Posted on 01/25/2008 8:13:51 PM PST by GovernmentShrinker
Heads are likely to roll high in the French financial establishment after it emerged yesterday that President Sarkozy was kept in the dark for three days over the €5 billion (£3.7 billion) fraud by a rogue trader at the Société Générale bank.
The wrath of the President, who was apparently told only on Wednesday of trouble at SocGen, added to widespread suspicion that France’s second bank and the Banque de France were too eager to blame Jérôme Kerviel, the solitary trader.
As well as Daniel Bouton, SocGen’s chief executive, Christian Noyer, the governor of the central bank, is among those in the line of fire.
[snip]
Some experts said that France could even face action from the US Federal Reserve, because the Banque de France was complicit in SocGen’s secret operation to close off liabilities worth €30-€50 billion. American sources suggested that although technically possible, this was unlikely.
The three-day sell-off of losing futures bets on European stock market indices may have helped to trigger the market slide on Monday. This caused the Fed to rush in with an emergency drop in interest rates.
(Excerpt) Read more at timesonline.co.uk ...
It scares me how little discussion of this situation is appearing on FR. The Chairman/CEO of a major European/French bank and the Governor of the French central bank conspired to dump around $75 billion of index futures in the market, on a day when liquidity was very tight due to the US markets being closed, and when the world financial system was already shaky. They furthermore concealed this activity from the French President and Prime Minister and other central bank chiefs around the world, leading to equity market chaos and a rushed interest cut by the Fed. Why is there so much hesitation to label this criminal insider trading?
The world financial system is in for a very rough ride for the next couple of years, no matter what. But if central bankers and senior executives of major banks are behaving like criminals, manipulating the markets, and concealing their actions from chiefs of state and other central bankers, the ride is going to be a whole lot rougher and do a lot more permanent damage to a lot of people’s lives.
If Bouton and Noyer haven’t been fired by the middle of next week, we should be very very worried.
How many more multi-billion dollar losses are currently hidden, awaiting discovery, against bogus, unwitting or nonexistent counterparties in derivatives?
How many investment banks and hedge funds are operating not much unlike this “rogue trader,” just awaiting the day that their “investments” (sic) turn out to be counterpartied by phantoms?
~~Alan Greenspan, May 2003
“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.”
~~Alan Greenspan, May 2005
“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.”
~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen
Anybody seen George Soros around here?
He’s at Davos with the other billionaire masters of the universe.
I think there are more of such potential dangers in the financial world. One wrong move leads to costly loss, which also leads to another wrong move which compounds the problem further. Before you know it, you are faced with a huge loss which can make the entire corporation go under. They would resort to anything to get out of jam. The damage to the market will become the second concern.
This is how things can unravel.
The bulk of this loss was caused, not by anything the unsupervised trader did, but by the criminal actions of Bouton, Noyer, and whatever few pals they brought in to help. They TRIPLED the loss. And that’s just SocGen’s loss. They also inflicted losses on countless institutions, hedge funds, and individuals in the process. Frankly at this point, I think the movers and shakers in the financial world need to forget about Kerviel and focus on prosecuting Bouton and Noyer and any other senior SocGen and/or French central bank executives who were privy to the weekend plot and Monday mega-dump.
The state of New York and the city of Cleveland Ohio are now suing most of the big investment banks, for hornswoggling them into terrible investments that the investment banks knew or should have known were going sour. This may be one way we see their rotten books at last: in court.
Interesting times my friend! Good night——midnight on the USA east coast.
A big problem has been that since 9/11 the genuine risk management process has been forcibly entangled in the anti-money laundering process and massive regulatory "risk management" requirements. The way the latter two are being conducted results in precisely zero reduction of money-laundering and zero reduction in the risk of a major financial institution collapse. But the latter two are being imposed by regulatory authorities, so they keep getting prioritized, while real risk management initiatives languish at the bottom of the to-do list. The amount of time and money and IT expertise that's being wasted on pointless but legally required "customer due diligence" and risk capital calculation schemes is really alarming.
A managed unwinding of these positions, similar to what was done with LTCM’s positions (which were unwound over the course of something like a full year) would have minimized the losses.
Derivatives and futures (SG was trading Euro-stock index futures) are interesting in that for one person to lose xxx Dollars on them, some other has made xxx Dollars.
Zero sum game.
Thus, from a global economic perspective, they are a wash.
Of course, the loss for one party might be enough to bring down a big bank. Could happen.
And a sudden sale at firesale prices might influence market direction temporarily.
Well, SG admits knowing about their futures overexposure last Friday. That weekend futures went nuts, indicating that word had leaked. Monday and Tuesday saw a global rout...
...but the "spin" was that the rout was due to the U.S. bond insurer and sub-prime crisises.
So the "spinners" share complicity. The global rout was due to Europeans fire-selling their futures positions...not due to a U.S. crisis.
By Wednesday, word was leaking out that the problem was with SG in Europe. Combined with agressive Fed action, world markets began recovering from their Monday/Tuesday panic.
Well, options traders made a fortune with those giant market swings, as did the futures traders on the other side of SG's transactions.
Was this a way to funnel money to someone? Who bought SG's positions? Did they have advance knowledge of the situation?
...and why the *rush* to unwind SG's positions? Clearly it looks deliberate to time the sell-off when U.S. markets were closed due to MLK day.
But worse would be that SG *needed* to sell their positions to raise emergency cash. So the scandal here is that SG may be illiquid or technically insolvent. That instead of insiders doing something malicious, that insiders were doing something desperate.
I think I might be more panicked by a closed court proceeding. Too much being hidden as it is. A court needs to haul it out into the daylight.
I expect there are some interesting negotiations going on right now. I still suspect that Bernanke may pull strings to stop Chase and MS from leading SocGen’s bailout financing, or use the threat of pulling those strings to make sure several heads roll in France. Though if Sarkozy and PM Fillon are as pissed as it sounds like they are, all the relevant heads may roll without Bernanke batting an eyelash.
These are the lines I've been thinking along too. That there's a LOT more to the story, and that Jerome Kerviel's 15 minutes of fame may be up as soon as the rest of the story starts coming out. It made NO sense to liquidate those positions all in one day, and with liquidity impaired by the US markets being closed. Unless, as you said, the emergency they were dealing with wasn't the one they've told us about.
There's been noise for a while now about various French banks running overnight cash deficits on a pretty regular basis, though I was under the vague impression SocGen wasn't one of them. Maybe SocGen was only pretending not to be one of them.
At the point that SG admits learning of the overexposure last Friday, liquidating the positions immediately would have only lost SG $1.5 Billion.
...but...
Clearly word leaked. Futures contracts tanked in overnight trading during the weekend. Big Players had learned of SG’s plight.
By the time the smoke cleared from the actual trading days on Monday/Tuesday, SG’s index future losses were $7.1 Billion.
Why?
Why would you incur that level of losses, when waiting until today for the entire sales would have saved $5 Billion or more?
Two potential explanations come to mind:
1. They were trying to tank the world markets, or
2. SG is in desperate need of immediate cash
They did this on Monday, the US holiday. European mkts traded down 7% that day, contributing to the FED decision to cut rates by .75% intrameeting to avert a market crash. The FED says they weren’t advised of this problem and it didn’t contribute to their decision. Meaning, they may not cut by the expected .50% next Tuesday at their regular meeting. Meaning, markets here could be disappointed in not the expected reduction. Next week could be volatile.
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