Washington Post Death Spiral Watch
Union Density

Positive-Feedback Investment Strategies and Société Générale

Nelson Schwartz and Nicola Clark report Barry Ritholtz's suspicions:

Société Générale’s Sales May Have Incited Market Plunge: As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks. Someone was selling, all right — Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel....

Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.

“I have little doubt that Société Générale’s unwinding of those positions absolutely pressured indexes worldwide,” said Barry L. Ritholtz.... Granted, fears of a recession in the United States and continuing worries about the spread of the subprime mortgage collapse were also responsible for the market downdraft in the last 10 days. But Mr. Ritholtz argued the rapid move by Société Générale to close out tens of billions in futures positions might have been a major factor in pushing an already nervous market into an outright panic....

On Monday afternoon, with United States markets closed for Martin Luther King’s Birthday, Mr. Ritholtz said, many Wall Streeters were struggling to figure out just why Europe and Asian markets were off so steeply. “Instant messages were lighting up, and people were saying ‘This looks like a big European hedge fund blew up.’ ” Indeed, there was little market-moving data before the plunge.

He was quick to add that the French bank’s rapid turnover of the positions assembled by Mr. Kerviel would not have been enough to push the German market down 7.2 percent Monday. But in today’s fast-paced markets, hedge funds and investment firms often pile on once the selling starts. “These things take on a momentum of their own,” he said...

I see the Fed's response to the Asia-Europe panic storm as preserving its options--moving its planned rate cut forward by a week to assure markets that it was not asleep, and now able to reoptimize at its meeting this week. I'm curious to see what they will do.