The US Fed, Societe Generale Rogue Trader, William Poole, and Black Swans
Stock-Markets / Market Manipulation Jan 25, 2008 - 08:20 PM GMTBy: David_Urban
On Tuesday morning, the Federal Reserve cut interest rates by 75 basis points in response to a worldwide selloff. The selloff started on mounting fears that the United States has fallen into a recession. The mass fear became so great that the Federal Reserve felt compelled to act before next week's meeting in an attempt to restore confidence in the markets. In the press release, one governor, William Poole from the Federal Reserve Bank of St. Louis voted against a move before next week's meeting. While his actions may leave some people scratching their heads, one needs to go to the website ( http://stlouisfed.org/default.cfm ), note the commentary on the left side of the page, and read the following speech ( http://stlouisfed.org/publications/re/2008/a/pages/inflation.html ).
In turn the United States government proposed a stimulus package aimed at rescuing the economy from a recession. With a government stimulus package now in place, eyes will turn to the FOMC meeting next week wondering if the Federal Reserve is going to cut rates once again.
Ben Bernanke is taking a huge gamble with the rate cutes risking the recreation of the same bubble which started the subprime problems back in the early to middle part of this decade.
Will the interest rate cuts make a difference? In terms of subprime lending, it is unlikely the cuts will save a majority of borrowers due to the problems currently affecting the markets. The credit that originally caused the subprime crisis has been withdrawn from the system and will not be replaced in the near future. Loans that are resetting to far higher rates or where the buyer lied about their income cannot be saved.
In terms of corporate stimulus, the cuts will have little or no effect. Budgets are decided on for the entire year and most companies are choosing to tighten their belts in response to the uncertainty surrounding the elections scheduled for later this year.
As mortgage insurers and banks dilute shareholders by attracting capital to shore up their base, it is better to look elsewhere for opportunities. If we were comparing the dot-com collapse to the financial markets collapse we are at the point where the dot-coms started to go under from a lack of funding. The Sovereign Wealth Funds are providing the post-bubble financing that was not available to many dot-coms post-bubble collapse. The next step will be a shakeout with strong players absorbing the weak players in the system. The acquisition of Countrywide by Bank of America was only the start.
Confidence in the Bernanke led Federal Reserve is at an all time low. Unfortunately, he was the person handed the job of cleaning up the mess that Greenspan created and discovered that his theoretical papers and models were not applicable in the real world.
The confidence level has dropped so low that Senator Chris Dodd has made the process of appointing people to fill empty seats in the Federal Reserve a political process. If the government had confidence in the Federal Reserve this would not be happening.
The frightening disclosure of a 4.9 billion euro loss attributed to a lone trader at Societe Generale (SocGen) is enough to put everyone in the financial community in a state of fear. SocGen was known worldwide as a leader in the derivative market and considered one of the best managers of risk in the world. As the amount of derivatives worldwide continues to grow it is not surprising that losses attributed to rogue traders continue to grow.
If the information currently available is correct and massive futures positions were unwound when they were uncovered it may have been a Black Swan event which triggered the global sell off Monday and Tuesday ending with the Federal Reserve cutting interest rates by 75 basis points. If this indeed was the reason behind the cut, one has to wonder if William Poole was correct in his assessment that the available economic data did not justify a cut in interest rates. We will know next week when the 4 th Quarter US GDP numbers are released.
Could this have been a case of mass fear caused by lack of communication between counterparties? Only time will tell but the current problems in the financial markets are being caused by a lack of trust between counterparties, something lower interest rates cannot solve.
addthis_url = location.href; addthis_title = document.title; addthis_pub = 'financialsense';By David Urban
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