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Saving Société Générale

The inside story of how 31-year-old trader Jérôme Kerviel nearly destroyed French giant Société Générale, bank CEO Daniel Bouton's dramatic rescue, and the surprising aftermath of the affair.

By Peter Gumbel, European editor

Kerviel, photographed upon his release from prison, is now a folk hero. While CEO Bouton, dodges brickbats.

(Fortune Magazine) -- In the early afternoon of Sunday, Jan. 20, Daniel Bouton, the chairman and chief executive of the huge French bank Société Générale, was in his 35th-floor office preparing for a board meeting that evening when one of his lieutenants, Jean-Pierre Mustier, came to break some calamitous news. Mustier, Société Générale's head of investment banking, had already alerted him about a 31-year-old junior trader in the stock arbitrage department named Jérôme Kerviel who had been caught making big unhedged bets on European stock futures.

But it was only now, after auditors had spent two days and nights furiously digging through computer records and Mustier himself had questioned Kerviel, that the bank knew just how big those bets were. Kerviel's open position was a gigantic $75 billion, or almost twice the bank's equity. Société Générale, which Bouton had spent the past 15 years building into one of the most respected and profitable banks in Europe, was suddenly at risk of imploding.

With his 15-member board set to convene in just hours, Bouton, 58, made a stunning decision: He opted, Fortune has learned, to tell his full board absolutely nothing about the unfolding scandal.

It was a startling move for an executive who is a French authority on corporate governance and who wrote an official report in 2002 on board transparency and accountability. But it was the first step in a swiftly executed plan that ended up saving Société Générale. By keeping his board in the dark (he did confidentially brief the head of the audit committee that Sunday night) and then handing the task of unwinding Kerviel's positions to a single trader who wasn't even told how much he had to sell, Bouton ensured that word of the crisis wouldn't leak. If it were to, he worried, Société Générale risked provoking a stampede in the markets and among its customers. "We all had Northern Rock in our heads," says an insider, referring to the British financial institution that was brought to its knees last year by panicky customers queuing up to withdraw their savings.

Three frenzied days

Over a frenzied three-day period Bouton and his tiny team shed Kerviel's entire position and at the same time persuaded two U.S. investment banks to guarantee $8.5 billion in new capital. On Wednesday, Jan. 23, only after he had shored up Société Générale, Bouton called an emergency meeting of the board, where he finally disclosed the immensity of Kerviel's position and the very costly steps he had taken to pull the bank back from the brink. Bouton, who declined to comment for this article, would later tell Le Monde that when he first heard about the size of the bank's exposure, he had a vision of an aircraft carrier about to sink.

In some places this salvage effort would have turned Bouton into a local hero. Yes, it was imperious and high-handed, much like Bouton himself, but it kept Société Générale afloat at an especially fragile time for financial institutions. The world will never know what might have happened if Bouton had gone public with the crisis sooner, but the carnage elsewhere suggests it would have been ugly. The British government had to nationalize Northern Rock to prevent it from collapsing, and most recently Bear Stearns (BSC, Fortune 500) was sold to J.P. Morgan Chase (JPM, Fortune 500) at the behest of U.S. regulators.

Société Générale, by contrast, is in relatively good shape. Its net losses from the affair amount to about $7.5 billion. (Controversially, the bank offset a $10 billion trading loss with some earlier gains Kerviel had made.) Despite the extraordinary Kerviel-related loss, plus an additional $2.5 billion write-down of its exposure to the U.S. subprime crisis, the bank nonetheless reported a profit in 2007; its capital ratios now are even stronger than they were before the crisis, and just three weeks after the scandal it completed the acquisition of a big Russian bank, as scheduled. The stock is down for the year (so is the rest of the French stock market), but it is rebounding, and retail customers remain loyal.

France's favorite villain

Yet instead of earning praise, Bouton has become France's favorite villain. President Nicolas Sarkozy has called for Bouton's head, and several peers in the French banking world believe his days are numbered; at the very least they expect him to give up either his chairman or his CEO role. Most painful of all is public opinion, which holds him and the bank largely responsible for the crisis in the first place, and for which Bouton has become a symbol of the arrogance and snobbery of the French elite.

