SocGen’s Big Mistakes

Did Jerome Kerviel and Societe Generale cause Monday’s market meltdown? I asked the question yesterday, and today it’s looking increasingly as though the answer might be yes. His positions are being reported at between 40 billion and 50 billion euros, which is a lot of money – but not enough to cause a big stock-market meltdown under normal conditions. The thing is, however, the conditions on Monday were far from normal, and the French bank, in liquidating them, made a couple of enormous mistakes.

Firstly, they decided to liquidate as quickly as possible, dumping the overwhelming proportion of their huge long position in one day. And secondly, the day they picked was Martin Luther King Day: a public holiday in the US, which meant that Chicago was closed.

As a result, futures traders across Europe had to scramble to find a huge amount of liquidity in a very short time, and prices predictably plunged.

If I had to guess, I’d say that when Kerviel’s position was discovered, he was maybe 1.5 billion or so euros underwater; the rest of SocGen’s losses are just as much the bank’s fault as they are Kerviel’s. If they’d taken a deep breath and simply bid the position out to a big bank or hedge fund, I think they could have got away with much, much smaller losses.

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