NYTimes, Société Générale, & Me


When it rains, it pours: Last night, I actually spoke with a reporter (novel idea) about a piece he was writing on Société Générale, the market sell off, and the Fed.

It was based on Fed’s Folly: Fooled by Flawed Futures?, the discussion we had with clients about the panicky 75 bp Fed cut.

Its a pretty big quote. Here’s an exerpt:

"Société Générale rushed to unwind those trades during Monday’s
market plunge, and trading in those futures contracts soared to record
levels. The bank’s abrupt reversal contributed to a decline that
snowballed into an avalanche of sell orders around the world, some
traders said. The ensuing turmoil helped prompt the Federal Reserve to
orchestrate the surprise cut in interest rates announced Tuesday.

“I have little doubt that Société Générale’s unwinding of those
positions absolutely pressured indexes worldwide,” said Barry L.
Ritholtz, chief executive of FusionIQ, a New York-based investment
research and money management firm. “And wouldn’t it be embarrassing if
the Fed had to make one of the biggest emergency rate cuts ever because
of some rogue trader?”

Granted, fears of a recession in the United States and continuing
worries about the spread of the subprime mortgage collapse were also
responsible for the market downdraft in the last 10 days. But Mr.
Ritholtz argued the rapid move by Société Générale to close out tens of
billions in futures positions might have been a major factor in pushing
an already nervous market into an outright panic.

Mr. Ritholtz is not alone in his suspicions. “I definitely think there is a link,” said Byron R. Wien,
chief investment strategist at Pequot Capital Management and a 40-year
Wall Street veteran. “This precipitous unwinding created the negative
momentum that spread around the world.”

Mr. Wien also singled out the Federal Reserve chairman, Ben S. Bernanke, for criticism. “Bernanke has been reacting to events, rather than anticipating them,” he said.

On Monday afternoon, with United States markets closed for Martin Luther King’s
Birthday, Mr. Ritholtz said, many Wall Streeters were struggling to
figure out just why Europe and Asian markets were off so steeply.
“Instant messages were lighting up, and people were saying ‘This looks
like a big European hedge fund blew up.’ ” Indeed, there was little
market-moving data before the plunge."

Not too shabby . . .


Société Générale’s Sales May Have Incited Market Plunge   
NYT, January 26, 2008


Fed’s Folly: Fooled by Flawed Futures?   
Thursday, January 24, 2008 | 10:15 AM    http://bigpicture.typepad.com/comments/2008/01/feds-folly-fool.html

What's been said:

Discussions found on the web:
  1. kaan commented on Jan 26

    As much i hold FED responsible for the current
    mess, i think Bernanke did the right thing.It was a zugzwang.The foundations of the house of cards are trembling.When panic starts and JPY
    pushes below 100 1929 crash might seem benign in comparison with what may unravel.
    Trillions of dollars of speculative positions may have to unwind.
    I am afraid not even you still appreciate the severity of the problem. Bernanke finally got it.But it will not matter much.

  2. ryan commented on Jan 26

    Let me get this strait. Because of the Rogue Traders bad bets SG sold off most of their positions in turn selling off the European and Asian Markets. Because we had MLK Day Uncle Ben called an emergency meeting and cut the rate 3/4 of a point with the desired effect of not creating a panic on wall st. Is that what we are saying? Sounds like this is kind of a win for Uncle Ben.

  3. Pete commented on Jan 26

    Looks like Bernanke gets a new moniker: from “Helicopter Ben” to “Bailout Ben”.

    I also urge all voting FED members be required to get forehead tattoos: “Wall Street’s Bitch”.

    Congrats Barry for exposing the fraud that is the FED.

  4. bt commented on Jan 26

    Trouble posting comments. Trying short comment…

  5. Don commented on Jan 26

    Société Générale’s CEO says Rogue Trader had on SHORT positions.

    This does NOT make sense. From the Wall Street Journal:

    “Mr. Kerviel had been investing the bank’s money by hedging on European equity market indices. That means he made bets on how the markets would perform at a future date.”

    “Société Générale’s chief executive, Daniel Bouton, said the trader had been betting throughout 2007 that markets would fall. But the bank says he had overstepped his authority and was wagering more money than he should have.”

    The guy was SHORT, not long. As such, closing down his positions would have been to buy back the shorts. That would have created BUYING pressure, not selling pressure. It’s what drove our market up so much on Wednesday.

    Maybe the article is wrong and he was long. Maybe they misquoted or mistranslated the bank CEO who said rogue boy was short.

    On the other hand, if the article is correct, doesn’t that completely destroy any argument that the liquidation of these positions caused a panic? If this guy was really short, doesn’t that put him in the same league as all those smart guys at Goldman?


  6. Don commented on Jan 26

    Clarifying comment. When I said, “It’s what drove our market up so much on Wednesday.” I meant short-covering in general, not the unwinding of SoGen’s short position.

  7. Winston Munn commented on Jan 26

    Keep in mind that it is only a single-step removed from accepting at face value a written account compared to being duped by trust-induced gullibility in a face-to-fact encounter.

    Has anyone seen actual data from the So Gen deals? Has it been made available anywhere?

    Besides, there are still rumblings of the 2.0 and 3.0 tremors that can be precursor of “The Big One.”

