Did SocGen Spark Global Sell-Off? What is the Fed's Next Move?

http://www.princeofwallstreet.com/2008/01/24/did-socgen-spark-global-selloff-feds-move/

There is a theory circulating around Wall Street today about why
markets got hammered on the 21st of January globally and on the 22nd in
the U.S.  It is pretty interesting and may hold some grains of truth. 
It also offers some insight into how the federal reserve may act at
their up coming meeting.

At its core the theory blames the precipitous declines in markets on
Monday and Hang Seng on forced selling in the futures market and
equities markets by Société Générale as it tried to shore up its
capital base and wind-down trades related to its rogue trader, Jérôme
Kerviel.  Presumably, SocGén found out on January 18 about the
fraudulent trader and moved to unwind its future positions and equity
trades on Hang Seng, the first major liquid market to open.
When the Federal Reserve unexpectedly cut 0.75 percentage-point in
the federal-funds target on Tuesday morning, the provocation was
concerns about a U.S. recession that had hit the the markets.  WSJ’s
MarketBeat write, "Sure, the thinking went, the Fed was in danger of
looking like it had responded to market action rather than an economic
report, but if markets were reacting to economic reports, well, it’s
all the same in this world these days."  Now there is a sense that the
Federal Reserve may have acted for the wrong reasons after being dupped
by forced selling by SocGén.  This may mean that the fed stands less
likely to cut rates when they next meet.  Trading in the federal-funds
futures suggests a less aggressive move by the Fed next week.  As of
yesterday, the market was still pricing in 100% odds on a half-point
cut at next week’s Fed meeting and even a decent chance of another
0.75-point cut - but the odds on a half-point drop have declined to 91%
today.
Officials at Societe Generale did admit that the firm was in the
markets trying to close positions in the last few days before telling
people what was going on. ft.com/blog/2008/01/24/10432/live-blogging-the-socgen-conference-call/">FT.com’s Alphaville blog did a live-blog of the firm’s call, where officials said that “with the
chance of good fortune, it was possible to liquidate these positions
over three days, which was quite exceptional.” The image “http://english.vietnamnet.vn/dataimages/200705/original/images1312071_finance-companies.jpg” cannot be displayed, because it contains errors.

Regardless of what hand SocGén may have played in the recent
sell-off the embarrassment that their brand has taken is staggering. 
How could one trader lose so much money?  Where was compliance?  Did
other traders on the defrauders desk have knowledge of his fraudulent
trades?  Where were the risk management professionals?  Could this
happen at other banks?  The list goes on and on.
For now the markets attention is focused on the next Fed meeting. 
Maybe the Fed will consider how SocGén may have caused the sell-off on
Monday and hold firm after its .75 cut on Monday.  Of course, the blow
to confidence could hurt the entire financial sector.  Of course,
something similar, or worse, could still happen in London, New York,
Hong Kong.

America’s CEO of SocGen, Jean-Jacques Ogier
The Prince
http://www.theprinceofwallstreet.com

 

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------ "its the running joke now, we now have fair trade with china so they send us poisoned sea food and we send them fraudulent securities."

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