Société Génerale: why more capital ?

David Martin · #1 (**permalink**) 01-27-2008, 03:16 PM

In the news now, there's one thing I don't fully understand ... maybe somebody here can explain it.

The french bank, Société Générale, has lost 5 billion Euros because of the trading deal, plus another 2 or so on the sub-prime deal. But the CEO, Daniel Bouton, he emphasized that even so, they will still have a net profit in for 2007.

But yet they have hired JP Morgan Chase and Morgan-Stanley to raise 5.5 billion Euros in new capital for them. I have read they are doing this to maintain their existing debt to capital ratio. Otherwise Fitch and Moody, and Standard and Poor's will downgrade their rating.

So they must have borrowed more money during 2007, and consequently were planning on a huge profit ?

It just seems odd that they still made money in 2007, as Daniel Bouton was quick to point out, but yet they need to raise addition capital.

Normally, I'd think they'd only need to raise capital if they *lost* money in 2007.

brian · #2 (**permalink**) 01-29-2008, 12:35 PM

Glad you noticed that as well - that had me somewhat confused as well.

Also, on the point of the rogue trader - the suggestion is that he was actually a billion in profit - but once discovered, the bank sold everything and short at that, creating the huge losses themselves:
Rogue trader made profit; SocGen caused losses

fl18 · #3 (**permalink**) 02-08-2008, 06:14 PM

Capital was used to make the investments and was lost, so capital goes down. Even without increased borrowing, there's still proportionally more debt in relation to capital. The more debt you have in relaiton to capital, the less likely you can pay all of that debt, or any new debt, thus the potential for a downgrade.

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