Ever heard of Jerome Kerviel? Bernanke would probably like to meet him.

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I had never heard of him either…..until last week.  He was the trader who single-handedly caused a world of chaos on Martin Luther king day here in the US.  That same day, I stopped by the office early that morning, just to catch up with some office work and as soon as I walked in, I saw the DOW Futures down 500 points. Ok, So I am aware of the ongoing crisis, but typically the US leads  all the other international markets. Namely, they see what is going on in the US and then they follow whatever direction our markets are heading for. So to see the markets down 500 points on a holiday was beyond me…..I was wondering what in the world happened.

Back to Jerome; he was a trader at  Societe Generale, which is one of the biggest banks in France and considered a player on the world scene..  Jerome Kerviel had a huge position in the DAX ( the German stock index) and by the time he liquidated all his positions, it resulted in a net loss of $7.2 Billion. Other news followed: he may not have worked alone; he tapped into other trader’s computers, etc…..This is a 31 yr old trader, by the way, who built up a position worth 73 billion dollars. Those types of traders are known as : rogue traders” who pretty much do whatever they want with the blessings of the financial institution. They have access to virtually unlimited funds. To be fair to the institutions they typically have a limit on the number of lots they can trade; obviously, Jerome found a way around that “hoping that the markets would turn back in his favor..

After reading about him, I had a few fundamental questions that really bother me still. The first is, how can one individual, in a matter of a few days collapse all major world indices and take under one of the largest banks in the world? Where are the banks alert systems? Where are the risk parameters permissible per trader?  Maybe he had an excellent track record and the bank’s directors just gave him carte blanche?  The other question is, imagine for a moment that he got lucky and that Societe Generale showed a profit of $7 billion. Would we know about it? Are there individual traders that can cause this kind of volatility and affect our portfolios to such extremes even for one day?  You’ve surely heard about all the hedge funds that blow up, but what about the ones that are successful and affect us adversely?

Lastly, did Bernanke drop rates ¾ of a point because of that incident? I am not saying that we did not need the break, but did he panic like most of us? Was he scratching his head too? Well, I guess even the head of the Fed is human and reacts to his emotions (and a little political pressure). Nevertheless, it would be a shame if he reacted; he certainly did not take the bull by the horns that day;  instead the tail wagged the dog.

I don’t know the answers but I thought maybe somebody would like to address them, so investors (and brokers too) can finally take a day off and relax with the rest of the country.  That would be nice.

Best Regards,

Matt Zimberg

President

Optimus Trading Group