Imagine a warehouse full of dollar bills – seven billion of them. Now imagine someone throwing a match in.

It is difficult to comprehend the magnitude of the losses that Société Générale, France’s second largest bank, (known as SocGen in the financial markets), suffered last week as the result of a rogue trader’s activities.

Nick Leeson lost only $1.4 billion and that was sufficient to bankrupt Barings Bank. Jérôme Kerviel, a 31-year-old trader, now has the distinction of having caused the largest loss in history – $7 billion (about £3.7 billion). Luckily, SocGen’s balance sheet was big enough to take the hit but it still needed a capital injection to ease the pain.

It is a situation that I know all too well. I was faced with a rogue trader crisis of my own at Morgan Grenfell Asset Management. I went to Morgan Grenfell in 1991. I was recruited by Keith Percy, one of the most respected people in the industry who had joined the firm the previous year. The business was a mess and we set about sorting it out. By 1996 it had become recognised as one of the leading fund management firms in Britain.

That summer I gave birth to my fifth child and was on maternity leave. It was a hot August day and I was standing in the kitchen of our house in Hampshire when the phone rang. It was Keith. He told me there was a £450m hole in the value of our European unit trust and that Peter Young, the manager, was responsible for this shortfall. Keith believed there had been outside collusion. My heart virtually stopped.

Keith offered to resign but Deutsche Bank, which owned Morgan Grenfell, decided to leave him in place. Two months later he was sacked as the bank responded to press comment. Three months after that I was pushed out, too.

If Morgan Grenfell had not been owned by Deutsche, it would have gone the same way as Barings.

I had known Young for many years having worked with him at Mercury Asset Management. He was quiet and unassuming, not somebody one would have expected to bring an entire organisation to its knees. I tried to analyse what had motivated him to behave as he had and the answer seemed to be greed. He wanted to prove himself to be a “star” in order to earn huge bonuses. The courts also found him mentally unfit to plead.

The story of the latest financial scandal bears an uncanny resemblance to the plot of a new novel, Meltdown (published by Pan Macmillan), by my husband Martin Baker who has, in fiction and nonfiction, studied market traders’ motives. We think that the SocGen loss was not just about money: Kerviel also wanted the kudos that came with being a star fund manager.

Stars are revered by their peers, worshipped by investors and written up in financial publications. Companies allow their stars more freedom, trying to fit this within a tightening regulatory framework. The star system encourages wannabes who push things too far.

Little is known about Kerviel, other than that he once worked in the bank’s back office and was paid less than €100,000 (about £75,000) a year. The bank does not believe that he profited from the trades himself. One explanation for his behaviour, therefore, was that he was trying to get noticed and elevated to star status himself. The fact that the financial markets were in turmoil led to huge losses and his downfall.

When I left Oxford in 1982, I was swept along on a wave of enthusiasm for the City and became a graduate trainee at SG Warburg, then the premier merchant bank. I have watched as the City has sucked in the most talented graduates from the best universities, not just in Britain but from across the world. Given the huge numbers of people now employed in financial services, it is inevitable that there will be the occasional rotten apple.

It should be remembered that the underlying funds circulating around the financial system, which is treated as the playground of the young trader, belong to pension funds, savers, insurance companies and banks.

Ultimately those clients are ordinary people who own shares and bonds through their pension entitlements or unit trust holdings. Too often, financial executives put the desire to further their own careers and huge bonuses above those of the stakeholders in their businesses.

The reaction to an event such as the SocGen loss is to tighten regulation and demand the resignation of top management. In this case, Daniel Bouton, the chairman and chief executive of SocGen, and his senior team offered their resignations but the board refused to accept them. In my view this was the right decision.

There is no way that Bouton could have known about the activities of one trader. If his resignation had been accepted, it would have thrown the bank into further turmoil precisely at the time when strong leadership was required.

I worked at SocGen for a number of years, setting up its fund management operation in London, and I found Bouton to be a man with an incisive mind who ruled SocGen with a rod of steel. SocGen is acknowledged as being one of the world’s leading players in the derivatives markets and has the controls and risk management processes that should have meant that it could not be possible to lose $7 billion.

However, having lived through the Young affair, I have learnt that if a clever trader or money manager wants to get around the controls and processes that are in place, they will find a way.

Increasing the burden of regulation is not necessarily the answer. Next time there will be a different set of circumstances, a different cast of players and another victim or victims.

Kerviel has earned a place in the hall of fame that includes Leeson, Young and others. But what will the future hold for SocGen? When I was there, it battled for independence in the face of a takeover bid from its rival, BNP. Bouton won the day and SocGen went on to prosper on its own. Whether it can maintain its independence much longer is now in doubt.

Times Recommends

• Ted Hughes was a prophet of climate change
• Health & safety can damage your reasoning
• It’s Big Brother’s stupidity that scares me