Daily Market Reports | Jan 26 2008
By Greg Peel
It was Friday. The end of the first week of net gain for the Dow in 2008, and the end of one of the most tumultuous ever experienced by Wall Street. Friday is always a good day to square up ahead of a hopefully relaxing weekend.
The Dow closed down 171 points, declining steadily over the day from a +100 point opening. It was not a day of consequence, for once, just a day to take some gains off the table. Not much can be read into Friday. The bears will say failing rally and the bulls will say interim profit-taking. The reality is that we start next week with another clean slate.
Dominating discussions, however, is the ongoing saga of one Monsieur Kerviel – the rogue of Societe Generale. There are a lot of accusations flying around, and a lot of speculation about exactly what occurred. Apparently SocGen knew about its US$7-8bn (it depends who you read) loss last Sunday night, and management began unwinding the huge long stock index future position into the market in Europe on Monday. As we recall, it was Monday night in Europe that triggered a massive world-wide sell-off, including a 7% down-day in Australia, while Americans looked on in shock during their long weekend. There had been no “new news”, and no lead from Wall Street. Why, oh why, was the world suddenly tanking?
SocGen has been quick to deny that it was the bank’s forced selling at the root of the collapse. As to whether this is a realistic denial is by the by, as it will never be proved either way. What we do know, however, is that the Dow futures market was indicating a fall of more than 600 points in the index at the open on Tuesday. We also know it was this point at which the Fed decided to make an emergency 75 point rate cut. Can that historic cut actually be linked back to Kerviel?
The short answer is: Who cares? The Fed has said it would have cut anyway, but it matters little as to what truth may lie behind that statement. What’s done is done, and there are few in the market who would now say a 75 point cut was not needed irrespective of one particularly bad session across the globe. From Friday to Friday, the Dow is up 108 points. There will surely be those across the globe who would like to see Kerviel’s head on a platter, having been forced by margin lenders to sell out of losing positions at the bottom. Well – c’est la vie.
And the authorities would like to find Jerome Kerviel so he can be prosecuted. Pathetically, SocGen management wants to sue Kerviel – a lowly paid ex back office bookkeeper – for its US$8bn loss. Kerviel has indeed broken the law, but if anyone should be prosecuted or sued it should be the criminally incompetent SocGen management. They are the culprits here, just as the greedy morons at Barings were singularly responsible for that bank’s collapse in 1995, not Nick Leeson.
The world is scratching its head as to what motive Kerviel could have had. For he did not profit one euro from his supposed fraud. This only means the world is sadly clueless, and looking for a scapegoat for its own failings. For Kerviel is no criminal at all. Nor was Nick Leeson.
We know little about the Kerviel story as yet, but we do know a lot about Nick Leeson. And the two stories seem identical in many respects. Leeson was a inconsequential young barrow boy with enough street-smarts to be given an almost carte blanche reign over Barings’ profit-making venture in Singapore. As long as there were profits, Barings management were happy to be oblivious porkers feeding at the trough.
One day, one of Leeson’s junior operators made a trading error. She bought index futures on the Nikkei instead of selling them, as her client’s order dictated. Keen not to see his inexperienced junior lose her job, Leeson took on the responsibility of the error himself. He then made the fatal mistake all experienced order-fillers know not to make – he decided to run the position, on the assumption the market would eventually come back. Rule Number One – always cut errors immediately.
But the market didn’t come back, and the losses mounted. Leeson may have been naive, but he was a lot less naive than his superiors. He was able to hide the losing position and fund it through fictitious short put positions. But still the losses mounted. Finally an earthquake hit Japan and the Nikkei collapsed. At that point a scared little boy realised it was all too much, so he ran away.
Kerviel had supposedly accumulated huge paper profits by December in his index futures trading account. The boy from the back office was a star, and was no doubt feted by all and sundry above him at SocGen. But as we know, January turned very sour in world equity markets. The young Frenchman watched his world collapse. But having come from the back office, and being a supposed “computer genius” (which in management terms probably meant he knew where the “on” button was), Kerviel knew how to hide US$8bn from his risk managers. He was no doubt hoping the market would come back and all would soon be well again. How on earth can a bank bleed US$8bn and not wonder where the money’s coming from?
When it all got too much, it would seem a scared little French boy ran away. Leeson spent years in Changi prison for his “crime”. A few Barings executives lost their jobs. Kerviel will no doubt be locked away eventually as well, and a handful of SocGen heavyweights will be paid to clear their desks. Barings Bank was ultimately swallowed up by Dutch bank ING. SocGen has its hand out for the US$8bn.
And the world will move on.
Book-squaring was the order of the day across most markets on Friday. The Aussie, gold and silver are relatively unchanged. Base metals staged an early rally before falling back and consolidating. Oil was the only mover of consequence, adding another US$1.30 to US$90.71/bbl.
After a week of extraordinary rallies, Australia looks set to give a little bit back on Tuesday morning, Monday night offshore trading notwithstanding. The SPI Overnight closed down 75 points.
There will be another Overnight report to digest on Tuesday morning, but in the meantime, Happy Australia Day to one and all.
