Confidence in banks, already fragile as a result of huge subprime losses, has been shaken further by a shocking fraud at one of Europe's largest banks.

Société Générale says that last weekend it uncovered a fraud "exceptional in its size and nature," executed by a single trader, that has generated a loss of 4.9 billion euros, or $7.1 billion. As a result, France's second-largest bank says that it will seek emergency funds.

The size of the fraud dwarfs the $1.4 billion loss created by Nick Leeson that caused the collapse of London's Barings Bank in 1995. It also comes at an unusually vulnerable time for the banking system. The credit crunch has forced major central banks to take aggressive steps to increase liquidity. But big banks in Europe and the United States are still reeling from losses on their investments tied to American subprime mortgages.

The huge Société Générale fraud is "everyone's worst nightmare," Richard Fuld, the chief executive officer of Lehman Brothers, said at the World Economic Forum in Davos, Switzerland, according to Reuters.

The fraud is especially surprising given Société Générale's stellar reputation for trading complex derivatives and for managing risk. Indeed, the bank has largely weathered the turmoil in the credit markets, although today it also announced that it was taking a $3 billion write-down on its subprime exposure. The bank is planning to raise nearly $8 billion in capital in a rights offering.

The trader was identified as Jérôme Kerviel, who turned 31 just two weeks ago. A graduate of the University of Lyon, he had a master's degree in finance. He joined Société Générale in 2000.

He worked on the bank's "delta one" team in Paris. Delta one refers to a range of derivatives that give investors exposure to the capital markets beyond holding the underlying securities.

French media reports say he was thought by some to be a computer whiz. Le Monde reports that he has had some unspecified family problems.

It is unclear what his motive might have been. The bank said the trader confessed to the scheme and acted alone, yet he did not appear to benefit in any way from the fraud.

In a conference call, Daniel Bouton, the bank's chairman, said that he did not know where the trader was but believed that he still had his passport. The trader earned less than 100,000 euros a year.

The bank noted that the trader was "responsible for plain-vanilla futures hedging in European equity-market indices." But the trader had instead taken "massive fraudulent directional positions." He concealed these positions by creating fictitious countertrades, the bank said. He was able to do so because he knew the bank's control procedures very well as a result of having previously worked in the back office. The scheme apparently came to light after he made trades betting on stock markets to rise in January—trades that blew up.

Société Générale said that it detected the positions on Saturday, and quickly sold or unwound them by Wednesday. "The decision was made to unwind this position because it was impossible for the bank to maintain," said Bouton, according to the Financial Times.

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