Rogue Finance

Globalized high finance has been shaken by yet another scandal. Société Générale (SocGen), the second-largest French bank, is in serious trouble due to the wild speculative transactions of rogue trader Jerome Kerviel. But this weekend in Tokyo, the ministers of finance and central bankers of the G7 will discuss another matter. Behind SocGen's colossal loss of 4.5 billion euros ($7 billion) there is another, much more serious crisis that the Kerviel affair has made it possible to hide. In mid-January, SocGen wrote off 2 billion euros of bad debt linked to the American subprime crisis. This phenomenal loss went unreported in the media because all eyes were focused on the French rogue trader.

Naturally, the financiers of the global village knew what was happening but kept mum. Privately many people judged SocGen's strategy brilliant: the publicization of Kerviel's losses provided a convenient smoke screen. Especially after the shock of the U.K.'s Northern Rock, bankers' worst nightmare is to share the humiliating destiny of the British mortgage lender. Hit by the subprime hurricane, Northern Rock was literally besieged by its British clients. Though saved from bankruptcy at the eleventh hour by the British government, Northern Rock is still looking for a white knight willing to buy it and to inject the necessary cash to keep it afloat. SocGen, on the contrary, has had no problems in employing Merrill Lynch to help recover Kerviel's losses. In finance, appearances count more than facts and SocGen knew that its bad management of the trading floor was a better crisis to publicize than taking a huge hit from the subprime global
meltdown.

This strategic consideration helps us to understand the "irrational" behaviour of SocGen during the last few weeks: the sudden denunciation of the rogue trader in the middle of the collapse of the world stock exchanges, which led to the maximization of losses for the bank. Only two weeks earlier Kerviel's portfolio had shown a profit of 1.5 billion euros. Now that we know that the young trader was used as a smoke screen, we can unravel another mystery: why did the complex system of controls that allows the bank to verify the total volume of transactions on a daily basis fail to detect Kerviel's irregular transactions? The answer is simple. All traders take excessive risks -- they regularly bet much more than they are allowed to. This is the common "unorthodox" behaviour of modern finance. Rules and controls are systematically ignored. This explains why last November SocGen ignored the recommendation of Eurex, one of the most important exchanges for derivatives, to check on Kerviel's trades. Just a few days ago, the European Union commissioner for trading, Charlie McCreevy, publicly condemned such behaviour.

The crisis of subprime lending is spreading to Europe because European banks have subscribed to the insane American mortgage boom. At the same time the crisis is beginning to erode the ethics of the banking system. Those who administer our savings renegotiate the rules of the game daily, ignoring the system of controls. The fear of the domino effect (already felt with the U.K.'s Northern Rock), in which the failure of one bank would prompt the bankruptcy of many others -- all intertwined through subprime loans -- justifies manipulations such as the construction of the Kerviel scandal.

How many people are aware of this reality? And how many bear some responsibility? In the pubs and restaurants of the City of London people whisper that the responsibility lays well beyond the board of directors of SocGen. The crisis of the subprime market is imposing a new code of conduct on high finance, a set of new rules that nobody likes because these rules are replacing transparency -- a key characteristic of globalized finance -- with a maze of smoke and mirrors. Everybody feels at risk: "Today Kerviel was the fall guy, tomorrow can by someone else, one of us," traders say to each other.

The real danger, however, is that obscuring one crisis with another, instead of protecting people's savings, may end up wiping them out. To hide a loss of 2 billion Euros in the subprime market, SocGen ended up losing another 4.5 billion. The shocking reality that the G7's financial mavens will need to face this weekend is not the discovery of yet another rogue trader but the rise to power of rogue finance.

Comments

[ronjbee]

Ms. Napoleoni's excellent article raises many questions, but above all how to stop this from happening in a financial world that too often takes aim at greed rather than reasonable profit margins. While it won't happen, I think they should shut down Societe Generale, send the leaders of the bank to jail, liquify its assets, and use the CEO's personal bank account and those liquified assets to pay back shareholders for the money that was stolen in this horrid deriative scheme. The accompanying letter should apologize, and encourage investors to put their money somewhere that has more responsible leadership. Only consequences such as these will deter future abuse, and make corporations think for a nano second about what they must do to keep a tight ship. That may only hold off greed until the next scheme comes along. Stealing is stealing and those that profit from it should pay higher if not the highest consequences.

[Sundialsvc4]

Sometimes I think that I missed my calling. Unfortunately, when my calling came calling, I had to work. So this leaves me with no ability at all to wave my hands and make money appear out of nothing at all. Markets do not move a thousand points when a rumor leaks out about what I might possibly be considering thinking about thinking. Whenever I borrow money, I have to pay it back. Life stinks ... or does it?

