“This is Leeson-squared”

Senior market participants reacted with disbelief on Thursday to news that a SocGen trader was able to hide toxic positions from his superiors that were so large it has cost the French bank almost €5bn to unwind them.

Rumours of a mega-writedown at SocGen have swirled in Paris and London over recent days, but the assumption had been that the bank had merely been slow to recognise subprime-related exposures. The fact that the apparent rogue trader was operating in run-of-the-mill equity index derivatives compounded the shock.

“This is Barings times how much?,” asked one trader. “Leeson squared?”

He added: “The potential size of the underlying (trading positions) is incomprehensible. You can’t just hide things like this in a modern investment bank.”

Market participants were quick to blame recent extreme weakness in European equity markets on the fact that SocGen has been desperately unwinding its positions over recent days. “This explains a lot. It helps explain the dislocation between here (London) and New York.”

While SocGen’s shares remained suspended on Euronext, equities across the rest of Europe surged on Thursday, with traders citing a combination of catching up with a recovery on Wall Street overnight and a sense of relief that a mystery market overhang had been removed.