Thursday, January 24, 2008

Bigger than Baring's

During the work day today, the one story that kept nagging me was the one about how a "rogue trader" -- whatever that is -- cost France's second largest bank about ­€ 4.9 billion ... that's $7.1 billion.

Société Générale is big enough to absorb the hit, however painful; although it did have to come up with the cash in an awful hurry, through a secondary public offering. After the money-laundering that went on at BCCI which led to its collapse around the time of the first Gulf War, this may be the second biggest bank fraud in history.

The democratization of the stocks and futures markets, in particular foreign exchange or 4X, has been a good thing. Mostly. Even Joe or Jane Blow can now take positions on everything from orange juice and cattle, to potential interest rate moves and platinum, for a relatively small sum. You have to deliver the contract at some point but as long as you make a buck in the end you come out okay.

The problem is when it's done with borrowed money. To cover your losses, you sell yourself short but run the risk of getting more into debt. And when it's other people's money, or a bank's assets, then there's a real problem. It looks like someone took a bet on where the European markets were going and got burned by the sell off earlier this week, although the fraud was actually uncovered this past weekend. I found it interesting to read Nick Leeson, the guy who brought down Baring's, put it this way when told today of the SG scandal: "He survived for one day, he survived for a week, he survived for a month and eventually you start to believe that, okay, it's not quite as bad as it was."

The "he" in this case is accused to be Jérôme Derviel, a 31 year old who'd been at the bank for about eight years but at this critical trading desk for just two of them. He's suddenly found himself named to the Top Ten Most Wanted lists in more than just France. And because it's money and not lives, the search for him will be more diligent than for Osama Bin Laden.

And I have to agree with what they said this morning on CNBC. Most people were betting on a half point drop in the Fed next week, on top of their surprise ¾ cut earlier this week. Now all bets are off. Thanks to one stupid idiot who got caught losing billions rather than the thousands out there who skim mere dollars no less illegally -- or illogically.

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