What I know is the point-of-view of the working-man, and by the way there are hundreds of millions of people in my boat and only a small handful on your yacht. This gives me street-smarts that Wall Street types just don't seem to have, and what those smarts are telling me is this: whatever affects me, and millions like me, also affects you whether you like it or not.

The turmoils of our worldwide(!) financial markets are not simply the result of bad decisions; they are the result of crimes. Banks engage in rampant usury; they defraud millions of account-holders by twisting the timing of transaction settlement to their own advantage. And most of all, they drench all these practices in false clouds of normalcy and inevitability.

A crime ... is a crime.

A man who holds another man's money has a fiduciary duty to that man, and must earn his profit honestly -- not by taking advantage of his position.

The money you are looking for is not there. It does not exist; it is a grand fiction. The robbers took the symphony and left a cassette tape behind.

[GnitenGoodLk]

"Wall Street's five biggest firms are paying a record $39 billion in bonuses for 2007.
It was a year when three of the firms suffered their worst quarterly losses in history and shareholders lost over $80 billion."

http://www.nydailynews.com/money/2008/01/18/2008-01-18_wall_street_paying_record_bonuses.html

Dick Grasso -chairman and chief executive of the New York Stock Exchange from 1995 to 2003

""I invite members of the FARC (terrorist org)to visit the New York Stock Exchange so that they can get to know the market personally." Some find the meeting inexplicable, considering that the FARC has anti-capitalist ideals and has no officially recognized financial clout. Grasso told reporters that he was bringing "a message of cooperation from U.S. financial services."

On 24 May 2004, Grasso was sued by New York state Attorney General Eliot Spitzer, demanding repayment of the majority of a nearly $140 million pay package. Prior to being dismissed, Grasso had been in line to receive an additional $48 million over the $139.5 million he had already received; he was not paid the additional funds."

http://en.wikipedia.org/wiki/Dick_Grasso
http://www.washingtonpost.com/wp-dyn/content/article/2006/10/19/AR2006101900974.html

"One of the key architects of former New York Stock Exchange chairman Richard Grasso's now infamous pay package is calling it quits."

http://www.usatoday.com/money/markets/us/2003-09-22-nyse_x.htm

NYSE used to be a non-profit, now it is private, thanks to greedy bastards like Grasso.

Nasdaq overtakes Wall Street

http://www.usatoday.com/money/markets/2007-03-12-symbol-salvo-usat_N.htm

Our candidates criticize Wall Street, no mention of Nasdaq
http://www.swamppolitics.com/news/politics/blog/2007/09/obama_criticizes_wall_street_v.html

http://www.nysun.com/article/67563

Why is Nasdaq going after Wall Street? Look back to 2000:

http://findarticles.com/p/articles/mi_km2928/is_200102/ai_n6935145

Our wars abroad are merely an extension of our wars within.

[flatus]

"Rogue Finance" sounds a bit too romantic for my tastes.

I would have prefered something like "Greedy Fucks Out of Control Finance".

[realitytrumpsbull]

I second that emotion, and it's not just france, it's GLOBAL. Global Insider Trading Assocation, Global Slumlords' Alliance, International Bank Fraud Consortium, whatever you want to call it, they all play golf together and probably play poker in Monaco or something. I've always kind of held the general view that some people have more money than brains, and that's fine, the difference between crazy and eccentric is 6 figures in the bank, but when it starts being Other People's Money, and you start wrecking other people's lives with your little 'oopsie', there, well then it's time to say something, and ask questions about who the hell is really minding the store, here.
Makes the old-sock-and-coffee-can investment model seem a lot more trustworthy...

[Henry]

Same old, same old I am afraid.
In 1987 (during the Reagan prxditcy) the FSLIC knew there was a $100 billion hole in American savings and loans.
It would be kept as bad rumors by the cognoscenti & glitteratti and dumped onto the succeeding administration: Dukakis or Bush.
It finally hit in 1989 and the hole had expanded to $250 billion. Of course this would be bourne by the taxpayer. The china-syndrome of extending failures beyond a liquidity-limit granted by insurance of brokered deposits was the small element of corrupt arrogance that put the country into a recession. The players: Merrill Lynch and their Pres Don Regan.
The more things change, the more they stay the same.
Small time greed and avarice has its limits. Consolidated empires of greed and arrogance, invstment banks, pro sports, the media... they all stink and mostly because they are all too big (they lose sight of what they are there for)

[WIpatriot]

Spot on, Henry!