    Bloomberg has this:
    “Jan. 25 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke is proving powerless to prevent a deteriorating commercial real estate market.

    While the yield on 10-year Treasury notes fell 1.43 percentage points in the past three months to the lowest since 2003 following four interest rate cuts, the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 1.25 percentage points, according to David McLain, principal and chief investment officer of Palisades Financial LLC, a private equity firm in Fort Lee, New Jersey.

    ‘The market is locked up right now because there’s a huge overhang of leveraged assets of every type, development deals that won’t meet projections made last year when things were rosy,’ said David Tobin, a principal at New York-based Mission Capital Advisors LLC, which was involved in $5 billion of asset sales last year. ‘It will end just like the residential housing market.’

    Kaan, who posted above, may well be right.
    Bernanke is likely to have simply crapped his pants.

  8. Steve Barry commented on Jan 26

    OT To Whammer:

    In case you din’t see this on the other thread:


    There are several facets to my opinion on gold right now:

    1) Gold will always be the optimal currency for the reasons I gave from the essay…it would prevent debasing of the currency. It certainly has more intrinsic value than a piece of green paper. Gold should back the paper. It can’t just be printed out of nowhere…it protects the people.

    2) Gold right now is very overbought short-term according to Commitment of Traders report…insiders in the industry are betting against gold prices and they are normally right.

    3) In a severe recession/depression, gold will likely fall as silver did in the Great Depression (gold was price fixed back then). In a depression all assets will deflate, including gold IMO.

    4) The time to buy gold will be after the credit bubble fully pops…in the Depresion, that happened around 1932 for silver. When it happens the next time is unknown of course.

    5) While gold should outperform stocks in a deflation, I think QID is a better investment (for my risk tolerance and style) than gold.

  9. RW commented on Jan 26

    Just found time to read John Mauldin’s latest (1/25/08) ms and concur with his opinion:

    “…what was the reason for the cut if not stock prices? Why an inter-meeting cut much larger than the market was expecting next week, just seven days later? What was so urgent that we needed a shock and awe rate cut a week early?…

    I believe the monoline insurance companies like Ambac and MBIA are in worse shape than most realize, the counter-party risk in the $45 trillion Credit Default Swap market is much worse than we realize, and the exposure by various banks to their problems is much larger than currently understood. The Fed understands this, and realizes that they have been behind the curve but need to catch up.”

    IMO considering the panic in equity futures, or the ‘general condition’ of the markets, as a primary cause of an early and major Fed cut is probably a post hoc error.

  10. SDM commented on Jan 26

    Looks like our FED induced commodity and goods inflation, and currency destruction, is now based upon rogue traders futures positions.

    Millions and millions of responsible savers and fixed income retirees are sacrificed on the alter of equity appeasement.

    The US financial system has become a total fiction, the FED is Wall Street’s lackey. Truly shameful.

    The markets could have sorted themselves out without panic rate cuts from the FED. When prices are attractive, people buy.

    The FED is force feeding the markets like one sticks a funnel into a ducks throat to force feed it corn so as to generate Foie gras, yes?

  11. ECONOMISTA NON GRATA commented on Jan 26

    First off you have to be incredibly naive to believe that a rouge trader was the cause of Société Générale’s losses. I’m sorry, I don’t mean to offend anyone, BUT PLEASE! I’ve been around since the day before yesterday and unless an institution is keeping it’s book on stone tablets and hiding them in some cave, in an undisclosed location, near the Dead Sea…. I mean “PLEASE”, this story about the rouge trader is insulting to my dog’s intelligence.

    It’s BULL SHIT, and it’s so unbelievable that you almost have to believe it. This “rouge trader” story is something for the Hollywood gossip tabloids.

    As for Ben and the Fed, I believe they made the right move by cutting the FF rate. However, they are going to have to cut again and again and again. And even then, we are still very likely to enter a severe and prolonged recession.

    ROUGE TRADER….. My eye…. ;-)


  12. Eleven commented on Jan 26

    now i am getting nervous. where are the 165-200 negative responses. back into a bear market on monday…

  13. AJF commented on Jan 26

    The quote from the upcoming article in question asks why Bernanke is reacting to events and not anticipating them; seriously, how in the hell could the Chairman know what was going on @ SocGen Monday and Tuesday prior to the rate cut? It has been inferred by the WSJ that the ECB may have known to some extent what was transpiring. However, it has not been overly transparent in dealing with its US counterpart. If there was no cut this week, the DJI would be hovering around 11,300 right now, which is probably what most of the angst is about. How many got caught short?

  14. SINGER commented on Jan 26

    Thank God they backstopped you with Wien otherwise you would have been totally lacking in credibility :o)

    It’s funny, whether or not the FED reacted to the market malaise, and whether or not the SocGen thing caused the crash…One thing is for sure and it’s something we’ve known for a long time now…THE FED IS SHADY…

  15. John Borchers commented on Jan 26

    What I find interesting is the amount of people holding inverse funds lately. Inverse funds are typically futures or options based and non-diversified.

    Some people are holding these funds with 100% of their capital and are wrongly assuming that if the market crashes these funds are going to be worth a bundle (as much as 100-200% gain).

    In fact it’s much more likely if the market crashes that these funds lose more money than the stock market index itself because the fund isn’t designed to protect against a crash it’s designed as a short term trade.

