Eric’s finance HQ

As you may have read over the past few days, Jerome Kiervel, a front trader agent employed by the Societe Generale (one of the biggest French Banks) is the only one implicated in the biggest finance fraud ever in Europe (7.2 Billion).

Do you really think that only one man is responsible? Are you sure that Societe Generale management, led by its CEO, Daniel Bouton, didn’t have a clue about what was going on? According to the current economic situation, the Societe Generale has many advantages to consider. Here are the facts:

• Jerome Kiervel was one of the formers inspectors of the entries posted into the trade market system (back-office). His position was changed to front trader agent by his management few years ago. This decision was of course very risky… History has of course shown this to be true with Nick Leeson at Barings Bank who, in 1994, dragged it to bankruptcy.
• Societe Generale said it had learned of the fraud last weekend. But how can’t you notice a 7.2 billion fraud with massive holdings representing more than 60 billion??? No agent trader can work alone without being covered by back control agents or management board.
• Last weekend… What a coincidence! Just before the subprime mortgages crisis! The bank was forced to sell the contracts just as stock markets were dropping. It took the bank three days to unload them. It was in the Societe Generale’s best interests to unhinge the market. After all, for several months, there were rumors in financial circles about a potential buyout from HSBC - which is now, effectively, a hostile takeover!

As an extra note, the bank had actually earned more than 1 billion last year thanks to the trader agent illegal positions. Nice! Read the mainstream news details of the current situation here.

 Auto and oil executives do what they can to keep the demand for oil high. With flowing oil comes flowing cash! Unfortunately for the consumer, the prices rise as well, as the source of that flowing cash. Did you know that the oil price per barrel has risen by 90$ from 1946 to 1997, and that we entered the New Year with an oil price record of 100$ a barrel?

When will it stop? Well, one thing’s for sure: the demand sure isn’t going anywhere. In 1900, there were 4000 cars in the United States. In 2002, the world had more than 531 million passenger cars. If fuel alternatives present themselves, maybe things could change, but as long as oil infrastructures are in place and there’s still oil in the ground, that won’t happen any time soon.

Here’s a 60-year look at the rising price of oil, by the barrel. Frightening!

This is maybe a sad topic to begin my blog with, but the recession can’t be neglected by finance enthusiasts like us. By global economic standards, a country is considered in a recession when its GDP declines for 2 or more consecutive quarters in a year. In the past, economists often had a poor forecasting record: several missed predicting the Great Depression in the 1930s. Are we witnessing a replay of the same situation? A 2001 survey indicated that 95% of American economists denied that the country was in recession (even though one had already started).

A recession obviously affects employment and investment, with the housing market hit critically. House prices fell 5% in the last year when the residential investment collapsed.

Can the rest of the world escape American economic trouble? It seems that the economies of Europe and Japan are slowing down. It may be surprising to say that the solution for global growth is to stay strong in emerging economies. Indeed, with economic reforms, their annual growth rate hit 7%. In 2007, they contributed half of the planet’s GDP growth. In the past, those emerging countries often needed the help from the big players, but it appears that this time they could be the rescuers.

An America in recession reduces other countries’ exports, but the emerging economies are less vulnerable than they used to be. Their home demand permits greater autonomy. The increase of consumer spending in China and India contributed more to international GDP growth than in America.

As far as the global economy’s concerned, for the moment, wait and see before any major investments.