Fed: We didn't know about SocGen trades
As we suspected earlier today:
The Federal Reserve was not aware that Societe Generale was unwinding trades in Europe on Monday that had been amassed by a rogue trader at the firm, a Fed source said Thursday.
The unwinding presumably didn't help turmoil in overseas markets on Monday. The sharp market declines in Europe and Asia was cited by Fed watchers as the critical reason that the Fed engineered an emergency rate cut only one week before their formal meeting.
Federal Reserve board chairman Ben Bernanke was watching the markets closely on Monday, a government and trading holiday in the U.S., before convening a video conference call with the Federal Open Market Committee later that evening. The FOMC decided to cut rates by three-quarters of a percentage point to 3.5%. The decision was announced on Tuesday morning.Economists said the Fed has good reason to worry about falling stock prices. If the weakness in overseas stocks spilled over into the U.S. market, the wealth outlook for U.S. households would have darkened because of already dropping home prices, economists said. This could curb demand at just the time that the economy sputters on the edge of a possible recession.
Analysts initially attributed the plunge in global stock markets on Monday to fears that the U.S. may be in a recession. But now it appears that something else might have been afoot...
'nuff said . . .
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Thursday, January 24, 2008 | 06:05 PM | Permalink
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So I'm sure Helicopter Ben will take back that 3/4ths of a point, now that we know that there wasn't a coming catastrophe. Right?
Um...right?
Posted by: Mr. Flibble | Jan 24, 2008 6:12:10 PM
I'm not a finance pro, but it seems like the fed wasn't the only one spooked by this trading activity. Was a real panic actually underway? If so, does it really matter what touched off the panic? Once the herd gets running, does it matter whether the noise they heard was really a gun shot or just one of the bulls stepping on a stick? They were running, and there is enough uncertainty about the solvency of the global financial system to keep them running a long way. Perhaps this news will introduce deeper emotional confidence than the rate cut did, but clearly we're in an environment where fear, some of it well justified, is rampant.
Posted by: Layman | Jan 24, 2008 6:30:31 PM
Doesn't this reduce the likelihood of another cut next week? Or am I missing something?
Posted by: Clayton | Jan 24, 2008 6:31:25 PM
Rate cuts, stimulus package, bond insurer bailout, mortgage/homeowner bailout, etc.
It's all getting to be a bit much--its reminding me of the gov't response to Katrina about a week after the storm and the place is still empty.
Posted by: Johnny Vee | Jan 24, 2008 6:34:14 PM
Right, Mr. Flibble, and for those that weren't aware, our real estate troubles are now over, as well...Indymac just announced it will be profitable in 2008. Its stock price shot up 25%, and it had its biggest rate-lock day in forever. It's on Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=a79NyKmPE7H0&refer=home
I'm in the business, and this f'ing feels real familiar. So, Uncle Ben will reflate the housing asset bubble, but in the end, no one gets any richer. Understand that? More little slips of paper does not greater riches make.
Posted by: Don | Jan 24, 2008 6:39:19 PM
So what does that say then about the likelihood for further rate cuts next week. I would think they will be extremely reluctant to cut more next week given they now understand that much of the stock market turmoil was "artificial".
Posted by: Stuart | Jan 24, 2008 6:40:13 PM
I'm a little confused. Why should the anonymous Fed spokesman be believed? What are the implications of the Fed acting while knowing of the SocGen trades?
Do anonymous Fed spokesmen have the same track record as other anonymous leakers coming from inside the Government?
Also, how does a 31 year old, low level "non-star" trader secretly amass tens of billions of dollars of positions?
http://www.moonofalabama.org/2008/01/what-is-behind.html#more
For the record I don't think I'm paranoid.
Posted by: Bruce F | Jan 24, 2008 6:43:25 PM
The 3/4-point rate cut by Bernanke reminds me of the drunk driver that flips his turn signal on after swerving into the other lane to make it look like he meant to change lanes.
What a scumbag.
Posted by: Will T | Jan 24, 2008 6:50:22 PM
Well then its decided, no more rate cut till next meeting in march.
but hey the bright side is it was due to a rogue trader not due to risk aversion. so i think we will get some bull days, unless economic data does not look good.
how hard is it to make the data look good, now that the government does not want people to get spooked?
can ADP be coerced to present a rosy picture?
not that i am complaining, i will take anything required for a slow unwinding of this mess and warding off long recession/depression.
Posted by: techy | Jan 24, 2008 6:52:19 PM
If one trader in France caused that entire selloff, then there are Weapons of Mass Destruction in Iraq
Posted by: Ryan | Jan 24, 2008 6:55:07 PM
If one trader in France caused that entire selloff, then there are Weapons of Mass Destruction in Iraq
Posted by: Ryan | Jan 24, 2008 6:55:51 PM
Let's see if I can recap this. A French version of Barney Fife used his one bullet to fire the "shot ducked round the world"?
Is that about it?
Posted by: Winston Munn | Jan 24, 2008 7:08:54 PM
Off topic, but does anyone think the $150K cap on these rebates are a little low? This is what they are considering upper middle class??? I might make about the $150K, but could still use an extra $1,600. More welfare if you ask me...
Posted by: bob | Jan 24, 2008 7:21:43 PM
Well, Ben's showing his cards now. I've said this before, Many in my profession were good at the books in school but couldn't handle the human condition in the real world. They would eventually fold like a lawn chair.
Ben's not giving much confidence. Ron Paul was grilling him in a hearing and Ron asked him what he was going to do about inflation and retired Americans losing their wealth. He said it wouldn't matter if they bought goods in dollars?
Posted by: ken h | Jan 24, 2008 7:22:06 PM
Monday: futures collapsing, panic selling overseas, bearish sentiment at major levels.