  16. Inquisitor commented on Jan 26

    Simply stunning. A 75 basis point cut caused by a rogue trader? Does that mean if a hedge fund collapses again we’re going to start WWIII?

  17. knowno commented on Jan 26

    I’m embarrassed for both Marketwatch and CNBC who still have the nerve to seriously discuss the likelihood of a 25-50 bp cut from the Fed next Wed.!!!!!!

    Nevertheless, I’m no currency expert, but can anyone tell me why I shouldn’t go long the Australian Dollar? (I believe the Reserve Bank of Australia is still set to raise rates on February 4th.)

  18. Ross commented on Jan 26

    Per Winstons comment about commercial RE rates.

    We sold a smallish piece of commercial land to a developer in the DFW area in 2006. The developer put it together with other properties and built a strip center. It has the typical big box retailers, JCP BBY etc.
    The take out loan was grouped into a cmbx and sold to some European pensions. I asked the developer what the terms were and was told it was priced on a 3.5% cap asuming 100% occupancy. UNBELIEVABLE but true.

    This will all end badly…

  19. Steve Barry commented on Jan 26

    John Borchers:

    Please elaborate on this statement:

    I cannot figure out what you are talking about. If nasdaq drops 40%, I expect QID to rise 80%.

  20. JSL commented on Jan 26

    “And wouldn’t it be embarrassing if the Fed had to make one of the biggest emergency rate cuts ever because of some rogue trader?”

    And wouldn’t it be embarrassing for the Federal government to be spending billions of dollars on national security because of a few fringe terrorist elements from the far side of the world? The cause is one thing, however trivial, what it could have instigated (a domino effect of massive panic selling) is quite another imo.

  21. bt commented on Jan 26

    This explains what happened. Trader went long to cover his tracks and got caught in a sharp selloff. Looks like the trader’s huge losses are a result of the market drop, not the other way around.

    Bouton said the trader had been betting throughout 2007 that markets would fall. “He was therefore winning, virtually,” he said.

    But the bank says he had overstepped his authority and was wagering more money than he should have.

    So at the beginning of January, Bouton said, the trader voluntarily created losing positions, to neutralize his earlier gains and cover his tracks.

    But markets dropped this month, and fast. “This sad affair veered into a Greek tragedy: His virtual losing position became huge,” Bouton was quoted as saying.

  22. doc commented on Jan 26

    Re: “Instant messages were lighting up, and people were saying ‘This looks like a big European hedge fund blew up.’ ” Indeed, there was little market-moving data before the plunge.”

    Total crap there, because the amount of the trades involved was not that big and people on Friday were already aware that a lot of poorly run situations were out there and there was a feeling that more problems were going to be coming out, just like next week, and the week after; everyone was in place to be ready for problems and obvious things like bad earnings, bad housing, bad economy; no one was caught or shocked that the S&P500 was overvalued, it was just an opportunity to sell and then The Fed bought in and bingo, more bad news next week, next month and a recession; what a shock, are all the traders sitting on retarded positions this weekend waiting for bad news? Duh?

    The next thing to wait for is the factored in rate cuts, unless the market goes down 55 and The Fed cuts again week after week…..wake up!!!

  23. John Borchers commented on Jan 26



    Page 7 – “3) the risk that securities prices, interest rates and currency markets will move adversely and the Fund will incur significant losses”

    I had EEV it’s similar. If the market actually does crash the fund fund could be kaput.

  24. John Borchers commented on Jan 26

    Steve, I’m actually looking at page 9 now and it’s rather ill information. A lot of DOG and QID holders don’t expect this stuff. This is why I dumped the other fund when I could.

    Look at the early close trading halt risk.

    Basically in general the problem is how to dispose of the contracts bet on the market decline. If a serious market decline happens, let’s say 30% QID goes up. But who wants to buy QID the next day for 30% up when the market normally doesn’t crash that far more?

    This is the kind of risk they are trying to explain in valuation, etc.

    The other problem is that if the market crashes very hard, EVERYTHING will be sold as liquidations occur including short funds.

  25. donna commented on Jan 26

    So Ross, you’re agreeing with Calculated Risk that the Commercial Real Estate crash comes next?

    Gonna get interesting if there are lots of deals like that one out there…

  26. David commented on Jan 26

    To Ross (2:43 post):
    If QQQQ drops 40%, the QID might not rise as much as 80%.
    The ratio of QID to QQQQ is based on the DAILY move.
    For an example, take a look at the QLD versus the QQQQ from the period 1/26/07 to 1/4/08. During this period QQQQ is up about 10%, but the QLD is up by no more than this amount.

  27. jag commented on Jan 26

    Don: you haven’t read the article closely enough. Through most of the last year, Kerviel had short positions. However, at the end of 2007, he put on an unhedged LONG bet that index futures would rise, and got hammered by the slow bleed we’ve seen in January – losing 15% in the process across the world. They were unwinding LONG bets over the weekend.

  28. lurker commented on Jan 26

    The wall of worry is getting mighty steep and tall and as long as the great wall of China. Does that mean an oversold bounce or an oversold crash? Please don’t tell me you know the answer because no one does. It will be interesting to watch however.

