U.S. saves France from itself (again, and again, and again)

[EnumaElish]

Did SocGen trades trigger market rout, Fed cut?

LONDON/PARIS (Reuters) - Societe Generale's 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.

[...]

"The huge amount of futures selling could be one reason why markets fell off a cliff on Monday, and maybe that was an ingredient in forcing the Fed to bring forward a part of its interest rate cuts," said Andrew Bell, European strategist at Rensburg Sheppard.

[...]

The U.S. Federal Reserve cut its discount rate, or the rate at which it lends directly to banks, in August, soon after BNP Paribas, another French bank, spooked investors worldwide by freezing 1.6 billion euros worth of funds due to problems in the U.S. subprime mortgage sector.

http://news.yahoo.com/s/nm/20080124/ts_nm/socgen_markets_dc

The Reuters article indicates that the 4.9 billion is the amount of loss on a 40 billion total position.

Does anyone else think that this could have been the financial equivalent of a Chernobyl disaster, had the U.S. Fed not acted quickly and decisively?

As long as the Fed is ready to act, why wouldn't a junior trader in France take a 40 billion position and lose it all?

 

[Art]

Yeah, the $8.4 billion loss reported by Merrill Lynch and the $13 billion write down by Citi and the $13 billion write down by Deutsche Bank and the $30 billion emergency loan to Northern Rock etc etc etc has nothing to do with the current financial turmoil. It's all the Frenchies fault.

 

[EnumaElish]

This is exceptional, because it is the result of a single "fraudulent" junior trader that wasn't discovered until Monday.

More than the U.S. and German companies Art referenced to, it is reminiscent of the Nick Leeson episode -- the trader who lost about $2 billion on a total position of about $25 billion in the mid-90's. The bankruptcy of Barings was one of its results.

The excuse is worse than the crime. How in h*ll can a junior trader hide a 40 billion position?

The bank "rejected an offer of resignation by its chairman," and "gave him a renewed vote of confidence." :rofl:

The bank chairman is giving up his salary through June to "accept responsibility."

Either he is making more than 800 million a month, or his salary will not pay for it. (Something tells me it's the latter.)

 

[Anttech]

http://news.yahoo.com/s/nm/20080124/ts_nm/socgen_markets_dc

The Reuters article indicates that the 4.9 billion is the amount of loss on a 40 billion total position.

Does anyone else think that this could have been the financial equivalent of a Chernobyl disaster, had the U.S. Fed not acted quickly and decisively?

As long as the Fed is ready to act, why wouldn't a junior trader in France take a 40 billion position and lose it all?

Ermmm yeah rigggghhhttttt... The US Fed dropped its interest rates to help the french out. Of course, why didnt I see that. Its not because of the total mess of the whole Western Markets, because of the gun-hoe approach of banks everywhere towards credit.

1+1=57 of course so it does

 

[russ_watters]

Interesting possibility, EnumaElish.

Yeah, the $8.4 billion loss reported by Merrill Lynch and the $13 billion write down by Citi and the $13 billion write down by Deutsche Bank and the $30 billion emergency loan to Northern Rock etc etc etc has nothing to do with the current financial turmoil. It's all the Frenchies fault.

Apples and oranges, Art. Those numbers (and that was my first reaction too, btw), are losses realized over months. This was a single days' trading. Taking such a hit in one day can certainly affect a market's bottom-line.

 

[russ_watters]

Interesting possibility, EnumaElish.

Yeah, the $8.4 billion loss reported by Merrill Lynch and the $13 billion write down by Citi and the $13 billion write down by Deutsche Bank and the $30 billion emergency loan to Northern Rock etc etc etc has nothing to do with the current financial turmoil. It's all the Frenchies fault.

Apples and oranges, Art. Those numbers (and that was my first reaction too, btw), are losses realized over months. This was a single days' trading. Taking such a hit in one day can certainly affect a market's bottom-line.

Previously, I didn't quite grasp the fact that the futures market really is the real NYSE, so when the market opens down, it really opens down. It isn't like US investors opened in panic mode and it dropped. The fact that not a whole lot happened for a few hours after the opening means US investors opened in "what the hell is going on" mode.

One is forced to wonder if any of this would have happened if this bank had chosen to unload those securities over a week instead of on a single day when the US markets (and the extra available investors) weren't even available to absorb the influx of panic-selling.

