Did SocGen trades trigger market rout, Fed cut?

[Extend a Hand]

Societe Generale's (SOGN.PA: Quote, Profile, Research) shock disclosure of a fraud that lost it $7 billion has left investors wondering about a link between the fiasco and Monday's European stock market rout.

The sharp fall, which was followed by an emergency U.S. rate cut, came as SocGen tried to close out positions built up by one of its traders.

SocGen, France's second biggest bank, said on Thursday that it had been the victim of a massive and "exceptional" fraud by a junior trader resulting in losses of 4.9 billion euros, and announced a large capital increase. SocGen said the trader, responsible for futures hedging on European equity market indexes, had taken massive fraudulent positions in 2007 and 2008 beyond his authority.

The bank said it had decided to close the positions as quickly as practicable after they were discovered on the weekend of Jan 19 and 20.

http://www.reuters.com/article/marketsNews/idUKL2455504620080124?rpc=44&pageNumber=1&virtualBrandChannel=0

[nightrider767]

1. No surprise here...

we need to change white collar crime laws. If stealing a $1000 is a felony, then stealing a million dollars should bring you a 1000 verdicts that shoud be serveded back to back.....

[Traps]

2. It certainly seems that way

http://www.thoughtleader.co.za/traps/2008/01/25/evil-kerviel-societe-generales-rogue-trader/

[whatchamacallit]

3. It's possible I suppose, but I'm wary of such convenient causalities

Remember this recent explanation for $100 oil?

http://news.bbc.co.uk/2/hi/business/7169543.stm

Again, possible, given the volatile nature of markets, but one more story like this and my bullshit detector will peg.

[Joe Chi Minh]

4. Absolutely not. This, from Taking Stock in the (UK) Mail on Sunday,

a column written by Simon Watkins:

"Is this really true? Did a geeky French trader scare the world's most powerful central bank into making a grotesque panic move?
No. SocGen's actions accounted for about ten per cent of the value traded in global markets last Monday. This is not insignificant and might well have added to the pace of the panic. But the panic began elsewhere. Markets in Australia, Japan and Hong Kong ahd already slumped dramatically before SocGen's Paris traders had puffed their first Gauloise on Monday morning.

Last week's slump was due to a global economic fright, a terror that the US might be heading into deep recession - which remains a real possibility."

(snip)

"Consider this. If the fed were to conclude that last week's meltdown was caused by a rogue trader and that it had been prompted to cut rates erroneously, now that it knows the truth, it will have only one logical course of action - to put US rates back up.

Don't hold your breath."

Anyway, as Watkins states at the beginning of his article, it is clear that (just as, in fact, Nick Leeson was scapegoated in the Barings fiasco) Kerviel is being scapegoated (though it seems he's not taking it lying down and has been naming names, if not directly kicking ass). Leeson was interviewed the other night on the subject of the SocGen fiasco, and said it was impossible that such a loss could have occurred over a brief time-span. The fault was one of self-regulation, as long as the figures were looking outstanding, the bosses didn't want look any closer into their provenance. I know nothing about finance, but I should be very surprised if the bosses didn't personally come out of both affairs very much richer than the adoption of a more pedestrian policy would have permitted. (Ah, the freedoms we enjoy in the Wild West that those Iraqis so envy! And how shrewd of Rumsfelt, however shameless, in his comment: "Stuff happens… Freedom’s untidy, and free people are free to make mistakes and commit crimes and do bad things.) He must be a prime candidate for the office of Lucifer's deputy.

As the Financial Mail editor put it in another article in today's paper:
"Yet still bankers remain in a league of their own when it comes to squandering money. And that is because senior executives turn a blind eye to dodgy goings-on in the more profitable- but higher risk - parts of their empires."

She had earlier in the same article written: "An investment banker told me last week of a colleague who would, in the style of television detective, Columbo, gently probe those who whose financial whizzkiddery he could not understand. Invariably, this would prompt a sharp change in direction."


Here is another interesting link:

http://www.dailymail.co.uk/pages/live/articles/news/worldnews.html?in_article_id=510610&in_page_id=1811

with further links.