Federal Reserve policy makers didn’t know about trading loss at Societe Generale
Jan. 24 (Bloomberg) — Federal Reserve policy makers didn’t know about a $7.2 billion trading loss at Societe Generale SA prior to their Jan. 21 decision to reduce interest rates, said a Fed official.
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Noyer Knew of Societe Generale Trades `In Real Time’ (Update3)
By Helene Fouquet
Jan. 24 (Bloomberg) — Bank of France Governor Christian Noyer said he learned at least four days ago that Societe Generale SA had identified a rogue trader whose positions led to 4.9 billion euros ($7.2 billion) of losses, the largest in banking history.
The bank disclosed the losses today after the trades were liquidated. The Bank of France, the banking regulator, also said today it was opening an investigation.
“We were immediately informed,” Noyer told reporters in Paris. “That means in real time.” He said he kept abreast “throughout the weekend,” which began on Saturday, Jan. 19.
“In retrospect, the bank was in a very dangerous situation Friday night,” Noyer said. “And, in fact, it was for a certain time in a very dangerous situation.” Now, he said he was confident that the bank was “healthy and solid.”
France’s second-largest bank by market value said it would raise 5.5 billion euros from shareholders after the trading loss and subprime-related writedowns depleted capital, the Paris- based company said today. An offer by Chairman Daniel Bouton to resign after the trades were discovered was refused by Societe Generale’s board, the bank said.
Noyer declined to disclose the timeline of his exchanges with Societe Generale. He also declined to say whether he notified the European Central Bank and the U.S. Federal Reserve.
`Necessary Contacts’
“All necessary contacts were made in due course,” he said. In Davos, Switzerland, ECB President Jean-Claude Trichet declined to comment on the matter. Fed policy makers didn’t know about the losses at Societe General prior to their Jan. 21 decision to reduce interest rates, said a Fed official today.
Societe Generale had been planning a press conference Monday where it was going to say it would report profit of about 5.5 billion euros in 2007, even after taking a further 2 billion euros in writedowns linked to the U.S. subprime crisis, according to Bouton.
Those plans were shelved and Societe Generale started unwinding the positions linked to European stock index futures on Jan. 21, a day when equity markets in France, Germany and the U.K. fell more than 5 percent. The next day the Fed announced its decision to cut rates by the most in 23 years as “financial market conditions continued to deteriorate.”
Societe Generale’s Philippe Collas, the head of asset management, said “it’s not possible that our covering operations contributed to the market’s fall.”
“There was never any question of holding on to the positions, hoping markets would go our way,” Bouton said. “And if we’d told the world about our positions, we’d have had the whole market against us and we’d have had losses 10 times as large.”
Noyer didn’t name the trader, who was later identified as Jerome Kerviel, 31. He did call the fraud “very grave.”
“It’s not because he is on the run, because he is in the wild, that he shouldn’t feel worried,” Noyer said. “Rest reassured that he won’t find a job soon.”
To contact the reporter on this story: Helene Fouquet in Paris hfouquet1@bloomberg.net
Last Updated: January 24, 2008 13:48 EST
Bloomberg
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Fed Unaware on Jan. 21 of SocGen Loss, Official Says (Update3)
By Craig Torres
Jan. 24 (Bloomberg) — Federal Reserve policy makers didn’t know about a $7.2 billion trading loss at Societe Generale SA prior to their Jan. 21 decision to reduce interest rates, said a Fed official.
Policy makers were convinced by late December that increasing volatility in financial markets reflected a weakening U.S. economy and that further rate reductions were needed, said the official, who spoke on condition of anonymity.
“Legitimately, one could say they moved not because they were panicked about the stock market but because it was telling them important things about the macroeconomy,” said Peter Kretzmer, senior economist at Bank of America Securities LLC in New York.
The Federal Open Market Committee convened a conference call at 6 p.m. on Jan. 21 after stock markets in Asia and Europe tumbled. Members voted to cut the federal funds rate by three quarters of a percentage point, the most since the Fed began using the rate as its main tool of monetary policy in 1990, to 3.5 percent. Chairman Ben S. Bernanke and his colleagues concluded that losses in financial markets may result in reduced credit for companies and consumers, the official said.