 

[mgb_phys]

One is forced to wonder if any of this would have happened if this bank had chosen to unload those securities over a week instead of on a single day when the US markets (and the extra available investors) weren't even available to absorb the influx of panic-selling.

Thats the whole point of futures contracts, you bet on what the price would be on the day they come due.
You can't buy futures and when they are due say, 'oops the price doesn't look good at the moment, do you mind if I sell them to you at next weeks price instead'

 

[russ_watters]

Does anyone else think that this could have been the financial equivalent of a Chernobyl disaster, had the U.S. Fed not acted quickly and decisively?

No. Though a single dump can be a bump that triggers a round of panic-selling in an already skittish market, but I doubt US investors would have continued the panic. It would have been a nasty day, I don't think the losses would have continued much past the opening. That's just speculation, though.

As long as the Fed is ready to act, why wouldn't a junior trader in France take a 40 billion position and lose it all?

I'm not sure what one has to do with the other. It isn't like the Fed bailed that bank out - they really did lose all that money. The Fed just gave the market a shot of optomism to reverse the panic.

 

[lisab]

This kind of financial stuff is well beyond me. Can someone tell me who gained? I mean, the guy basically bet 4.9 billion euros, and lost - who won the bet?

 

[Anttech]

Just for the record, when was the last time the USA saved France?

 

[EnumaElish]

This kind of financial stuff is well beyond me. Can someone tell me who gained? I mean, the guy basically bet 4.9 billion euros, and lost - who won the bet?

Whomever sold him the contracts he bought, or bought the contracts that he sold (totaling 50 billion euros in all).

Let's say that on August 1st, 2007 he entered a futures contract which specified that he agrees to deliver 5 billion kilos of wheat to "Boulangerie Patisserie" in Paris on January 31st, 2008, and get paid 10 euros per kilo (totaling 50 billion euros). He was making a bet that the price of wheat will decrease from August to January. Instead, the price of wheat increased 10%. By contract, he is obliged to deliver the wheat, but now he'll have to spend 55 billion euros to buy the wheat (in the spot market), whereas the boulangerie has agreed to pay 50 billion euros for the same quantity. In this example, the shopkeeper profited 5 billion euros.

This web page offers an easy to understand introduction to futures markets: http://www.investopedia.com/university/futures/default.asp

 

[mheslep]

I agree the SocGen trader's loss was exceptional, but I don't think we can say the SocGen loss and the subprime related losses are unrelated. I'd say the subprime mess had set up the 'tinderbox forrest', bone dry, and SocGen was the lighting strike that set it off. I doubt a SocGen like loss would have triggered a world wide sell off two years ago. Certainly BNP Parabas was had no such impact.

 

[DrClapeyron]

Thats the whole point of futures contracts, you bet on what the price would be on the day they come due.
You can't buy futures and when they are due say, 'oops the price doesn't look good at the moment, do you mind if I sell them to you at next weeks price instead'

The futures market itself is not a bettors market.
Futures markets exist to offer an alternative to the cash markets. Firms can now hedge, go short the cash or long the cash. The downside to futures is delivery date, so yes the contract can be sold at next weeks price since most contracts stipulate the delivery date shall be somewhere between the beginning of the month and the end of the month.

This hedging helps maintain profit margins, which is akin to a bettor taking the moneyline (team A to win) and taking the spread to be beat (taking team B to break the spread).

 

[EnumaElish]

The SocGen trader had bet on stock market indexes (mainly CAC-40, some DAX) rising over time.

When stock markets began to fall in the new year, SocGen's internal alarms went off. They became aware of their huge exposure and started to sell contracts gradually.

On Monday (a U.S. holiday), Asian stock markets fell rapidly, and this spread to Europe. My guess is that at that point SocGen decided to sell more, faster. This, however, exacerbated the free fall in Europe and increased SocGen losses on the remaining contracts that they had not yet sold.

There is a possibility that Fed's rate cut on Tuesday stopped this free fall and prevented even a bigger loss for SocGen, and anyone else who had bet similarly on stock market indexes.

Of course, Fed's move also saved European markets (along with the U.S. ones) from a possible free fall, especially given that ECB has adamantly refused to cut its rates (because of its primary [only?] mandate of anti-inflationary policy).

 

[EnumaElish]

Just for the record, when was the last time the USA saved France?