  29. randy commented on Jan 26

    what worries me some is that these inverse funds use credit default swaps and i’m not sure how that would play out.one of my general rules is if a position i have makes 20% i sell at least half,and trailing stops are a good idea also.jmo cbw hbb.

  30. KJ Foehr commented on Jan 26

    If Ben moved sooner than planned because of the “rogue trader” market panic, does that not reduce the likelihood of a rate cut on the 30th?

    I am amazed that nearly everyone seems to expect another 50bps cut next week. Is there any precedent for two cuts so close together resulting in a 1.25% rate reduction in just two weeks time?

  31. John Borchers commented on Jan 26

    German news out that says they may have hundred billion or so writedowns. That’s not going to be good for any market I imagine.

    I found it amazing that if the market’s actually crash the short funds also lose. I wouldn’t have expected that.

  32. Steve Barry commented on Jan 26


    From that expected return graph, I am even happier…if Nas drops 40% this year, if volatility as they measure it is less than 40% roughly, I would make even greater than 80%.

  33. Scramjetman commented on Jan 26

    To John Borchers,

    You wrote:
    “In fact it’s much more likely if the market crashes that these funds lose more money than the stock market index itself because the fund isn’t designed to protect against a crash it’s designed as a short term trade.” and explained your reasoning in e-mails that followed that comment, for example: “Anyone with DOG or QID (Proshares Short Funds) you should see page 20 http://media.proshares.com/documents/pssai.pdf“.
    Please notice that page 20 deals with ONE YEAR performance. IF one were to HOLD an inverse fund during a WHOLE year during which the volatility is very high, of course you may not do well (and actually may lose money even if the index would in the red) because volatility is computed as the standard deviation of the index through the year, regardless of whether the fluctuations are positive or negative. Therefore, if the volatility is very high, this may be a result of the index having gone UP (the opposite of a crash) during small intervals of the year, which may result in the inverse fund ONE YEAR performance being negative, even though the index itself may also be negative. But this has nothing to do with a crash. If there is a crash, you will make money with an inverse fund (not lose money), as long as you are able to sell the inverse fund during the crash and as long as there is enough liquidity to be able to sell it.

  34. John Borchers commented on Jan 26


    Your last sentance hit the nose on the head. “as long as you are able to sell the inverse fund”

    Read also the prospectus of those funds. If you don’t believe me call the fund itself and ask them if it’s possible the whole fund goes to $0 if the market crashes.

    You already know the answer before you even call because the answer is in the fund’s prospectus that it’s heavily leveraged.

  35. Winston Munn commented on Jan 26


    I’d appreciate your comments on this topic. As I see it, the risk is not so much sudden and dramatic collapse (although not impossible) but a slow and gradual decline that resists intervention.

    It doesn’t really matter whether we are talking about residential real estate, commercial real estate, credit-card debt, leverage buy outs, junk bonds, or auto loans – all areas were caught in the trap of borrowing future gains to support immediate gratification of current expansion with no regard for risk. Too much debt chasing too few real assets.

    Payments in kind, covenant lite agreements, over-levaraged malls and office buildings….the list goes on an on…

    Although a cleansing and dramatic “collapse” would speed the outcome, the damage would be too great to endure so the likely projection going forward is a slow process of intervetion and unwind, over and over, as debt reverts to mean gradually over a number of years.

    Wakari masu ka?

  36. John Borchers commented on Jan 26

    Steve, Note the chart is ESTIMATED and BEFORE COSTS. Also note that’s only part of what is said in the fund. Read the whole prospectus and it will be quite clear how dangerous the fund is to actually invest in during a time of market uncertainty. It would be far better to short individual stocks.

  37. Scramjetman commented on Jan 26


    During a crash you are MUCH better off holding an inverse fund than holding a security that is long in a market index. If the situation would be so bad that you cannot sell your inverse fund right away, all that means is that you may not recover as much gains as theoretically possible, but that does not mean that you would lose money. You can only lose money if the market goes UP. The worst I could imagine would be for example a sharp crash, followed by a very sharp recovery, and you not having the opportunity to profit from the crash. But the reason why you would lose money would be because of the market going up so fast that it erases the crash before you have the opportunity to profit from the decline (a very unlikely event). The important thing to understand is that you don’t lose money as a result of the index going down.

    Of course, when you hold an inverse fund (just as when you hold a short position) you should watch the market and try to sell it as soon as you make significant gains because bear markets (on the average) last much less than bull markets. The page 20 that you quoted discusses holding an inverse fund for a whole year, which is something that would not be prudent.

  38. scorpio commented on Jan 26

    get rid of the Fed. set short rates at 3% and get out of the way.

  39. John Borchers commented on Jan 26

    Scram, If you think your right and you read the prospectus so be it.

    It should be quite clear though that as the market comes down options and futures expenses would be much greater and profits from the fund would be significantly reduced.

    If the market would close limit down day after day you would never be able to sell your fund.

    Additionally, the fund might not have enough options, swaps or futures contracts to actually profit from a one day down of 10 or more percent.

  40. Falco commented on Jan 26

    In europe we don´t think SG affair was the cause of a market plunge.

    At least nobody believe the official story released by them. That is a bad joke

    The plot has a lot of grey zones and contradictions.

