On Monday, France’s banking giant, Societe Generale disclosed trading losses that may top $7.2 billion. Officials at France’s largest bank reluctantly admitted the mishap was the work of a lone 31 year old trader. According to European press reports, a junior bank employee, Jerome Kerviel, used his knowledge of the computerized trading system to circumvent security safeguards. Although Kerviel’s motives are unclear (he made no apparent personal profit from the trades), the episode was reminiscent of the 1995 scandal involving the collapse of Britain’s 240 year old Barings Bank at the hands of a single trader.
As details of the incident emerged, markets from Europe to Asia plunged. The news sent the Chinese markets into a free fall resulting in a 10% sell off while their European counterparts plummeted 5%.
Fortunately, the U.S. markets were shut for the King Holiday. A similar fate on Wall Street was averted when Fed Chair Ben Bernanke flew to the rescue by slashing interest rates by ¾ of a point before the markets opened on Tuesday. While the decisive action of Bernanke should be applauded, this incident further underscores the susceptibility of individual investors to circumstances beyond their control. It does not matter that Kerviel acted alone, or that French banking safeguards are slack. Rather it supports the simple wisdom of securing your portfolio through actual asset diversity.
No one disputes that Wall Street dodged a bullet. However, investors trading in markets other than the U.S. stock market saw significant opportunities to profit in spite of the alarming news from abroad. For example, on Tuesday, gold started the week below $850 per ounce only to close Friday nearly $60 higher at $910. Crude oil prices rose almost $5 closing to over $90 per barrel. Although the European calamity spurred the dollar make marginal advances against the Euro, the Canadian gained significant traction on the Dollar.
As the losses from the subprime debacle continue to pile up, the market has become hypersensitive. One Wall Street insider recently cautioned that, “the herd already senses the wolf and it won’t take much to spook em.” In other words, any negative news, no matter how attenuated, could trigger a “stampede.” When that happens, it’ll take more than a gun slinging, whip cracking Fed Chair action figure to keep the individual investor from getting trampled.
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