This past Monday

 

[russ_watters]

Thats the whole point of futures contracts, you bet on what the price would be on the day they come due.
You can't buy futures and when they are due say, 'oops the price doesn't look good at the moment, do you mind if I sell them to you at next weeks price instead'

Huh? You can, and do, sell them early. That's the whole point of open trading and what was done here. They were unloaded - and more because of the fraud than because it was a good idea.

Caveat -- it isn't clear from the article whether all were dumped at once or if they only started to unload them on Monday.

 

[russ_watters]

I agree the SocGen trader's loss was exceptional, but I don't think we can say the SocGen loss and the subprime related losses are unrelated. I'd say the subprime mess had set up the 'tinderbox forrest', bone dry, and SocGen was the lighting strike that set it off. I doubt a SocGen like loss would have triggered a world wide sell off two years ago. Certainly BNP Parabas was had no such impact.

You're missing the point. The losses were related to each other, yes (they had the same root cause), but losses are only realized when you sell an investment, so the way they were realized was different. When Citibank lost $8 billion or whatever it was, it took a year to lose that much money. This bank lost $7 billion (or whatever), in one day (or just a few days) by dumping $50 billion worth of equities no one wanted onto the market.

Think about it this way. If you're Bill Gates and you decide it is time to diversify your 50% share of Microsoft's stocks, do you:

1. Sell all of it in one day at whatever price the market is willing to pay for it.
2. Sell it a little bit at a time over a year or two.

Hint: Bill Gates already did exactly one of these two. Which did he do and why?

 

[russ_watters]

Just for the record, when was the last time the USA saved France?

Just for the record, when was the last time France saved the US?

 

[Smurf]

1781? (This is a stupid debate, but one I find I cannot but be drawn into)

 

[russ_watters]

It is stupid, but yeah, that's the only time I can think of.

 

[mheslep]

Anyone see today's NY TImes piece on this guy? What a hit job.

http://www.nytimes.com/2008/01/26/business/worldbusiness/26trader.html?ref=worldbusiness"

PARIS — Jérôme Kerviel was too middling to be considered a loser.
...
He failed in a bid for town council in his 20s; he never rose higher than a green belt, a midlevel rank, after years of judo training — because of his bad knees; and he attended an average college where he earned respectable but unremarkable grades.
...
the mundane outlines of the life of Mr. Kerviel, 31, betray no flashes of brilliance.
...
His less-than-impressive persona
...
he didn’t distinguish himself from the others
...
one unremarkable low-level trader

It goes on and on. The subtext is that the guy could not have accomplished this by himself, but absent any proof of that the reporter hit this guy with a freight train of mediocrity and attached a Lee Harvey Oswald like 'I hate you all' grainy photo. I'd rather they said I robbed banks than write this about me.

 

[denverdoc]

To me it remains amusing that France should occupy a didproportioante amt of attention. It would seem the real issue is/was their failure to support the war against Iraq. Any cursory exam of history will show we have been thick as thieves with France, and opur last major effort on their behalf was in Vietnam, where they had the good sense to bail, and we did not. Thare is an interesting symmetry to the current Iraq policy, jut perhaps they have learned from mistakes whereas we seem hellbent on repeating them.

 

[Art]

Huh? You can, and do, sell them early. That's the whole point of open trading and what was done here. They were unloaded - and more because of the fraud than because it was a good idea.

Caveat -- it isn't clear from the article whether all were dumped at once or if they only started to unload them on Monday.

In Europe quarterly bets, known as futures, have a fixed expiry date. The expiry date is always the Tuesday before the third Wednesday of the contract month which means it looks like SocGen left it as late as possible before terminating the contracts.

 

[russ_watters]

Anyone see today's NY TImes piece on this guy? What a hit job.

http://www.nytimes.com/2008/01/26/business/worldbusiness/26trader.html?ref=worldbusiness"

It goes on and on. The subtext is that the guy could not have accomplished this by himself, but absent any proof of that the reporter hit this guy with a freight train of mediocrity and attached a Lee Harvey Oswald like 'I hate you all' grainy photo. I'd rather they said I robbed banks than write this about me.

I'm a little thin on the specifics, but the way I read the reports, that sounds like exactly the type of guy to commit this crime. He wasn't really trying to be a criminal, he was just a mediocre trader who wracked-up huge losses and knew how to cover them up because of his previous work experience.

