Money-Rx Blog

New York Times: Paris - As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks. Someone was selling, all right - Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel. Mr. Kerviel, 31, took huge bullish positions on the Dow Jones Euro Stoxx 50 index and the German DAX in particular...Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.



This is why they say you should not smoke near a gas station. It's a tinderbox waiting for a tiny flame. Which is what happened to the global markets. Everyone was already spooked and waiting for more bad news. At the first whiff of trouble, they start unloading. I tell you true, if this really leads to a recession, this story will be repeated in every behavioral finance classroom for a century or two as the perfect example of the power of sentiment and herd mentality.



For the entire month of January, this blog and others have been trying to protest against bear proponents. The negative indicators necessary for a recession just were not there. It was all a mirage. And now, when the real reason for the Asian and EU market crash - a rogue trader in a French bank - has come to the fore, what do we have? A 75 basis points cut and a FED Chair with egg on his face, having shot his bolt and left with no ammunition to face a 'real' crisis. What do you think is going to happen if we really need a cut in basis points in the near future? With Bernanke at the wheel, it's a bloody wonder the US economy is still standing at this point...


On the other side of the story, the Associated Press is reporting that Jerome Kerviel in Paris has been taken into custody for questioning. He gave himself up. French officials said the trader had been dealing with more than $73.3 billion. That figure outstrips the bank's market capitalization of $52.6 billion, and is close to the annual GDP of entire nations such as Slovakia, Qatar or Libya. In an interview published Saturday, Societe Generale's chief executive, Daniel Bouton, dismissed the notion that the bank's actions helped fuel the turmoil on world markets. "It's absurd!" Bouton told Le Figaro daily in an interview published Saturday. "Anyone could calculate our contribution to the market in recent days." In Thursday's statement, the company also announced another $2.99 billion subprime-related loss and said it planned to raise $8.02 billion in new capital. The bank says the scale of the damage was so great only because of the bad timing of the discovery.


Forgive me for being a skeptic, but this seems like one coincidence too many. Leave alone the impact on the global markets. Let's just focus on the internals of Societe Generale. So the company announces $2.99 billion in subprime losses and wants to raise $8.02 billion? Raising that kind of money is not a decision you can make in a single meeting, or in response to a single event, such as Jerome Kerviel's bad bets. More likely that they were planning to raise that kind of capital anyway. So the question is, why raise $8.02 billion in response to a $2.99 billion loss? You tell me. Couldn't be that they know about this little flap over a rogue trader than they're letting on, and prepared for it? Either way, it smells bad. And do you remember who cut the ribbon on the EU subprime crisis in August 2007? BNP Paribas. In France. Something tells me we haven't seen the last of these French tragic comedy dramas yet...