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January 25, 2008
Will Kerviel Haunt Bernanke?
To cap off what has already been an extraordinary week, yesterday it was revealed that the unwinding of billions of dollars in rogue trades at Société Générale may have helped fuel the crash in global equity markets to begin this week. Apparently the world’s latest Nick Leeson, Jérôme Kerviel, made billions worth of optimistic (long) bets on equities and Société Générale discovered the trades over the weekend:
“Working through Saturday night and Sunday, the disgraced trader helped SocGen staff to uncover his hidden punts. Most positions, mainly predicting that European indices would rise in 2008, were still open. They would have to be closed on Monday, when the markets opened”
Obviously these revelations have led to the speculation that the actions of a single rogue trader compelled the U.S. Federal Reserve to panic and aggressively cut interest rates only days before a scheduled meeting. Whether or not these speculations are founded is not really the issue. That they are being talked about at all is.
Two More Bailouts
Monoline insurers are in the process of being bailed out and it is also being reported that billionaire Wilbur Ross will buy out Ambac. Interestingly, many people speculated, including Evans-Pritchard, that the Fed cut on Tuesday because the monoliners were in trouble. What these speculations failed to adequately explain is how a Fed rate cut would help. Let’s not forget that last years rate cuts and late-year promises for endless liquidity from the Fed were not nearly as effective as SWF investments in U.S. financial stocks.
Announcing his stimulus scheme only last week, President Bush worked quickly to get the documents drawn up this week. Along with the rebate checks and business investment incentives, Fannie and Freddie will be given larger loan caps for 1-year.
Unpredictable Gyrations
The gold bull died earlier this week but gold is trading at record highs this morning. The bear market readings across the globe on Tuesday are turning mixed as many major markets are set to end the week higher. On Wednesday the Fed was (100% according to futures) expected to cut rates by an additional 50 bps on January 30, but with a monoline bailout and/or continuation of the stock market rally it is entirely possible the Fed will do nothing next week…
Yes, it has been an extraordinary week, and it isn’t over yet. One final thought: if the Fed doesn’t cut interest rates again next week, January 15 will go down in history as the day Jérôme Kerviel scared Ben Bernanke...
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