 

[russ_watters]

In Europe quarterly bets, known as futures, have a fixed expiry date. The expiry date is always the Tuesday before the third Wednesday of the contract month which means it looks like SocGen left it as late as possible before terminating the contracts.

I don't see a point in there anywhere.

 

[Art]

I don't see a point in there anywhere.

You said

They were unloaded - and more because of the fraud than because it was a good idea.

so I pointed out it looked like they hadn't any choice.

 

[russ_watters]

Ok, well I don't see any evidence of that.

 

[Matthieu]

Just for the record, when was the last time France saved the US?

Yorktown? Chesapeake Bay? ;)

Just poking, however you guys give ourselves more credits than we deserve here. The fed is adjusting its rates because you're already well in troubles even without our participation to the mess :).

 

[mgb_phys]

Huh? You can, and do, sell them early. That's the whole point of open trading and what was done here. They were unloaded - and more because of the fraud than because it was a good idea.

You can sell them early if you can find some idiot to buy them.
My understanding was that they were in a bad position with the falling markets and so held on to the contracts until the due date in the hope that the market would turn around.
Wether the bank got itself into the state and made it worse by holding the contracts, or wether it only found out about them on the due date and so had to panic sell - we don't know. We also don't know how much of the 'fraud' loss was rolling up the banks other bad positions.

Northern Rock (a small UK S+L) got istelf into £25B/$50B or trouble without any help from the futures market by simply assuming it could go on giving mortgages to idiots at 10% while borrowing money on the markets at 5%.

 

[mgb_phys]

Just for the record, when was the last time France saved the US?

Now that you don't like France anymore - is there any chance of you chaps switching over to driving on the correct side of the road?

 

[Matthieu]

Now that you don't like France anymore

I don't understand what's with this "disliking countries". Personnaly I consider Bush's moron, however I don't think I've been saying stuff like "Americans are like this or that" or "I dislike the USA" or whatever (yet many people, and not just in France, don't bother with their brain and openly bash the Americans all day long and vice versa). Seriously people, these flame wars are so "bourgeoises" (grammar pedantic: bourgeois is accorded in gender and number and the French word for war has a feminine gender).

 

[EL]

Just for the record, when was the last time France saved the US?

I think Anttech is referring to the title of this thread.

 

[vanesch]

Just for the record, when was the last time France saved the US?

Hum, it didn't work, but when they tried to persuade you not to go into Irak ? couldn't resist...

 

[vanesch]

This Societe Generale's thing is of course the big headlines here in France, and nobody is really understanding a lot, but the financial part of the federal police is of course looking into it.

There are in fact two contradictory theses:

-according to the Soc. Gen. management, a week ago or something they FINALLY discovered one of their traders who had broken into the computer system of their control organs to dissimulate his actions (formerly, he was one of the designers of that security system apparently) and to give himself totally free lattitude. Apparently he has been doing this for months or even a year, and totalled positions for about 50 billion Euros (which he was never supposed to gamble but which he had dissimulated from the control systems). When management discovered this, they followed STANDARD PROCEDURE in their company, which is to sell IMMEDIATELY all the "fraudulent" (that is, outside of their authorised rules) positions, which... engendered 5 billion Euros of losses (or about 10%).

- according to many experts, this story is not possible unless we have James Bond or Randi in front of us, and this means that this company had accumulated knowledgingly 5 billion of losses, and were looking for a way to dissimulate this, and invented this story of the lone and fraudulent trader. They think it is unthinkable that management wasn't actively or passively endorsing his actions.

Apparently, police interviews with the trader seem to show that the first story is nevertheless correct, although the guy denies having acted fraudulently: HIS SAME TECHNIQUES allowed him to gain about 1.5 billion Euros two years ago, and he was, at that time, *congratulated* by management. Aparently, he set out to become "the best trader of all times"... his ambition was not to be fraudulent, but to show how good he was... (got this on the radio this morning).

Now, the funny thing is that Soc. Gen. did even announce modest gains this year. They were hoping in fact for about 5 billion Euros of gains, and ended up with the meager gain of a few hundreds of millions, after their covering of the losses caused by this affair.

 

[Ivan Seeking]

Hum, it didn't work, but when they tried to persuade you not to go into Irak ? couldn't resist...

Heh, we even started calling French Fries, Freedom Fries, in protest of your lack of support for the invasion.

Yipper shipper, that'll show em! dur de dur