The pieces are falling in place and we are understanding what happened. As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks. Someone was selling, all right — Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel.
Kerviel built a virtual company within Societe Generale, bank officials said. He balanced each bet with a fictitious one for almost a year. On Jan. 18, a routine check found a trade that exceeded the bank's limits. A call to the other party in the trade found the transaction didn't exist.``He was running two books simultaneously, one real and one false,'' Chief Executive Officer Daniel Bouton said.
From his desk, Kerviel, took huge bullish positions on the Dow Jones Euro Stoxx 50 index and the German DAX in particular. 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. The graph shows the DAX (German Bourse) index fall.
“Société Générale’s unwinding of those positions pressured indexes worldwide,” said Barry L. Ritholtz. “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?” “I definitely think there is a link,” said Byron R. Wien. “Bernanke has been reacting to events, rather than anticipating them,” he said.
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