When the news flashed about the rogue trader at Société Générale in France, we wondered: what did he trade and how did he do it — undetected? Little by little we learned that “le rogue” traded equity futures at European exchanges, and those positions were unwound, quietly, prior to the SocGen announcement. And oh yes, it looked like losses would be around $7.2 billion. The U.S. market, which had been roiling in the past weeks, serviced by an emergency 75 basis point cut by the U.S. Federal Reserve, was stunned.
To put it in perspective, Nick Leeson’s 1995 Barings blow out added up to $1.4 billion. Long-Term Capital Management lost $4 billion in its 1998 fall from grace. Hedge fund Amaranth lost $6.6 billion in 2006. Hell, even the subprime losses of some investment banks were less than what Kerviel lost in his trading adventure. And the more SocGen spoke, the more questions arose: how could one trader, by most accounts not an exceptional trader, use his “back office” knowledge to get around the sophisticated risk management system of a world renowned bank? Revealed at press time was that French authorities were speaking with an employee of Fimat (now NewEdge), which was the brokerage side of SocGen. This development makes the most sense, as surely Kerviel could not have worked alone. Most industry people I spoke with were perplexed by the early tales trickling out of France, but as one former exchange officer told me casually, “if a trader is clever enough, it’s sad to say, he might be able to get away with it.” (see Trendlines, page 12)
But if the French government errs on the side of helping its companies make sure they don’t get hurt (too much) in the marketplace, it’s apparently au contraire in the United States.
On Feb. 5 comments were released by the U.S. Department of Justice (DoJ) stating that “certain regulatory policies governing financial futures may have inhibited competition among financial futures exchanges,” specifically, that the exchanges exercise control over the clearing services. These comments, prompted by an ongoing study done by the Department of Treasury to revisit the regulatory structure of the financial markets, was a direct shot at the CME Group, which had just made a bid for Nymex Holdings Inc. CME Group stock dropped over 17% the next day, resulting in a loss of market capitalization of $5.5 billion (almost but not quite as much as Kerviel’s losses). Although prices came back somewhat the following day, the DoJ’s action was damaging.
And questionable at best. Like a doctor, the government should take an oath to “first do no harm.” Apparently DoJ lawyers don’t have any such rule. The CME swung into action by holding an investors’ call in the midst of its stock free falling, pointing out problems with the DoJ report. Then the wagons circled: Sen. Dick Durbin (D-Ill.) and Rep. Rahm Emanuel (D-Ill.) wrote a joint letter to Treasury Secretary Henry Paulson and U.S. Attorney General Michael Mukasey objecting to the DoJ’s letter, noting by the way, the DoJ didn’t seem to have problems in allowing the merger of the CME and Chicago Board of Trade six months ago. Even the CME’s own regulatory agency, the Commodity Futures Trading Commission, came to its defense. The next day the DoJ backed off, and perhaps that’s even more disturbing — that the legal arm of the United States government could be so easily cowed.
Was the DoJ report totally off base? No, but it’s apparent it got its lead from Wall Street. Who else would mourn the loss of BrokerTec? The DoJ should stick to lawyering, perhaps take a gander at the deleterious actions by subprime lenders, who by the way are the main advocates of delinked clearing, and finally, dare I say it, look to the French government for some etiquette lessons.
