So you all heard about this right? If you have’t you have been living under a rock. But seeing as we cater to all sorts (including those who live under rocks) I will give you the back story. From the Wall Street Journal…..
In one of the banking world’s most unsettling recent disclosures, France’s Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.
Okay, here is the joke (from Market Watch)….
The Federal Reserve was not aware that Societe Generale was unwinding trades in Europe on Monday that had been amassed by a rogue trader at the French bank, a Fed source said Thursday.
The bank’s scramble to get out of those trades is now presumed to be a factor behind the panic sell-offs that roiled overseas markets on Monday. And those sharp declines in Europe and Asia were cited by Fed watchers as a central concern that moved the Fed to engineer an unprecedented emergency rate cut only one week before their formal meeting.
In case this needs to be spelled out for you here is Felix Salmon to explain how one little trader at one little bank struck terror into the heart of the Fed……
Firstly, they decided to liquidate as quickly as possible, dumping the overwhelming proportion of their huge long position in one day. And secondly, the day they picked was Martin Luther King Day: a public holiday in the US, which meant that Chicago was closed.
As a result, futures traders across Europe had to scramble to find a huge amount of liquidity in a very short time, and prices predictably plunged.
Macro Man also assumes that he’s not alone in scratching his head and thinking “what now?” Next week’s Fed meeting is set up to be an extraordinarily interesting one. It has emerged that despite the Banque de France knowing about SocGen’s travails over the weekend, the Fed had no clue when they hit the panic button on Tuesday.
Grep Ip seems to suggest that the SocGen revelation won’t impact the Fed’s decision next week, but come on! If, before the equity market meltdown, the Fed was planning on doing 50…..why should they cut any more next week, thereby at least doubling the amount of their originally intended easing?
Yet to the market, it’s not a question of whether the Fed eases, but by how much. The OIS market is currently pricing in 40 bps of easing. Of course, if the Fed doesn’t ease, markets could then puke, delivering the kind of price action that prompted the emergency cut in the first place. The problem with allowing the market to lead you, Mr. Bernanke, is that it inevitably leads you into an uncomfortable corner.
What seems evident is that volatility is set to remain pretty high. If the Fed doesn’t cut next week, equities should tank and bonds soar. If they do cut….well, let’s just say that the dollar will be (French) toast.