Jerôme Kerviel, 31, was making roughly $145,000 a year to trade stocks for France’s second-largest bank, Societe Generale SA.
Some time last year, it appears, some of Kerviel’s trades went south. Perhaps he didn’t want to report an embarrassing loss, so he found a way to hide it by hacking into the bank’s computer system.
He also found ways to secretly trade the bank’s assets. So he traded again and again, hoping to recover before anyone noticed the money was gone.
Unfortunately, Kerviel was better at deception and computers than he was at trading. By the time the bank discovered his scheme, he’d suffered billions in losses. And after the bank unwound all of his unauthorized trades last week, it tallied its losses at $7.2 billion.
It was a new world record for a rogue trader, towering over the $1.3 billion Nick Leeson cost Great Britain’s Barings Bank in 1995, or the $2.6 billion that copper trader Yasuo Hamanaka lost at Japan’s Sumitomo Corp. in 1996.
It may have also shaken the ground here in America in ways I find amusing.
Unbeknownst to our economists, market experts, or even the geniuses running the U.S. Federal Reserve, France’s second-largest bank had been unwinding tens of billions of dollars in Kerviel’s secret trades since it discovered the problem two weeks ago.
Given the size of Societe Generale’s losses and the nature of the scheme, it’s likely Kerviel’s trades were leveraged though derivatives or even simple puts and calls. Unwinding them quickly may have contributed to last week’s staggering declines in the Asian and European stock markets, market observers say.
Many U.S. investors watching this global melee Monday felt trapped in a burning house. They believed U.S. markets would almost certainly follow with a 1,000-point drop in the Dow.
All the talk in the news was about a recession. But U.S. markets were closed for Martin Luther King Jr. Day, and there was nothing anybody could do but pray.
This panic soon spread to the Federal Reserve, which stepped in Tuesday with an unusual 75-basis point cut in the federal funds rate.
The Fed has not made a single interest-rate cut this large in more than 20 years. Many market observers praised the central bank for its swift intervention. Others complained it was being led by foreign markets rather than ours.
Then came Congress and the president, scrambling together an emergency stimulus package designed to give away nearly $150 billion to the people.
And all of this because of one young punk trader in France?
Well, not exactly. Like all global-scale disasters, we can point to a confluence of events. Banks around the world have been reporting enormous losses, many stemming from subprime mortgage loans in the United States. No one quite knows when this will end — which is one of the main reasons markets remain volatile.
Meanwhile, U.S. consumer defaults continue to escalate, spreading now from mortgages to auto loans and credit cards. And this has prompted an increasing number of economists to conclude that we will soon be in a recession if we are not in one already.
Against this backdrop, the financial machinery of the world is now so complex that nobody really understands it. Mortgage-backed securities, collateralized debt obligations, derivatives, bond insurance — when one part of this global machine unwinds because of massive loan defaults, it’s sure to affect another in ways no one can predict.
“It doesn’t take a whole lot to panic people at this point,” said Denver money manager Fred Taylor of Northstar Investment Advisors.
In this environment, the actions of just one rogue trader can be “like adding gasoline to the fire,” Taylor said.
“It’s like that butterfly in Indonesia causing a hurricane in the gulf,” said Jerry Paul, a merger-arbitrage hedge-fund manager with Quixote Capital Management in Greenwood Village.
“It’s just that goofy,” he said. “You’ll probably write a damn column about it and then trigger a sell-off in Asia.”
Or maybe even another rate cut at the Fed and a bigger tax rebate from Congress.
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to Lewis at , 303-954-1967 or alewis@denverpost.com.