By contrast, Jérôme Kerviel, the rogue operator who openly admitted to breaking bank rules, has assumed the unlikely role of folk hero - the common man who humbled a haughty institution. (Kerviel even called the subprime crisis correctly, making some smart, albeit unauthorized, trades before erroneously betting on a market rebound.)

What's behind this Freaky Friday - like switch in roles? The French have long been skeptical about the workings of capitalism and the ability of markets to bring prosperity to more than a tiny few; former President Jacques Chirac once described free-market liberalism as a scourge as big as communism. Bouton also appears to have become a lightning rod for a much greater disenchantment - even anger - with the French political and business establishment. "It's a pleasure to discover that the elite are not as good as all that," says Frédérik-Karel Canoy, a gadfly French lawyer who represents small Société Générale shareholders. "In France people are sick of these types who came top of the class and know everything."

Bouton didn't help his cause when he publicly lambasted Kerviel as a "terrorist" and declared Société Générale an innocent victim of the trader's machinations. The bank's own internal investigation into the matter shows that Kerviel's supervisors missed, ignored, or didn't take seriously 75 alerts about his trading activities over a period of two years, a damning record that gives credence to the young trader's defense for his actions: His bosses were aware of his trades but largely ignored his activities as long as he was making money.

Modern-day Robin Hood

Kerviel is charged with breach of trust and forgery (he admits he faked e-mails to cover up losses) but isn't accused of pocketing any money. This absence of greed - coupled with his Tom Cruise-like good looks and his small-town roots - are cementing Kerviel's image as a modern-day Robin Hood.

"Do you even know what 1.5 billion euros looks like?" asks Christophe Reille, a public relations consultant who has taken Kerviel on pro bono as a client. Reille, who looks a bit like Mr. Bean, is partly responsible for the unprecedented rehabilitation of Kerviel's image.

Most other rogue types in financial scandals are cast as bad boys, or they simply try to maintain a low profile. They don't end up, like Kerviel, with photographs in the glossy magazine Paris Match. Reille is explaining why Kerviel couldn't possibly have been trading without Société Générale's complicity. "That's three million 500-euro notes. That's as tall as the Eiffel Tower. Do you think it's possible to hide that without anyone seeing?"

A very authoritarian boss

Bouton's grandfather was a railway signalman and his father an engineer, so there was nothing preordained about his rise to the top of the French establishment. But he stood out early on by dint of his intellectual prowess. After winning a prestigious national history competition at the age of 17, he went on to the most elite college in the country, the Ecole Nationale d'Administration, which for decades has turned out France's top politicians and civil servants. He likes to excel at everything he does - his golf handicap got as low as four - and he isn't modest about it.

Gérard Longuet, a former Industry Minister who was a classmate at ENA, describes Bouton as "extremely rigorous." But he adds, "You can debate as to whether he's sympathetic by nature. He gives the impression of being pleased with himself." Bouton has been known to upbraid unpunctual journalists and take potshots at other French companies; he famously trashed media company Vivendi (VIVEF), for example, when it was struggling during the dot-com meltdown.

Despite his contentious personality, Bouton moved swiftly up the ranks of the civil service to become director of the national budget. Senator Michel Charasse, who was France's Budget Minister in the late 1980s, says Bouton has a sense of humor beneath his austere façade, but as a boss "he's very authoritarian." They had one big fight, when Charasse thought one of Bouton's deputies had been insolent and told him to fire her. Bouton refused point-blank, and Charasse says he almost fired them both - before he calmed down and retreated. Bouton was too good to lose, he says.

He was hired away to Société Générale in 1991 by then-CEO Marc Viénot, who groomed him to be his successor. Bouton took over as CEO in 1993 and has bulked up Société Générale and dramatically boosted its profitability since. He has also fought fiercely to preserve its independence; in 1999, Société Générale (SCGL.Y) ended up in a three-way takeover battle with two French rivals, BNP and Paribas, but managed to avoid being acquired. Almost a decade later bad blood still lingers between the banks. People who know Bouton well say the experience was a critical one that helped him deal with the Kerviel crisis. "He was incredibly involved right from the beginning, unlike in 1999," says one friend.