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

  1. Jan 24, 2008 #1

    EnumaElish

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    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?
     
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  3. Jan 24, 2008 #2

    Art

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    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. :rolleyes:
     
  4. Jan 24, 2008 #3

    EnumaElish

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    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.)
     
    Last edited: Jan 24, 2008
  5. Jan 25, 2008 #4
    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
     
  6. Jan 25, 2008 #5

    russ_watters

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    Interesting possibility, EnumaElish.

    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.
     
  7. Jan 25, 2008 #6

    russ_watters

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    Interesting possibility, EnumaElish.

    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.
     
    Last edited: Jan 25, 2008
  8. Jan 25, 2008 #7

    mgb_phys

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    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'
     
  9. Jan 25, 2008 #8

    russ_watters

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    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.
    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.
     
  10. Jan 25, 2008 #9

    lisab

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    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?
     
  11. Jan 25, 2008 #10
    Just for the record, when was the last time the USA saved France?
     
  12. Jan 25, 2008 #11

    EnumaElish

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    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
     
  13. Jan 25, 2008 #12

    mheslep

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    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.
     
    Last edited: Jan 25, 2008
  14. Jan 25, 2008 #13
    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 begining 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).
     
  15. Jan 25, 2008 #14

    EnumaElish

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    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).
     
  16. Jan 25, 2008 #15

    EnumaElish

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    This past Monday :biggrin:
     
  17. Jan 26, 2008 #16

    russ_watters

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    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.
     
  18. Jan 26, 2008 #17

    russ_watters

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    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?
     
    Last edited: Jan 26, 2008
  19. Jan 26, 2008 #18

    russ_watters

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    Just for the record, when was the last time France saved the US?
     
  20. Jan 26, 2008 #19
    1781? (This is a stupid debate, but one I find I cannot but be drawn into)
     
  21. Jan 26, 2008 #20

    russ_watters

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