the situation say. BNP could also submit a joint bid with Credit Agricole, according to Credit Suisse analyst Guillaume Tiberghien.
Potential buyers might decide to wait for a green light from the government, and to see if Societe Generale uncovers any other losses, according to one of the people familiar with the situation. Bidders may also want to see whether an emergency 5.5 billion euros rights issue succeeds next month, this person says.
In conversations Mr. Bouton and Societe Generale's finance chief have had with investors, the bank has outlined how the fraud carried out by Mr. Kerviel led to a 4.9 billion euros loss, according to a person familiar with the situation.
Details of Mr. Kerviel's risky trading have been trickling out following his interrogation by investigators over the weekend. Mr. Kerviel's lawyer said yesterday that her client told investigators Societe Generale managers couldn't have been unaware of his audacious bets on markets. "As long as he was winning, they said nothing," said Elisabeth Meyer, the lawyer.
The emerging antagonism towards Mr. Bouton -- who like many in the French government, attended France's elite graduate university Ecole Nationale d'Administration -- has put the pro-business administration of Mr. Sarkozy under pressure.
The fact that a trader could bet 50 billion euros, which is more than the value of the entire bank, has shocked a population traditionally wary of capitalism. Many French people look down on the making of easy money, and argue that companies shouldn't be making excessive profits and that stock options should be heavily taxed.
Since he was elected last spring, Mr. Sarkozy has tried to allay public distrust of the wealthy. In speeches, he has urged the French not to be ashamed of earning more -- if they work more.
Some within Paris's financial community say the government is trying to find someone on whom to pin the blame for the fiasco. Former Socialist finance minister Michel Sapin urged the government yesterday to "avoid looking for a scapegoat."
Mr. Bouton has run into trouble before with the new president. In 2004, when Mr. Sarkozy was finance minister, he summoned the heads of France's largest banks, including Mr. Bouton, and chided them for allegedly overcharging customers on banking fees. Societe Generale's banking fees were within the average range for Europe, and Mr. Bouton publicly aired his discontent at Mr. Sarkozy's rebuke.
Although Societe Generale was privatized in July 1987 after 42 years under state control, the government has never been far off. In 1999, for example, the government brokered a truce in a banking battle that pitted Societe Generale against BNP for control of investment bank Paribas. BNP walked away with Paribas.
Despite the political drumbeat yesterday, members of the bank's board are likely to proceed carefully on both issues -- management and merger.
Some people close to the bank say the departure of the bank's top executive would only cause more instability as the institution tries to rebuild its reputation. The board is also expected today to see an updated audit of the bank's 2007 financial results. The board meeting could include an update from a special audit review by certain board directors of the bank's trading operations.
Along with the 4.9 billion euros trading loss at the hands of Mr. Kerviel, Societe Generale also announced a 2.05 billion euros fourth- quarter write-down related to U.S. subprime mortgages. France's stock- market regulator AMF has launched a formal probe into share-price fluctuations and possible manipulation of the market, a person familiar with the matter says.
"In the current situation, I don't know if a change in CEO will help the situation," says one board member. "The situation is already very difficult, and will be more difficult with the government's interest."
The board is seen as loyal to the 57-year-old Mr. Bouton. Last Thursday, he offered to resign, but the board rejected the offer.
A shift in that support would be a significant turn. Mr. Bouton and his co-CEO Philippe Citerne have expressed support for each other in the past, but they have recently been at odds over strategy issues unrelated to the scandal. Mr. Citerne joined the bank in 1979, was named CEO in 1997, and has been co-CEO since 2006.
The bank is trying to pull off the 5.5 billion euros rights issue to shore up its capital levels.
Any buyer of Societe Generale, which operates in 77 countries, would gain access to a sprawling European franchise and retail and financial-services unit that had 22.5 million individual customers at the end of 2006. In France, the bank operates some 2,900 branches with nine million customers as of December 2006. Outside its home market, it has some eight million retail customers and 2,300 branches, including in central and eastern Europe, Africa and French overseas territories.
Until Mr. Kerviel's trading disaster, its crown jewel was its equities and derivatives business, which accounts for more than 20% of the bank's income. The bank long has been a leader in complex in-house and client trading strategies that use mathematical models to make directional bets on stock markets.
Jean-Pierre Mustier, head of corporate and investment banking, previously had been seen as a potential successor to Messrs. Bouton and Citerne. But the rogue trading occurred in his division, and he has his hands full unraveling it and retaining key bankers and traders. Bonuses are expected to be announced Feb. 7, and areas connected to the fraud are expected to see reductions in pay.
A number of investment banks are vying for the assignment to represent BNP in its consideration of a bid for Societe Generale. A sale of the bank would be the first big banking deal of the year, and perhaps the biggest in a year when merger activity is expected to slow compared with 2007.
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Christina Passariello, Cassell Bryan-Low, Dana Cimilluca and Nathalie Boschat contributed to this article.
