28 January 2008

FT: Trading troubles at SocGen make waves in China

The trading scandal at Société Générale has grabbed the attention of regulators round the world – but nowhere more so than Beijing. For the past two years, Chinese officials have been agonising over whether to allow trading of equity derivatives in the local market. The idea is strongly supported by the new generation of institutional investors who are eager to hedge their exposure to the volatile mainland market.

But regulators are terrified of trading disasters; China has history in this area. In the mid-90s, the authorities closed trading in government bond futures after a series of scandals; three years ago the Singapore subsidiary of state-owned China Aviation Oil lost $550m on oil futures trading.

Regulators are worried about the amount of hedge fund money that has illegally found its way into China and do not want to make heavy speculation any easier. There are also concerns about risk management systems at the country’s brokerages. Most of all, no official wants to take a decision that might end up being blamed for bringing the bull market of the past two years to an end.

Even though the bulk of technical work for trading stock index futures has been done, some observers were predicting that the decision would not be taken before the Olympics in August. Jérôme Kerviel’s exploits could now push that into next year.

Knock at SocGen’s door

Could the state-owned newcomer on the French banking block turn out to be the proverbial white knight coming to the rescue of Société Générale?

Launched barely two years ago, the Banque Postale – the new banking subsidiary of the French post office – has been looking for partners to help it become a fully-fledged retail bank and in due course be partially privatised. By coincidence, only a couple of weeks ago it forged its first partnership with a big French commercial bank – forming a joint electronic payments venture with none other than SocGen.

The joint venture and the colossal crisis that has erupted at SocGen are unrelated. But it does suggest that government endorsed efforts to make the postal bank more efficient and competitive were slowly starting to bear fruit. Indeed, a year or so ago, a French senate committee recommended the postal bank seek partnerships with commercial rivals, in particular SocGen.

Although the newcomer can boast to be the largest bank in the country by numbers of customers (29.3m) and branch network, its overall level of services and banking operations lag behind the country’s other banks – not only the big commercial groups but also the large mutuals.

But by far the biggest problem facing the postal bank is the threat of losing its joint distribution monopoly, along with the Caisse d’Epargne savings bank, of France’s popular Livret “A” tax-free savings account scheme held by some 45m small savers.

France’s commercial banks and other mutuals have been furiously campaigning against the monopoly. Moreover, the European Union last year ordered the French government to end the distribution monopoly. Although Paris is still appealing the Brussels ruling, prime minister François Fillon announced just before Christmas that distribution of the Livret “A” will be opened to all French banks by the end of this year or early next year.

The decision will be included in an economic modernisation bill to be presented by the government in a few months.

With its sinecure threatened, pressure has been mounting on the postal bank to accelerate its transformation into a modern, competitive bank. And now some politicians and government officials are beginning to think that the SocGen crisis could perhaps provide an unexpected opportunity to resolve both the postal bank’s problems and defend the risk of SocGen falling prey to undesirable foreigner competitors or indeed its domestic arch-rival BNP Paribas.

The general idea would be for the postal bank to take a large stake in SocGen together with other traditional French institutions such as the Caisse des Dépôts and the Axa insurer. Crédit Agricole will probably try to muscle in, trying to pick up SocGen’s investment banking arm. BNP will also try to get its foot into the SocGen door, seeking its retail operations.

But bringing the postal bank and SocGen closer together would follow the traditional model of French state intervention in defence of its corporate champions. It would partially privatise the postal bank at the same time as partially nationalise SocGen in the same way as it is doing with Gaz de France and Suez through a state orchestrated energy mega-merger. It would be a masterpiece of Cartesian corporate logic and keep nosey foreigners at bay. It would be a masterpiece of Cartesian corporate logic and keep nosey foreigners at bay. As for the postal bank, it already seems to think its troubled commercial rival is an alluring prospect; it holds 2.1m SocGen shares in its asset management arm.

By Geoff Dyer and Paul Betts

© Graham Bishop