A young trader blamed for huge losses at a French bank may have pushed the US Federal Reserve into an unprecedented rate cut this week, US media said yesterday.
"Was the Fed tricked?" asked David Gaffen in a blog published by the Wall Street Journal.
Gaffen questioned if Societe Generale's high-volume sales of tainted investments at the start of the week -- when global stock markets were in turmoil -- helped set the stage for the Fed's emergency cut.
Hindsight over the French bank's sales "puts the Fed's move in a new light," Gaffen wrote. "Namely, that they were taken in."
"This isn't to say, necessarily, that Societe Generale's trading caused the market turmoil of Monday and Tuesday, but it certainly contributed," he wrote.
Societe Generale said on Thursday that a single rogue trader had carried out a 4.9 billion euro (US$7.15 billion) fraud. Banking sources named him as Jerome Kerviel.
The bank said it discovered the illegal activities last Saturday and Sunday and by Monday was selling off those positions before revealing the fraud.
"Some analysts suggested that high-volume sales by Societe Generale on Monday as it secretly liquidated Kerviel's tainted investments contributed to the global market drops that led the US Federal Reserve to counter Tuesday" with an emergency rate cut, the Washington Post said.
A Fed source who spoke on condition of anonymity told the Post that the bank was unaware on Monday that Societe Generale was making its sales.
The US central bank cut its base short-term interest rate by three quarters of a percentage point to 3.50 percent early on Tuesday, amid worries a potential US recession could destabilize the world economy.
The Fed cited "a weakening of the economic outlook and increasing downside risks to growth," in justifying its surprise move.
"They were sucker-punched," the Wall Street Journal's MarketBeat blog quoted equities researcher Barry Ritholtz as saying of the Fed.
"What we see now is that it was a very ill-considered attempt to intervene in equity prices," he wrote.
In an editorial, the Wall Street Journal doubted that a single trader could have caused such mayhem, and noted that the affair had turned the highly profitable and conservative French bank into "takeover bait" overnight.
It blamed "woefully inadequate" internal controls, a "recent cultural shift in international banking" toward trading on proprietary accounts, and inadequate banking supervision across Europe, for the massive fraud case.
"The SocGen episode, and the past six months of subprime jitters, ought to propel efforts to improve the quality of banking supervision in Europe. National regulatory authorities have been shown to be out of their depth," the editorial said.
France stepped up efforts to restore confidence in the banking system as Societe Generale faced tough questions yesterday over why it failed to prevent the biggest financial dealing scandal in history.
Bank of France Governor Christian Noyer said in a radio interview Societe Generale's accounts were now clean.
Noyer dismissed speculation that some of the losses pinned on the trader were as a result of the ongoing global credit crisis, but hinted other French banks could announce writedowns linked to credit market losses when they report earnings.
"We know exactly what the exposures are. The provisions have been announced or will be announced in the coming days, where necessary," Noyer told RTL radio.
In full page adverts in France's leading newspapers, chairman Daniel Bouton apologized to Societe Generale shareholders as newspapers and analysts questioned whether a stay of execution granted him by the bank's board would last long.
Bouton offered to quit but was asked to stay on.
"I understand perfectly your disappointment and see your anger. This situation is completely unacceptable," Bouton wrote.
SocGen shares rose 1.9 percent to 77.25 euros in early trading yesterday, valuing the bank at around 35 billion euros. They outpaced a firmer market after falling 4 percent on Thursday.
The shares have fallen around 20 percent this year owing to long-standing rumours about its exposure to credit losses.
Outside the cloistered world of European banking, global investors largely shrugged off the scandal. Asian stocks surged in the wake of a higher close on Wall Street after US President George W. Bush and Congressional leaders agreed on an economic stimulus package to stave off a recession.
European stocks rose also, with the FTSEurofirst 300 index climbing 1.2 percent.
Antony Mak, a sales director at DBS Securities in Hong Kong, said markets viewed the dealing scandal as a one-off event.
"It's isolated and the bank can sustain the damage by doing a placement. It's well contained," he said.
But French newspapers made for uncomfortable reading for Societe Generale executives aiming to repair the bank's reputation as home to some of the world's most complex rocket-science finance.
And the respected Financial Times Lex column coined a new name for France's second biggest bank -- "ShockGen."
France's main business daily, Les Echos, said Bouton's position had been weakened and the bank was now a potential takeover target.
Societe Generale staff were "shocked and in waiting mode," one employee said in Hong Kong.
Rival bank BNP Paribas estimated that Societe Generale's trade exposure had been in the order of 33 billion euros and unions and a lawyer for small shareholders questioned whether the trader involved had been made a scapegoat.
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