It's been several years (since late 2004) that the bubble was labelled as a bubble (see this June 2005 post by me calling it the "largest ever"), but it's been imploding in slow motion, for the time being. No one contests the downturn, but a lot of people still cling to the hope that we can have a mild recession, because there has been no obvious crash -- Jerome a Paris.
The preceding was from June 17 2005.
Yet again we learn some of this bubble is fraudulent:
The world of high finance, already shaken by the imprudent greed of some of its biggest corporate names, was stunned yesterday by the largest ever fraud by an individual "rogue" trader.
Jérôme Kerviel, a Frenchman aged 31, working for Société Générale, one of the world's most reputable banks, lost almost €5bn (£3.7bn) in a series of complex, concealed deals on European stock derivatives.
...The massive fraud came at the worst possible time for the global finance industry. It will renew doubts about the stability, and ruling morality, of leading banks in the wake of the global recession threatened by the sub-prime crisis in the United States and beyond.
The greatest economic bubble in history will surely collapse. For the markets became more complex as appetite for risk turned careless. Instruments too difficult to understand suddenly became commonplace in the search for growth. Regulation and oversight waned throughout, it seems.
The relatively junior bank employee, who earned less than €100,000 a year, managed to evade supposedly fraud-proof safeguards to stake an estimated €50bn – which is more than the GDP of Slovenia, Uganda or Cuba – on the future direction of European stock markets. France's second largest bank had to scramble desperately to abandon his concealed trades on Monday and Tuesday, against the calamitous background of sharply falling European stock exchanges.
SocGen will survive this. Merrill Lynch posted an $8.4bn writedown on Oct 24th last year, $2.24bn of which was "subprime mortgages, asset-backed bonds and leveraged loans". The bank had to more than double its previous write-down. Similarly, former Citi CEO Chuck Prince oh so fervently avoided the inevitable $5bn write-down as the credit markets dried up last fall. But even after he left, Citi revealed it would need to post an $8-11bn write-down for the fourth quarter: many think the estimate conservative.
But SocGen's loss is different. The last cycle's Enron and this one's Citi hits were top-down dishonesty. Greed. Fraud. SocGen's only reeling from what one rogue inside the organization was able to steal, not terribly unlike the movie Office Space.
But survival is a different matter for the people left holding the real check, the investors. The people who keep businesses hiring or on full payroll. The people using company 401ks.
How many more skeletons will we find in the banks and markets' closets as the greatest bubble contracts?