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Societe Generale didn’t cause Monday’s market crash

Posted January 25, 2008

"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… It’s an appealing idea… But it’s also a complete fiction." — John Stepek

by John Stepek, Money Week

Baltimore and London – (TFN): 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.

Rogue traders come out of the woodwork

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… Read on to learn who could pay for Societe Generale's mistakes and how the European markets reacted to the "unwinding" news.

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