The decision was announced at 8:20 a.m. the following day. Markets in the U.S. were closed on Jan. 21 for the Martin Luther King Jr. Day holiday. The Standard & Poor’s 500 Index lost 5.4 percent the prior week and retreated 9.8 percent in the first three weeks of the year.
Risks Discussed
Fed officials considered the risks of cutting rates prior to the opening of the New York Stock Exchange on Jan. 22, and decided that the benefits outweighed the costs of waiting. They remain comfortable with that decision, the official said.
“Broader financial-market conditions have continued to deteriorate and credit has tightened further for some businesses and households,” the Fed said in its Jan. 22 statement. The FOMC took the action “in view of a weakening of the economic outlook and increasing downside risks to growth.”
Societe Generale earlier today said unauthorized bets on stock-index futures by a rogue trader caused a 4.9 billion-euro trading loss, the largest in banking history.
The Bank of France, the country’s banking regulator, is investigating the alleged fraud. The trades were discovered this past weekend, Societe Generale said.
Bernanke has written research papers on how financial- market losses feed back into bank lending and restrict credit. Since early January, he and Fed Governor Frederic Mishkin built a case, through speeches, for faster, “substantive” rate cuts.
Their arguments were bolstered by signs that inflation expectations remained stable even as oil prices climbed to $100 a barrel and forecasts for economic growth were trimmed.
The S&P 500 closed 1.1 percent lower on Jan. 22 after the rate cut, compared with the 4.5 percent drop indicated by stock- index futures prices the previous evening.
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net
Last Updated: January 24, 2008 15:19 EST
http://www.bloomberg.com/apps/news?pid=20601103&sid=arEnnY3xv7Lo&refer=news
January 24, 2008, 11:19 am
Was the Fed Tricked?
Posted by David Gaffen
When the Federal Reserve surprised markets with a 0.75 percentage-point cut in the federal-funds target Tuesday morning, the thinking was that concerns about a U.S. recession had so fully enveloped the markets that just about anything could happen. 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.
However.
Mr. Bernanke: If you see these watches on the street, do not buy them. They are not Rolexes. (Getty Images)
The revelation that Societe Generale is taking a $7 billion write-down due to the activities of one rogue trader — and additional reports that the French bank may have been unwinding those positions on Monday, a thinly traded, volatile day when Asian and European markets were rocked with losses, puts the Fed’s move in a new light. Namely, that they were taken in.
“They were sucker punched,” says Barry Ritholtz, director of equity research at Fusion IQ. “What we see now is that it was a very ill-considered attempt to intervene in equity prices.”
Officials at Societe Generale admitted that the firm was in the markets, trying to close these positions in the last few days before telling people what was going on. FT.com’s Alphaville blog did a nice live-blog of the firm’s conference call, where officials reportedly said that “with the chance of good fortune, it was possible to liquidate these positions over three days, which was quite exceptional.”
This isn’t to say, necessarily, that Societe Generale’s trading caused the market turmoil of Monday and Tuesday, but it certainly contributed. Officials there said the firm “discovered this at the same time as the market was plummeting…we really had to settle those positions as fast as we could and we did so during the three day crisis which you all witnessed.”
That three-day crisis, of course, was the one that prompted the Fed to react in dramatic fashion, pushing through its largest one-day decrease in the funds rate since the Fed started announcing its policy changes in 1994, one now that looks awkward.
“I think Mr. Bernanke is clearly a very bright guy but he lacks the market savvy” that former Fed head Paul Volcker had, says Jeff Saut, head of investment strategy at Raymond James. He believes the Fed should have cut rates — but only after the markets had their chance to fall apart.
Trading in the federal-funds futures suggests a less aggressive move by the Fed next week as a result. 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%.
But who knows? Those odds may increase if the stock market has another hissy fit, or if there’s another trader lurking out there who can beat the $7 billion in Soc Gen losses.
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