Thursday: 75bps cut, non conforming loan increase, stimulus package, monoline interest, no earnings blowups, guidance OK, coupled with many stocks off 20-50% from highs.
interpret it for yourself and spare the conspiracy theories.
Posted by: kk | Jan 24, 2008 7:28:53 PM
Couple Tuesday's move with the panic cut of 50bps after a weak unemplyment number (that was revised away) in September and it paints a FED that is either using any and every excuse to cut rates fast, or is totally oblivious to financial data and market movements. Either way, the result is the same.
Posted by: JJL | Jan 24, 2008 7:50:22 PM
off topic:
Has anyone noticed how bogus the jobless claims number was today??? The government said that seasonally adjusted the claims dropped from 302,000 last week and 328,000 last year to 301,000 this week. There is only one problem the non-seasonally adjusted jobless claims for last year was 367,583 and this year its 408,333. So the real claims went up by over 40,000 without seasonal adjustment but went down by 27,000 with seasonal adjustment- a 67,000 fudge factor!…. I keep track of all the numbers in a spreadsheet and this adjustment was bogus. Currently claims are running at an average rate 0f 28,000 claims more per week than last year and 50,000 more than 2006. But they are claiming that the 4 week average is running only 2,250 more than last year and not the 28,000 when you look at the real numbers…..
The seasonally adjusted rate should’ve come in at 328,000 + 40,000 more over last year which would be 368,000. Another manipulation?? I really think if they had announced the 368,000 the market would have nose dived today.
Just look at the continuing claims. They are rising rapidly as is the nonadjusted insured unemployment rate as compared to last year.
Posted by: fyego | Jan 24, 2008 7:50:58 PM
KenH you took Ron Paul / Bernacke exchange out of context.
Ron Paul questioned Bernacke on the weaker dollar and the hardship that it would bring to retired Americans. Bernacke responded correctly that the weaker dollar does not impact people in the US paying in dollars.
As for Ben not giving much confidence, I would throw out that 95% of Americans never heard of him, and the balance feel pretty confident of him. The evidence was Tuesday.
Before '00-02 it was unwise to fight the Fed. '00-02 was an unwind of an extremely over valued equity market. Current equity valuations are much cheaper than '00-02, so I look at the Fed easings in the late '80's and '90's for perspective.
Posted by: kk | Jan 24, 2008 7:51:05 PM
I'm a little confused as to how 7 billion in losses to one Fr bank is a bigger deal that 100 billion of write's so far by various other banks, probably at least that much more to come, and half a trillion of liquidity pumped into the European system in recent weeks. 7 billion? huh?
Posted by: Bob A | Jan 24, 2008 7:57:59 PM
"Current equity valuations are much cheaper than '00-02"
Data please.
Betcha' can't show any.
Posted by: MTHood | Jan 24, 2008 7:58:32 PM
should the fed have known about the unwinding of the position? did the ecb know? i can understand socgen not wanting to advertise their open position, but...
so, in this case of imperfect knowledge, where you've seen two days of dramatic declines in the asian equity markets, do you step in to soften the landing? i know there are those who are moral absolutists who want to see people hurt, but...
is it worse to have a sudden decline in equity prices, or a "orderly" retreat...what's worse a15% decline in a day or week, or a 15% decline for a whole year?
Posted by: larrybob | Jan 24, 2008 7:59:19 PM
"responded correctly that the weaker dollar doesn't hurt"???????
WTF?
Weaker dollar means imports are more expensive.
Posted by: Whammer | Jan 24, 2008 8:01:15 PM
KK,
Your the same guy that was claiming no problem in housing 1-2 years ago. They are not making anymore land!! Guess that doesn't matter now does it. Looks like there is plenty to choose from, no?
I run a business and I hope your optimism is right. Problem is I see no change in the fundementals of most companies, why they would instantly become more attractive is beyond me. Mostly noise until this all unwinds.
As long as energy is at a an all time high I really doubt most companies will do all that well. They are STILL trying to igure out how to stick it to the consumer. Food to transportation is about to SKYROCKET.
The housing spicket has been turned off and these rate cuts and lending limits will not restart it.
No savings....On and On and On.
These are facts that are easily backed up, not conspiracy theories.
Posted by: ken h | Jan 24, 2008 8:02:44 PM
I begin to wonder if this wasn't a David Copperfield moment - misdirection raised to an art form.
The Fed pretends to have been duped by a French bank trader, giving everyone either a good laugh or a reason to complain, when all the while it really was panic - the reason for the illusion would have been to restore confidence that the monoliner's debacle isn't as serious as it surely is.
Terrence Patton wrote this about the monoliner's failures in another part of BP comments:
"The effect could easily have been – and may still be – a second lethal leg to the credit crisis, with vast losses. This could all too quickly lead to a run of bank failures."
I do not disagree with his assessment. The more likely cause of the Monday selloff was the threats to the monoliner's and the bonds they insure.
The phantom Frenchman may well have been nothing but a cover story to mask the real perceived need of the emergency rate cut - and like a good audience, we were amazed when the elephant in the room disappeared.
Posted by: Winston Munn | Jan 24, 2008 8:05:57 PM
JJl, using the current 5% unemployment rate as a dividing line, there were 475 data points of "high" unemployment with the rate at 5% or higher, and 220 data points of "low" unemployment with the rate 5% or lower. When the employment rate was "high" the market for large cap equities gained 15.9% over the next twelve months. When it was "low" in gained 7.2% one year out.
Similar results if you look at the ISM under 50 and over 50.
Posted by: kk | Jan 24, 2008 8:09:05 PM