    SG is the main market maker in several european countries, and has a name in derivatives… a “bad” name.

    If you run a secret and anonymous poll about SG between individuals and EVEN professionals the opinion will be very unfavorable, and this is a very polite and diplomatic way to say it. Anything could happen when they are the other side of the bet.

    I don´t know what scare me more, that they are lying or that they are saying the truth. A market maker without controls? hahahaha, in spain a chief of a bank branch needs a superior sign to move 100.000 €, and this guy that wasn´t a star (like neesson) could buy and sell whatever, unlimited amount… are we serious enough?

    bThe fed didn´t know it? so that implies we have to reverse the rate cut? NO.

    The fed knew it? The rate cut came when the position was closed then the only thing they should have done it would be to publish the new at WSJ and save the rate cut for another time.

    Take a seat, this is beginning and SG is a smoke curtain. This is not the only market maker that has recently closed massive positions.

    Join the party of nobody knows what really is happenning. and what they know that we shouldn´t know.

    Be careful out there.

  41. John Borchers commented on Jan 26

    Example For Inverse Fund: Friday: RRY against RRZ

    RRZ the double inverse lost 3.59% on a day the actual index lost 0.59%. RRY the double lost 2.46% on a day the index lost 0.59%.

    End result both losers as the options and futures brokers win.

  42. Thomas Shawn commented on Jan 26

    Maybe Ben should raise the rate back up 75bp, would that make everyone happy?

  43. Falco commented on Jan 26

    Let´s see more crap…

    eurostoxx futures, are moving between 2.000.000 to 4.000.000 daily, the position were 140.000 contracts.

    You can add dax futures and other indexes to the argument… and easily you can notice you can cover this position without causing a crash.

    Also they said that this situation was reported before monday… SOOOO you could have covered the asian plunge… and has nosense Trichet were throwing salt these days if he was informed.

    did they close the longs? or did they sell stock to cover if the trade was delta-1

    the real position or the virtual one?

  44. Scramjetman commented on Jan 26

    Explanation for example given by John:

    “Example For Inverse Fund: Friday: RRY against RRZ RRZ the double inverse lost 3.59% on a day the actual index lost 0.59%. RRY the double lost 2.46% on a day the index lost 0.59%.”
    ==> RRZ and RRY are very ILLIQUID funds. On the date quoted only 15000 shares were transacted.
    On the other hand, the inverse fund being discussed by the forum (QID) had more than 6 MILLION shares transacted that day and behaved appropriately.
    Comment: these issues have to do with liquidity of the inverse funds and NOT with any crash. In general you should watch out for any security that is illiquid (15000 shares transacted in a day, John!)

  45. Wayne C commented on Jan 26

    I never considered the conspiracy theory aspect of this until I read the comments. Is it easier to explain away losses to a rogue trader than it is to say you lost money by blindly buying rated paper gone bad?

    It doesn’t change the fact that Bernanke reacted to a massive cover trade. He’s damned if he does and damned if he doesn’t this week. I almost feel sorry for him. Almost.

  46. Scramjetman commented on Jan 26

    Actually, QID had 36 MILLION shares transacted that day (TWO THOUSAND times the number of shares transacted for RRZ or RRY)

    Be careful when trading ANY security that has less than 200,000 shares transacted in a day John

  47. Falco commented on Jan 26


    It´s not a simply as that. I believe the Fed did that for a reason, a reason that has nothing to do with the SG “official” affair.

  48. tom a taxpayer commented on Jan 26

    Petite pommes frites (small potatoes)!

    7 billion loss due to Kerviel pales in comparison to the hundreds of billions of losses of American banks and Wall Street firms due to CDOs, subprime, etc. The so-called “smartest guys in room” concocted these scams in broad daylight with the full support of top management at the banks and brokerages.

    Let’s not let this French farce divert attention from the needed investigations and prosecutions of the American banks and Wall Street firms who commited the financial crime of the century.

  49. dblwyo commented on Jan 26

    I have to agree with the commenters who want to see the data before concluding that this was the trigger. Barry’s usually a lot more of a support of data before starting a meme rolling.You know this meme is all over the place though I believe Mr. Ritholz really got it rolling.

    Two points:

    1) believe the markets in Asia were down more and faster on our and Europe’s Su. to the point of possible implosion; unless of course it was another rogue pretending to be the first rogue.

    2) does it matter – since we’re all empiricists and fact-based suppose the Fed hadn’t intervened ? In other words if the markets are headed down that hard in a general crisis situation does anybody care what triggered it ? More important to stop it before it gets out of control.

    That the markets are sensitive to be vulnerable to a rogue, it that were true and even possible (btw – how big were his positions ? what proportion of the total day’s float did he have ? who was taking the other side ?) is the real point. Not that any particular incident cause it to go over the tipping point. Check out the Wiki posts on tipping points, sandpile collapses,
    Asian currency crisis, catastrophe points, etc.
    If we’re going to be skeptical of retail sales data and challenge inflation data surely we can bring the same level of reasoned assessment to rogue trader meme-mongoring :) ?

  50. Ross commented on Jan 26

    I agree with your assessments. It is unknowable whether this becomes a sucking vortex or a waterfall. Perhaps a little of each from time to time.

