...a blog by Richard Flowers

Sunday, February 03, 2008

Day 2581: Let's Blame the French!


Oh hurrah, just when it looked like the world's economy was going to go to hell in a handcart, along comes the jolly old French to offer up a SCAPEGOAT.

The news that a Rogue Trader has cost top French bank Société General a whopping €5 billion, even better that the bank had been warned in advance, gives the economic incompetents who are running Great Britain and America the chance to point their fingers and say: "THEY were dumping their dodgy deals; THEY'RE to blame!"

Of course, the reality is that it was almost certainly the other way around.

Far from CAUSING the mad selling panic last Monday, Soc Gen were UNLUCKY enough to get caught up in it. Their Trader, Mr Jerome Kerviel, had left them in a sticky position with a number of deals that meant they would have to sell shares at a loss. What would NORMALLY happen, though, is that you could HIDE this by bundling those losing shares up with some NEW deals and roll the whole lot forwards in the hope that eventually you would come clean. Sort of like an endless DOUBLE-or-QUITS bet. Except of course, it can't REALLY be endless. And when a day like last Monday comes along and EVERYTHING is going downwards, suddenly there nowhere left to hide and you have to make the losses become "real" – i.e. cough up the dosh.

So, Société General didn't start the Market's plunge… but they might well have made it a whole lot WORSE because when other people might have stopped trading, they just had to keep on selling and it kept the spiral going.

And yet, and yet… funnily enough, there ARE some people who are treating Mr Kerviel as some sort of HERO – and not just for BOPPING the NOSE of a big institutional bank. The slightly loopy and yet disturbingly CREDIBLE suggestion is that by a DOMINO effect, he may have SAVED THE WORLD! Because he left the bank owing billions, THEY dumped them on the Market, that turned a fall into collapse which in turn panicked the Federal Reserve enough that they actually woke up to the danger inherent in America's poor economic position and THAT is what caused them to cut interest rates so dramatically that it might actually make a difference.

Or it might not, but that is the sort of chain of logic – and by logic I mean whimsical fantasy – that city traders love to cling to in a crisis. And lo, the markets did recover a bit.

Until the next panic!

1 comment:

Edis said...

I thought the problem with the French 'rogue Trader' was that his deals were actually making a profit when the accounting period loomed, so he had to make trades he knew would loose in order to avoid unexplainable figures in the black. So he did some deals to throw away money. Turns out that if he had just kept his holdings steady the actual losses in the overall market would have hidden his adventures admirably...