A rogue financial system

To describe Jérôme Kerviel, the man who allegedly wiped out a year’s profits for the French bank Société Générale by making the wrong call on which way stock markets would move, as a “rogue trader” is convenient but entirely superficial. Kerviel was, after all, only engaged in what traders all over the world are doing every minute of the day in New York, London, Frankfurt, Tokyo and other major financial centres.

Kerviel apparently came to inhabit a fantasy world of his own, creating a parallel yet secret system of deals hidden from SocGen’s top management. But what was his fantasy existence if nothing more than a perverse expression of what the bank itself was actually engaged in – the world of fantasy finance?

SocGen, like banks all round the world, has in the last 30 years become deeply involved in recycling debt, the buying and selling of exotic financial instruments such as derivatives and general speculation about the future movements of markets. While this seemed a great way to rack up profits, it was essentially a work of fiction rather than fact.

For the conjurer’s trick to work, the global economy had to keep on growing and create the increases in real wealth needed to service the mountains of debt that were clogging up financial markets. The recession in the US, expressed in the collapse in the housing and mortgage markets, was enough to begin the unravelling which are now witnessing.

SocGen’s losses of £3.7 billion are but a mere drop in the ocean compared to what the markets are facing. Some experts say, for example, that the amount of unrepayable sub prime housing debt alone held by banks worldwide amounts to $3 trillion – that’s with 12 noughts in case you are interested! As for the total debt in the system, no one is really sure of the total. As it revealed Kerviel’s calamity, SocGen also announced it had taken a £1.5 billion hit from the US mortgage crisis.

The revelations by SocGen are another blow to global markets suffering a dramatic loss of confidence. Banks started to refuse to lend to each other on the basis that they could not be sure whether borrowers secretly held loads of bad debt and therefore would prove incapable of making repayments. There are suggestions that SocGen held back on what had happened until it had sorted out its own position first. Such is the volatility in the markets, that it is even suggested that SocGen’s unwinding of the positions Kerviel had committed the bank to led to the sale of up to £40 billion of shares this week, reinforcing the slide in share prices.

Whatever the truth, you can be sure that the SocGen saga won’t be the last. The world of fantasy finance is coming down to earth with a bang, driving on the economic recession and calling into question the entire legitimacy of the capitalist market economy.

Paul Feldman
AWTW communications editor