    All I know is that risk is and will be repriced. I think we all know the definition of GDP. It is a measure of activity. Good activity (building a road) bad activity (rebuilding NOLA). Chasing fraud and correcting past bad decisions perversly add to GDP.

    I think there is an irony here. The internet and blogs like Barry’s allow people to yell “the Emperor has no clothes.” In the past, the MSM would tell the party line and the fraud would never be outed.

    I remember an old, now deseased congressman from Texas who was ranting about derivitives back in the early 1990’s. I think it was Albert Gonzales. This is the first time I had thought about the consequences of a meltdown in world financial markets.

    While the party roared the last 20 years, the rot was beginning to stink. I’m wondering why it took so long!

    It’s just a cycle. A bad cycle to be sure but some really really smart guys will find a way to make some serious moola in the destruction. What was Rhett Butlers reaction to the burning of Atlanta? “There are fortunes to be made from the destruction of a civilization.’ Or some such.

    I think Jimmy Rogers has it right medium term but I also believe he is a few hndred years too early.

    Gotta go feed the black gold.

  51. Winston Munn commented on Jan 26

    In fantasy, the acceptance of the world as presented by the writer is called the “willing suspension of disbelief”.

    After the iceberg has been struck, it is much more comforting to “suspend disbelief” and accept the captain’s claim that “the ship can’t sink” than to watch the water level grow in the lower decks and make a judgement yourself whether or not to jump into the frigid waters.

  52. Winston Munn commented on Jan 26

    Wayne C. wrote, “I never considered the conspiracy theory aspect of this until I read the comments.”

    Wayne, I’m not sure “conspiracy theory” is necessarily the right label to apply to questioning the reliability of the accounts that attempt to explain the market action.

    I think it is more fair to say that for many the Bullshit-O-Meter is spiking into the red zone.

  53. Leisa commented on Jan 26

    BB is damned if he does; damned if he doesn’t. The last ascription to crummy market action prior to the illumination of the rogue trader was that the market wasn’t happy with BB’s performance in the hearings the week before and additional concerns about the US going into recession. All valid and reason enough to be a little twitchy with the sell order trigger finger. Now with a NEW event (market action scapegoat)at the forefront–a rogue trader no less–we now have new a new ascription to crummy market behavior.

    The market was plunging–pick a reason there are at least a 1/2 dozen valid ones to include potential insolvency of some of the world’s most venerable financial institutions–confidence was lacking and action was needed. Action was taken. Let’s move along and stop speculating and jawboning.

  54. Suge Knight commented on Jan 26

    Assuming Bernanke cuts by 75bps next week (Yes, I’m saying 75bps, no 50bps), how will the markets react to it?

    Suge aka “Bernanke’s boy”

  55. noone commented on Jan 26

    I thought the market moving news was the report from the second largest Chinese bank increasing their reserves for sub-prime investments from a couple hundred million to $2b.

  56. Greg0658 commented on Jan 26

    7 Billion Man turned himself in, smart. NBC ran footage of his computers being hauled into custody. Last time I saw something like that was … was it LiveDoor from the orient.

  57. spcwby commented on Jan 26

    Rock On Senor Barry….calling it for what it was!

    “Some men worship rank, some worship heroes, some worship power, some worship God, & over these ideals they dispute & cannot unite–but they all worship money.”

    – Mark Twain’s Notebook –

  58. Steve Barry commented on Jan 26


    I am very comfortable holding QID. It will outperform any other investment IMO. Every prospectus and 10K has to list possible risks. Google’s 10K has 14 pages of risks! I sleep like a baby at night. The whole options market would have to collapse for QID to have problems. If that happens we are all done for anyway. We are in for a depression, but they will keep the markets working.

  59. Owner Earnings commented on Jan 26

    Barry I’d enjoy seeing a post comparing the value of those trades vs the value of trades for any given day.

    I highly doubt that $10 billion in futures trades could move the market or even $100 billion if that was the notional/nominal/principle amount.

  60. Pat Gorup commented on Jan 26

    Thanks for posting it as it confirmed our suspicions.

    Bernanke knows that this is being floated out there. It questions both his and the FED’s credibility. If he wants to show the market whose boss than they should stay pat with the current rate. If the market goes into a hissy fit, they’ll get over it. Bernanke should say that the FED wants to wait until they see how the stimulus package effects the economy before they reduce rates further. But my bet is that they cut.

  61. bt commented on Jan 26

    BB is damned if he does; damned if he doesn’t.

    Leisa, the problem is not that the Fed cut rates but the timing of it. As many pointed out, there were no new economic releases over the long weekend. Fed reacted purely in response to the stock market action around the globe. Despite the huge drops around the globe, most of those markets were only giving up some of the gains from last year. Why couldn’t the Fed have waited another ten days to cut rates if it was responding purely to economic reasons? The Fed has shown us time and again that they love to screw with the stock market and support risk takers at the expense of savers and moderate risk takers. Bernanke is showing us that he is no different than Greenspan, albeit one who speaks a little bit clearly, even if that clear speech is a bunch of lies made up to do the same old “reward the ridiculous risk taker, punish the saver” crap?

