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Last Updated: Friday, 25 January 2008, 15:03 GMT
Did one man cause market mayhem?
By Ben Richardson
Business reporter, BBC News

Traders in Germany
Markets and traders have been trying to work through high volatility
Financial markets have a long history of maverick operators.

In a world where fortunes can be made by going against the flow, there is a lot to be gained from being a contrarian or shaking up the consensus view.

Yet as exciting and attractive as going it alone must seem, it also requires a huge amount of skill and timing.

Get it wrong, as Societe Generale's rogue trader did so spectacularly, and there is a very good chance you will be caught with your pants down.

But as the markets mull the French bank's shock 4.9bn euro ($7.1bn; 3.7bn) trading losses, one question is being repeatedly asked - can one man really cause a global stock meltdown?

The feeling amongst investors and traders in London and abroad is that it is unlikely.

SocGen's problems coincided with some of the worst stock market declines since the 9/11 attacks in 2001, but they argue the drop was due to a number of reasons, not just the trading practices of one Frenchman.

"The market would have tanked anyway even without SocGen," the head of trading at a City stock brokerage told the BBC.

Perfect storm?

SocGen has yet to name the trader, but media reports have named him as 31-year-old Jerome Kerviel.

Mr Kerviel has been accused of making fraudulent trades on behalf of the French bank which bet that European stock markets would rise.

Unfortunately they fell, and rather than close the positions he had taken buying stock market futures, he allegedly increased his exposure in an effort to claw back mounting losses.

The problem for SocGen came after it found out about the situation last weekend and tried to shut down the trades Mr Kerviel is accused of setting up.

Stock market graph
There are a lot of people who work in the futures market who are scratching their heads over this
Senior trader in London

As one senior trader in London explained: "There were unprecedented volumes of futures contracts being traded on Monday, and it turns out that much of that was by SocGen.

"But this only exacerbated existing problems. It was a bad market and SocGen just made it worse," he added.

Negative sentiment was already prevalent on world stock markets, and SocGen walked into a wall of selling that amplified its losses to huge levels.

Market moves

Many investors were extremely active, shifting their holdings to reflect an expected period of slower economic growth that has been brought on by problems in the US housing market, weakening consumer credit and slower corporate profit growth.

Fears about the scale of losses linked to the US housing market were also increasing, with many analysts predicting that banks in Japan and China would soon have to start revealing the extent of their exposure.

The most pessimistic observers were warning that the global banking crisis caused by imprudent lending to US consumers with poor credit histories was going to be the worst in living memory.

And as if that was not enough, there were also rumours that bond insurance companies, the firms that provide banks with protection against losses on fixed income investments, were teetering on the brink of going bust.

Stock trader
Modern banks have systems in place to track employees' trading

So bad was the sentiment that on Tuesday, the US Federal Reserve took drastic action and slashed its main interest rate to 3.5% from 4.25%, its biggest single cut for 25 years.

As a result the market was already set to dive, traders said.

"Bond insurers are in trouble and if they go bust then it wouldn't matter if interest rates were cut to 1%, there'd still be no credit and the global economy would grind to a halt," the head of trading at a London stock brokerage said.

Market losses

By the time SocGen learned of its problems on Saturday, many of the world's main stock indexes had already fallen, and the relative optimism of the past years' rising market was in danger of being lost for good.

By the end of trading on Friday of last week, and before the three days of declines that started on Monday, the UK's main FTSE 100 index was already 8.6% lower for the year

Perversely, since the news of SocGen's problems the index has rallied, but the FTSE 100 is still sitting 7.8% lower for the year so far.

German trading floor
Can even the most sophisticated markets catch every rogue trader?

In the US, the main Standard & Poor's 500 index has lost 11% this year, and analysts are not predicting a recovery any time soon.

And yet, while you cannot level all the blame for the current market turmoil at SocGen and its errant employee, they cannot be completely absolved.

One person's actions, both good and bad, can have a massive and lingering impact on markets.

Billionaire banker George Soros famously took on the Bank of England by selling the pound, ultimately forcing it to withdraw in 1992 from the Exchange Rate Mechanism, the pre-runner to the euro.

Nick Leeson, the most famous of rogue traders to date, brought down the Barings bank in 1995. Other less well-known individuals have cost firms millions of dollars, euros, pounds and yen through poor decisions or through simple mistakes.

Head scratcher

The worry for the financial markets now is what else is out there, which firms also have problems and when will it all come to light?

"There are a lot of people who work in the futures market who are scratching their heads over this," a senior trader at an investment bank told the BBC.

In the aftermath of the SocGen scandal there is a whirlwind of negative rumours and speculation.

And in an industry where sentiment matters, a lot of people are saying that they have a bad feeling that just won't go away.

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