PARIS (Reuters) - A junior computer whiz at French bank Societe Generale was accused of racking up a $7 billion loss in bad bets on stocks in the biggest trading scandal in banking history.

France’s central bank and government scrambled to shore up confidence in the banking system after the 144-year-old SocGen told investors already battered by the credit crisis that it discovered the “exceptional” fraud late last week.

The trader had circumvented the bank’s risk controls through in-depth knowledge of its computer systems, but was caught when he tried to cover up his losses.

The country’s central bank chief dubbed the trader “a genius of fraud” while French police announced a criminal probe.

Richard Fuld, the chief of Wall Street firm Lehman Brothers , called the debacle “everyone’s worst nightmare” at the meeting of policy and business leaders in Davos.

The losses spiraled to 4.9 billion euros ($7.1 billion) -- nearly its net profit in 2006 -- as the bank tried to close out the rogue trader’s stock index futures positions in Monday’s sliding market.

“We get the feeling that the financial markets have become a big casino which has lost control. It seems incredible that the Societe Generale can lose 5 billion through one operator,” said Alain Crouzat, a portfolio manager at Montsegur Finance.

SocGen declined to identify the trader, but three SocGen sources named him as Jerome Kerviel, 31, a trader on the bank’s award-winning equity derivatives desk earning less than 100,000 euros a year.

A head shot of Kerviel cut from a trading Web site showed an earnest-looking young man. When his identity was revealed in the afternoon, he had 11 friends listed on the facebook.com social Web site. That number later dropped to four. Kerviel was not available for comment.

“He is not running away. He is at the disposal of the police,” said Elisabeth Meyer, a woman who claimed to be his lawyer, on French TV.

The loss ranks as the biggest caused by a single trader, dwarfing the $1.4 billion loss by trader Nick Leeson that broke British bank Barings, and the $2.6 billion Sumitomo Corp lost in rogue copper trades in the 1990s.

It also eclipses a $6 billion-plus loss racked up by hedge fund Amaranth trader Brian Hunter and his team ahead of the fund’s collapse in 2006.

A SHOCKER

News of the fraud hit the company’s Manhattan office like a bombshell, said a SocGen banker who didn’t want his name used.

“It makes us look incompetent, which isn’t the case,” the banker told Reuters. “We’re all wondering if this fraud will wreck the company.”

Societe Generale Chairman Daniel Bouton offered to resign but was asked to stay on by the board.

Shares in SocGen, which has a market capitalization of about 36 billion euros, fell more than 4 percent to 75.81 euros.

Traders said the shares were cushioned from further falls after the French financial establishment moved quickly to shore up SocGen’s shattered capital.

Instead of beating a path to cash-rich sovereign wealth funds, as some U.S. banks have done during the recent credit slump, SocGen announced a capital increase of 5.5 billion euros and said this had already been underwritten by other banks.

France’s prime minister reassured investors that SocGen’s woes were isolated from the malaise sweeping global financial markets after a meltdown in U.S. sub-prime credit markets.

“It is a serious case, but at the same time it has nothing to do with the situation on the financial markets,” Francois Fillon, speaking in Davos, Switzerland.

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In addition to the fraud, however, SocGen unveiled a further write-down of 2.05 billion euros related to the credit crunch.

Some investors wondered whether the bank’s maneuvers had contributed to that day’s global markets fall, and to the U.S. Federal Reserve’s decision to cut interest rates.

The Federal Reserve said Thursday it had not been aware of SocGen’s problems when it decided on a emergency 75 basis point cut this week.

‘GENIUS OF FRAUD’

One of France’s oldest banks but a world leader in free-wheeling modern financial derivatives, SocGen said the losses came to light over the weekend when it found that the junior trader had tried to cover up bad bets on the stock market.

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The Bank of France launched an investigation into the trades. The central bank’s governor, Christian Noyer, said SocGen had been able to overcome the crisis because it was solid.

“Today we have seen that there was a glitch in the system that was exploited by someone who I think got round five successive risk control systems so who was without doubt a genius of fraud,” Noyer said.

The announcement sent a shiver through the world banking industry, which is suffering from the credit crunch as high-risk U.S. mortgage borrowers default on their loans.

SocGen accused the trader of taking “massive fraudulent” positions in 2007 and 2008 on European equity market indexes, meaning he was gambling on broad movements in share prices.

When the bank discovered the hidden trades on January 19-20, it decided to close the positions in the market quickly. But this coincided with a market rout, and the bank ended up nursing losses of 4.9 billion euros.

The trader has been suspended and faces a formal firing and a legal complaint from Societe Generale, which is in turn already being sued by a group of 100 angry shareholders.

Like Leeson before him, the trader apparently benefited from knowledge of the bank’s control systems after working in the back office of its trading rooms, according to SocGen.

It said he had used a “scheme of elaborate fictitious transactions” to try to cover up his mistakes, but did not accuse him of profiting personally from his actions.

“He was not one of our stars,” said a senior board member.

Others said the crisis at SocGen, one of the top 10 banks in the eurozone by market value, could spell trouble elsewhere.

“The most serious thing is that this puts into doubt the risk-management systems at some banks,” said Fortis analyst Carlos Garcia.

Analysts said the episode would have a major impact on the reputation of SocGen, which was founded in 1864.

Several said the bank, which has for years been coveted by larger French rival BNP Paribas SA, could face a battle to remain independent.