  62. Stuart commented on Jan 26

    Funny how timely this story about a rogue trader was. Everyone seems to have forgotten about Fitch’s downgrade of AMBAC after close on Friday. No one will know why Ben cut 75 bps all of a sudden. The fact that it was a week before a scheduled meeting beyond credible debate indicates a spontaneous panic move. Either they got fooled into panicking by the market sell-offs (am not in that camp) they got a late night call by someone who is in trouble. Deduction leads us to a large financial and given the scale of the cut, they were just about to roll-over. They likely got a call from a large bank in similar circumstances to that last call from Rubin in August ’07. If you believe they got snookered by the rogue trader, then you seriously have to dismiss any credibility for all members of the FOMC as advisors to them. I don’t believe they are that naive and ignorant of market affairs.

  63. Bloated Jeff Macke commented on Jan 26

    “I cannot figure out what you are talking about. If nasdaq drops 40%, I expect QID to rise 80%.”

    did you fail mathematics? if the market plunged 40% in 1 day in a straight line, then yes QID would rise ~80%; extend that time horizon out and increase the volatility and the leveraged ETFs will not be 2x (or -2x) the index (hint: how much do you have to make to get yourself out of a 25% hole? or a 50% hole?)

  64. Rudy commented on Jan 27

    Some amateur detective work:

    German magazine ‘der spiegel’ claims the rogue trader had 140.000 dax futures.

    overnight margin = 14.700€ (why is so high compared with other indices?)
    1 dax point = 25€
    average daily volume is roughly 200.000 (pale compared to SPX or eurostoxx 50)

    Each dax point would have given him 3.5m€ (140.000*25) Not too shabby ;-)
    It would require roughly 2.05B€ in capital (140.000*14.700)
    ‘der spiegel’ runs a scenario at which he entered at dax 8.000,
    so holding a position of 28B€ (140.000*25*8000)

    The dax tumbled from roughly 8.000 at the start of the year to a low of 6.400.
    It would require 1.400 losing points to get to a loss of 4.9B€ assuming it all
    happened in one trade, which I don’t. ‘Le figaro’ claims he started from feb. 2007.
    Maybe he had losses during 2007 and tried to get even with a big dax position.

    If I correctly recall, the dax fell more than 7% on the 21ste of january, more than
    any other european index. If the SocGen bosses dumped 140.000 futures in a daily volume of only 200.000 contracts, they certainly would have moved the market and maybe pushed the already declining markets in panic mode. Also note that the dax had relative strength compared with SPX / CAC40 / Nikkei225. It moved sideways during late 2007, while the other indices were in clear downtrend. So ‘this rogue trader slapping Bernanke in the face’ theory may hold truth.

    I also wonder if this trader was any good. Well obviously not :)
    Why didn’t he take a 140.000 position in eurostoxx 50 with daily volume of > 1m?
    Why take the additional risk of going big into a relative small volume market?

    My take on Bernanke is that he has no choice. On previous occasions he also crushed the shorts. A falling propery market AND a falling stockmarket would be a double whammy. So he tries to halt / postpone / reverse the stockmarket decline, which ofcourse will fail.
    But it’s the only thing he can do.

    To finish off: Risk magazine named SocGen
    “Equity Derivatives House of the Year”

    Ouch! :))

  65. Albert commented on Jan 27

    I am not that worried about the markets now. Most of the bad news are out now. I think that we are in some kind of flat correction.

  66. Falco commented on Jan 27


    You can cover easily a dax future with an eurostoxx future it tha was the case. An eurostoxx future averages 2 million to 4 million contracts daily in recent times.

    As pointed above, the most probably is that the FED move has to do with monoline insurers.

  67. John Borchers commented on Jan 27

    QID and DOG holders. If the funds are totally options, futures short based how do you explain the divendend they have? DOG has almost 4% yield and QID has 5%.

    They are not betting on what you think they are betting.

  68. Steve Barry commented on Jan 27

    More on QID…it tries to match 2X inverse the daily movement of QQQQ. If a 40% cumulative move in QQQQ happens over a series of days, QID of course will not be cumulative -80%, but will differ…depending on volatility it could be more than 80%. Here’s what Barry said about the inverse ETFs, which I use in my IRA:

    Barry Ritholtz at the Big Picture traded these inverse ETFs recently and came away with the impression (links here and here): “A good product for hedging in accounts that either cannot short or use options; they are also superior to mutual funds, but inferior to shorting traditional ETFs.” I agree these products are well suited to IRAs and such; moreover, I think they benefit investors interested in a long-term directional bet or portfolio hedging as well.

    Barry on inverse ETFs

  69. John Borchers commented on Jan 27

    You have to realize in order to get 5% dividend you have to be invested long somewhere? Is it junk bonds / gov’t bonds? And how much of the fund’s capital is invested there to get 5% yield. It must be a lot.

    It makes no sense to invest in these in a IRA. With the market going up for years the short funds could have only lost. You would have been better off taking the long risk and losing half then you waste your money in these funds. After all for each dollar on the long side 50 cents on the ultrashort side cancel each other out no matter what the market does. This is completely unlike traditional money management where you long different devices to get the same effect and win both ways.

  70. D.H. commented on Jan 27

    Which is it: Too little, too late? Or, the Fed bailed out a 31 year old trader?

