Friday, 25 January 2008

Move aside Nick Leeson, here's Jerome Kerviel

Well the markets have been in a bit of a state recently; hugely volatile and mostly heading downwards. The main cause of this is the recent sub-prime scandal in the states. To those that don't know, the subrpime thingy-ma-bobby was just a case of lenders giving out highly risky mortgages on property without doing the proper checks. They did this because they could charge higher interest than what was generally available in countries (mainly USA) with very low interest rates. Property prices were also a bit overvalued, so when they dropped a bit, people were fucked and defaulted on these loans. Because of globalization, all these loans are cross traded, and thus most markets around the world had direct or indirect exposure to this. But I digress...

... It's reporting season in the states right now, and the write-offs on these debts that the big banks have been making have been GINORMOUS! Obviously the markets have been taking a big hit (and that's why Sandy has been so stressed of late.) Earlier this week, the Fed (US central bank) held an emergency meeting were they cut interest rates by 75 bases points (0.75%). That's a seriously big thing to do which shows that they were really worried about a big recession ahead.

Anyways, last night something came to light that shows that something else might have been causing some of the market turmoil this week that prompted this emergency meeting. A trader at Societe General in France called Jerome Kerviel had found out how to get past the banks checks and controls and had taken a massive unhedged forward position. This means he took a big, levered bet that the prices would rise. Well they didn't, and so he was screwed, and thus the bank was screwed, and thus the market..... you get the picture. You've heard this story before. They call this sort of a dumb-ass a rogue trader, and the most famous one to date was Nick Leeson (no not Ewan McGregor). But Nick only made $1.4bn in losses (and admittedly shut down Barings single-handedly), but Jerome managed to cause $7.14bn in losses.

This was only publicly announced last night as far as I know, but the bank has been aware since saturday, and presumambly the information had leaked into the market causing some of the turmoil earlier in the week. And the Fed was unaware that this was the reason. Thus very possibly, good ol J was also responsible for the biggest economy in the world' federal bank calling an emergency meeting for the 1st time EVER, and cutting rates by the biggest amount since.... fuck knows when!

He gets my vote for man of the decade.


Greg said...

Sub-prime is going to be the catchphrase of 2008, i predict. In fact, if it can knock 'global warming', or 'sustainable' off their perch (sorry Jim) it's a step in the right direction.

I like my steak sub-prime.

Dr Phil said...

ya this guy is a pearler: "Mr Kerviel’s motivation is unclear, though Mr Mustier does not believe he was doing it for profit. Indeed, the trader – who could not be reached for comment on Thursday – seemed confused about what he was doing. “He understood he was taking huge positions but I don’t think he understood the impact,” Mr Mustier said. “He kept telling me during the night that he had discovered a new trading technique which was performing very well.”"