Friday, January 25, 2008

Rogue rules, yeah baby

You know the markets are in lala land when stuff like this happens and you aren't even making it up.

With the financial world teetering on a knife's edge of fragility, what with melting CDOs, crunching credits, subprime sabotage, garbage arbitrage, and hell being carried in a handbasket, of late every bit of bad news was treated as the end of the world. News of the day turned a bit of a correction into a bit of a bear.

The slaughter became so intense, and the wall street wailing so pitiful, that Ben Bernanke grabbed his gun and went out bear hunting, preemptively slashing interest rates by three-quarters of a point.

So it was very strange indeed when, after three days of unmerciful slaughter on the floors of the exchanges, and in what seemed to be the coupe de grace, news hit the headlines that one of the world's largest and staidest banks, Societe Generale, announced that it had lost about 7 Billion dollars in a fraud committed by a rogue trader (isn't rogue a French word? Did they invent it or merely dewey decimalize it?).

Incidentally, they also lost about $3 billion in subprime, credit crunchies, but, hey, who's counting anymore?

So what did the markets do with that news? Was it the guillotine or the victory parade?

Well, of course, the markets rallied their little buttskies off.

And why? Because, first, it was only fraud, not the abject mismanagement and mis-rated greedy incompetence that marked the credit crunch news, day after day. Why, fraud is almost a breath of fresh aire.

But even more fraternally jovial was the story that it seems the markets got a free kick from old Ben. Ha ha ha. Boy, that old Ben is sure good for a joke or two. Kick him again.

You see, what appears to have happened is that SocGen got socked by bad trades that had to be unwound, at enormous losses, and quickly before word got out and others front ran the bears. In Spain they run with the bulls, in France they ran with the bears.

And in doing so, SocGen socked it hard to the markets, pressuring them in a downward spin at a very opportune time, when markets were thinly traded. And the French, the bastards, didn't even advise the markets what was happening, so in context, it looked for and to all the world like the credit crunch Armageddon had arrived.

And that's when Ben got suckered. But it was his own fault, really. The French didn't put him up to his Bernanke put; he did it all off his own bat to look like one of the frat brothers helping out the Wall Street houses.

You just can't make this stuff up, not that Jeff Mathews would.

David Gaffen didn't make it up, but reported it in a much more lucid way than Guambat. Read his post, "Was the Fed Tricked?".

AFTERTHOUGHT: What's Ben going to think about more rate cuts once he catches wind of this?

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