Societe Generale

It’s really bad when news is good just because it’s not as bad as it should be. Right now things are really bad, which is the only reason why a 63 percent plunge in net profit can be met with analysis such as this:

“These were a very positive set of results,” said Landsbanki-Kepler equities analyst Pierre Flabbee.

Societe Generale reported those earnings just a day after another patsy was named in the prior quarter’s trading soap opera. The bank would apparently love to get all the dividends it can from that petite drama.

Going back to 2007, the bank has pinned more than $7B in write-downs on the the pair of “rogue traders.” It makes for great theater in the financial media, but if a pair of traders in their 20’s (Thomas Mougard) and 30’s (Jerome Kerviel ) were allowed such autonomy, don’t you think you would be hearing it from Bloomberg? Probably they are only guilty of two things: 1) Being too small to have done the alleged crime without management’s complicity; and 2) being plenty small enough to take the rap when everything fell apart. Let’s take a look:

Kerviel’s legal team has insisted his higher-ups were aware of what he was doing and did not stop him as long as he made money for the bank — charges that the bank has always denied.

Isn’t that just par for the course? Oh, but wait. Even the bank itself kinda sorta agreed. Hear ye:

An internal report by the bank has said Societe Generale managers failed to follow up on 74 different alarms about Kerviel’s activities and queries from derivatives exchange Eurex. It said the bank had no knowledge of his actions.

No knowledge of his actions? Just to show it was serious about banks breaking going out of their way to see no evil, the French government fined SocGen a whopping €4M, which SocGen gathered from the board room coffee jar.

Meanwhile back on Earth, we realize that the real rogue traders were a cabal of greedy managers who tolerated everything the pair did as long as it payed off. But now stunned by the shock wave, those same managers are willing to sacrifice the pair. This is hardly original:

Kerviel’s manager “tolerated” bets on the direction of index futures and certain equities that were unjustified by his “assignment and level of seniority,” the document said. As a trader on the bank’s “Delta One” desk, his job was to use large volumes to arbitrage small price differences between equity index futures and forwards.

And thus Societe Generale reported €2.05B in write-downs and provisions linked to the subprime crisis. There were write downs of €1.2B ($1.8B) on credit default swaps and credit derivatives and €85M ($1.31B) in loan loss provisions.

The bank raised no new capital this quarter as all capital raising efforts were made back in the first quarter:

Societe Generale, which raised 5.5 billion euros in a March stock sale to replenish reserves, said its tier 1 capital ratio, a measure of financial strength, rose to 8.2 percent by June 30 from 8 percent at the end of March, under Basel II accounting standards.

Level 3 assets were valued for the second quarter at €3.1B ($4.79B).

Societe Generale has made it through the second quarter of 2008, but how much farther can it go? The answer depends on intangibles, but the smoke is already clearing and sooner or later the bank must come across earnings in a global credit crunch.