    There’s a huge gap between these two perspectives …

    “The Federal Reserve ‘made bad judgments’, said Joseph Stiglitz, the Nobel Prize-winning economist. ‘It looked the other way when investment banks packaged bad loans in non-transparent ways.’ The rate cut this week, Stiglitz said, would be too little, too late, because monetary policy usually takes between six months and 18 months to be effective, and the United States is in distress now.”

    Source: Mark Landler, International Herald Tribune, January 23, 2008.

  71. Eclectic commented on Jan 27


    You got spanked by Dr. Mauldin, the well-known dental implant specialist.

    He just implanted a wisdom tooth in your ratchet jaw.

    Only, Mr. Mauldin, a couple of comments:

    – Say, you’re talking to very sophisticated people, traders and such, in Europe that were s-u-r-p-r-i-s-e-d by the Fed? You mean they actually admit to being surprised?

    In what manner do you refer to them as sophisticated? Why, heck, it didn’t surprise me or Winston, and Winston plays piano in a lizard lounge piano bar, part-time no less.

    And I don’t get Sunday’s newspapers until Wednesday afternoon, and my computer is running Windows 98 SE, is 11 years old, and I have to wait 10 minutes for it to figure out how to run on what few good hard drive sectors that it has left… but I wasn’t surprised.

    Tell ‘em Winston, go’on and tell ‘em just how s-u-r-p-r-i-s-e-d we were.

    What is sophistication?… It is the possession of wealth?… Acclaim?… Influence? How sophisticated was Ted Turner when he flushed 475 Hypogazillitrillion dollars down the toilet at TW? (BTW, he’s waxed philosophical about it in the press and chuckled it all off)

    I happen to think they were anything but sophisticated to have been so surprised by the Fed. Where have they been the last 2 weeks?… At a wine and cheese conference? Birthday party for Jérôme Kerviel?

    Hey, Winston… know what they’d call Kerviel if he’d instead been a fraudulent renegade cosmetics dealer?

    ……A **Rouge Trader**


    Lastly, for those among our fellow BigPicsters who might be interested, and you too, Paul Kedrosky if you’re peeping, here’s tonight’s newest foray into punitive Calvinist Moralizing:


  72. Winston Munn commented on Jan 27


    Sorry to be late…but Joe, at the bar, is a friend of mine, and he just bought me a drink for free. You know how it goes…


    I am not surprised when a scorpion stings, a coyote howls, or a dung beetle rolls a ball.

    Why would I be surprised when a central banker acts like a central banker?

    And, yes, the Rouge Trader then took a powder, it seems.

  73. Winston Munn commented on Jan 27


    I wrote above, “you know how it goes…”

    Obviously, the is a gross error as one who practices his art in concert halls would not have comparible experiences to those of an accordian player holding a monkey and tin cup.

    I withdraw the offending phrase with sincerest of apologies.

  74. Winston Munn commented on Jan 27

    After reading more on So Gen, a hypothesis occured to me. For consideration:

    The information thus far is that rogue trader had real futures contracts hedged by ficticious contracts. Supposedly, the ficticious hedges kept the bank examiner at bay – and the bank in the dark.

    Therefore, this scenario makes more sense to me.

    The Asian and European markets were rattled by economic conditions deteriorating in the U.S., and the monoline’s downgrade Friday night sent it over the edge. The opening down gap caused a margin call on the real long positions established by rogue trader and held by So Gen – the first time the bank actually knew of the positions. Unable to meet the margin demands, So Gen was forced to liquidate into an already weakened market, futher exacerbating the panic.

    So, under this hypothesis, So Gen did not cause the selloff but instead was caught up in a selloff, and their forced liquidation of positions only added to the magnitude of losses.

  75. Don commented on Jan 27

    For anyone reading the article I linked to in my comment near the top of this page, the article has changed–in a huge way. Unlike a blog, where the changes are noted, the AP article is simply different. The portion that I copied and pasted into the comments here are now missing. Like I said, either the reporter messed up, or something else happened. Based on the changes to the article, it looks like the author messed up and corrected things. His earlier error has vanished.

  76. Steve Barry commented on Jan 27

    BTW, based on this chart QID has performed just as expected, up and down.

    QID vs. QQQQ

  77. Steve Barry commented on Jan 27


    Sounds very possible. If I may ask, what is your current investment allocation between cash, stocks (log , short), bonds, metals, etc? Where do you see market headed? I am 1/3 cash, 2/3 QID, though I would recommend 1/3 cash, 1/3 bonds, 1/3 QID for others. I see S&P going to 900 or less this year.

  78. Gary commented on Jan 27

    I have a question, why didn’t Soc Gen “immunize” or put some type of collar on this futures position? (ie sell calls/buy puts). it makes zero sense to just dump a position like that in 1-2 days and take that type of hit-

  79. Winston Munn commented on Jan 27


    I am 90% in cash at the moment – expecting and waiting for a tradeable low by mid February, followed later by futher declines. Presently have two small postions, one long (biotech) and one short (technology).

    I don’t mind disclosing my own foibles and idiot positions, but I do not wish to offer further guesses on market actions or sectors – myself, I use FusionIQ to check my judgement in these matters.

    All I try to offer on THP comments is my viewpoint based on an exercise of critical thinking, and toss in a little dry humor from time-to-time.

    That and 5 bucks will get you a latte’ at Starbucks.

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