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Panic’s over!
It’s OK, we can all stop worrying about the state of the financial markets and the global economy now. We’ve found the culprit.
The recent carnage in the markets was all down to one man. No, not Alan Greenspan, but Jerome Kerviel, a trader at French bank Societe Generale. The short version is that Mr Kerviel managed to circumvent the bank’s risk management systems, placing huge unauthorised bets on which direction markets would move in. He was discovered at the weekend, and the bank had to unwind the bets.
Of course, when SocGen started to unwind these bets on Monday, all that activity panicked the markets, sending them to the depths we saw in the last few days. In the process, SocGen lost £3.7bn – the biggest “rogue trader” loss ever seen.
It’s an appealing idea. Now the markets have caught the wrong-doer, we can get back to business as usual.
But it’s also a complete fiction…
More than a few commentators are trying to push the idea that the recent market chaos was all down to bets made by the ‘rogue trader’ at Societe Generale being unwound.
Where will the next rogue trader be found?
Now I’m not saying it didn’t have an impact. After all, as Edward Hadas points out on Breakingviews, “the bank must have sold something like 50bn euros worth of shares, the value of long positions required to lose [£3.7bn] in the first few weeks of 2008”.
But sadly, the theory that he was the sole cause of the market collapse doesn’t stand up to scrutiny. Monday’s market collapse began in Asia, where stocks sold off drastically overnight, before SocGen began its great sell-off. So while the idea that the Fed panicked and slashed interest rates solely because of the actions of a French Nick Leeson is quite amusing, it’s also somewhat exaggerated.
However, the story does flag up yet another reason for investors to be worried about what’s lurking behind the façade of the recent boom times. Many wise investors have pointed out in the past, that fraud which goes unnoticed during the good times, rapidly becomes obvious when things start to turn bad.
As Warren Buffett puts it, it’s not until the tide goes out that you see who’s been swimming without any trunks on.
So one obvious concern is that – if this chap could get away with it, who else is getting away with similar scams? It also shows just how much damage derivatives can do. Mr Buffett once called them “weapons of mass financial destruction” and SocGen, having been pushed into a multi-billion euro emergency rights issue, would have to agree with him.
These bets weren’t even terribly complicated. They were straightforward bets on the market rising or falling. Nothing to do with sub-prime or mortgage-backed securities or any of the other buzzwords of 2007. In other words, not where we’d have been expecting the occasions of mass fraud to crop up.
How you and I end up paying for banks’ mistakes
In many ways, SocGen – and by extension, the financial system – was lucky that Mr Kerviel slipped up when he did, or things could have become far worse. As Patrick Hoskings points out in The Times, having racked up billions in losses already, there’s no reason he couldn’t have racked up billions more. Instead of an emergency rights issue, SocGen could have been looking at outright bankruptcy.
And if that had happened, we’d all have had to pay for it. As Hoskings says, some banks are deemed “too big to be allowed to fail… Governments would undoubtedly be obliged to bail out any major bank in trouble. The squillions of dollars of bets placed every day in the wholesale money markets by such banks are underwritten by taxpayers.”
If you’re in any doubt about that, just look at the panic our own government got into over Northern Rock. The Rock is a pretty unimportant bank even within Britain, let alone on a global scale. Yet it was deemed too big to fail and has now caused untold damage to an already ugly-looking public sector balance sheet.
If nothing else, the first few weeks of 2008 have proved that we are in for a rough ride. In this week’s MoneyWeek magazine (out today), our editor Merryn Somerset Webb picks out the best places to put your money now. If you’re not already a subscriber, you can get your first three issues free by clicking here: 3-issues free trial.
Turning to the wider markets…
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London stocks soar as buyers return to market
In London, there were big gains for the FTSE yesterday as the investors piled back into the market following this week’s heavy losses. The blue-chip index ended the day up 266 point overall, at 5,875. Deal broker ICAP led the risers with a 14% jump after revealing that recent market volatility had helped it to better-than-expected results. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 added 99 points to close at 4,915. Over in Frankfurt, the DAX-30 index was 3381 points higher, at 6,821.
Across the Atlantic, it was another good day for stocks as more news from the Government regarding plans of an economic stimulus package offset weak house price data. The Dow Jones added 108 points to close at 12,378. The S&P 500 was 13 points higher at 1,352. And the tech-rich Nasdaq was 44 points higher, at 2,360.
The positive mood spread to Asia, where the Nikkei soared 536 points to close at 13,629, whilst in Hong Kong renewed demand for battered bank HSBC helped the Hang Seng to add 1,583 points to end the day at 25,122.
Gold hits new all-time high
Having risen over $2 yesterday, crude oil continued its climb this morning and was last trading at $90.32. In London, Brent spot was also at $90.32.
Spot gold hit a fresh record high of $914.50 an ounce this morning.
In the currency markets, sterling had strengthened to 1.9804 against the dollar and 1.3436 against the euro. And the dollar was at 0.6782 against the euro and 107.69 against the Japanese yen.
And in London this morning, Scottish and Newcastle – the brewer behind top brands including Newcastle Brown Ale and Kronenberg – accepted a £7.8bn joint bid from Carlsberg and Heineken, finally putting an end to three months’ of discussions. S&N shares was up by as much as 2.2% so far today.
Our recommended articles for today…
After the equity bubble – the litigation bubble?
– The New York Times guesses that the number of post-housing lawsuits could dwarf what followed the Enron collapse. Who to sue first: the central bankers, the ratings agencies… fellow investors who joined in the frenzy? Adrian Ash looks at what direction the blamestorming will take: After the equity bubble – the litigation bubble?
The cheap money’s gone – where next for private equity?
– Cheap funding was a key factor in the success of hedge and leveraged buyout funds. Now the cheap money’s gone, managers should get ready to take it on the chin, says Yves Smith. To find out why it’s not just the money, but the likely takeover targets that have all but disappeared, see: The cheap money’s gone – where next for private equity?