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Société Générale and the Economic Meltdown

I don’t know the person and his motives are totally irrational.

— Daniel Bouton, chairman of Société Générale, January 24, 2008

The Americans and British will naturally point a finger with glum satisfaction: Black Monday was the work of a wily, unreliable Frenchman by the name of Jérôme Kerviel. The loss of 4.9 billion Euros by the world’s seventh largest bank, Société Générale, is still being digested by markets. It has now become the biggest fraud in financial history. Some perspective can be gathered by the fact that the same company paid roughly half that price for most of the assets in its rival, the Russian bank Rosbank, in December.

Kerviel’s costly hedging on plain vanilla futures, though spectacular, is far from unusual. ‘Rogue’ transactions dot the banking landscape, with the 1990s being memorable for several practitioners of ‘off-the-book’ activity. The last time such an event of comparable magnitude took place was 1995, when Barings Bank announced losses totalling 1.6 billion US dollars. The perpetrator then was Nick Leeson, who is now spending time in resplendent solitude as a director of an English soccer club. Barings, once a great name, is defunct, swallowed up by ING for a mere one pound.

The Japanese had several. One was Yasuo Hamanaka of Sumimoto Corporation, who had the cunning to raise the price of copper through off-the-book transactions. In a sense, the sub-prime market was the paragon example of a grand rogue scheme, one sanctioned by an evolving practice that is tilting the global economy into recession.

Such financial lunacy has all but put paid to the interventions of Federal Reserve Chairman Ben S. Bernanke earlier this week. A Federal Reserve source claimed that no one within the bank knew about SocGen’s antics till after the announcement to cut interest rates. Initially uncertain and all at sea, the Federal Reserve has taken the first dramatic moves to hoist the American economy from the brink of recession. The first was a cut of three-quarters of a percent in the official interest rate, unheard off since the early 1990s.

The next move came from the White House, an initiative to force a credit binge through tax rebates. This measure has full bi-partisan support. Populist policies encouraging consumption are reminiscent of anti-recession adverts from Australia in the early 1990s: ‘If each Australian buys one pair of locally made socks, the economy [and wool industry] will be saved.’

The gloom that has spilt over from the speculations of Kerviel has affected global leaders. The British Prime Minister Gordon Brown, who was for a time England’s answer to a now discredited Alan Greenspan, has scolded the banking system at the World Economic Forum in Davos. ‘This is a testing time for the global economy and those of us who believe in free markets, flexible economies and sustainable globalisation.’

Risks in financial markets have been under priced. The very correcting mechanism so often ignored by practitioners of neo-liberal economics has now come back with a vengeance.

SocGen has been engaging in such sheet-activity, much of it clearly off-balance. Allowing a single trader such unaccountable access was suicidal, though it assures the public in a statement that his authority was ‘limited’, and his reputation as a junior trader insignificant. The statement makes little sense, given that Kerviel’s activity in placing billions on basic derivatives must have surely caught the eye of someone.

All credit is due to Kerviel, who must have been playing with sums in the order of 30 to 40 billion. Security safeguards were deftly evaded, which says much about those who put them there in the first place. His former employer’s response was weak: he concealed the nature of earnings and losses ‘through a scheme of elaborate fictitious transactions.’

The company’s chairman and chief executive Daniel Bouton, along with deputy Philippe Citerne will forego their salary till June 30 to right the ship. They can afford to, and still believe in the magic of the market. Bouton, betraying a general ethical deficiency in banking, seems to think much like the spurned Kerviel. ‘These losses,’ claimed Bouton at a press conference, ‘could have been gains if the market had climbed on Monday, Tuesday and Wednesday.’ As a letter to the London Times on January 24 suggested, we wouldn’t let these people be dentists.

BINOY KAMPMARK was a Commonwealth Scholar at Selwyn College, Cambridge. He can be reached at: bkampmark@gmail.com

 

 

 

 

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Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne. Email: bkampmark@gmail.com

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