Societe Generale

If one company is so stupid (or French) that a low-grade employee can bring the whole thing crashing down by writing out a Petty Cash slip, you can't help thinking that *any* company might find itself in the same boat - "frantic", "end of the world", etc.

It's not that simple. If shares drop everyone who holds them loses- there are no winners.

Money keeps the wheels of business, employment etc spinning and depends on the ability to borrow. When banks lose money they become fearful and stop lending so the whole system grinds to a halt. A slowdown becomes a problem for just about everyone eventually. That is what they are worried about.

Neb

Ask people wh have their life savings deposited there, or in Northern Rock. They'll tell you what the problem is.

Toom

"Toom Tabard" wrote

What problem do you think there is for savers at NR? Aren't they actually even safer than anywhere else?

When they drop, surely the winners are those who are now able to buy them cheaper?

Yes - I don't disagree with that. But it seems to me that what's happened with SG is that it has "lost" just 1.5% of the total assets it manages. I presume that represents a few months' of its gains earlier in the year.

But the central issue (see my OP) which I can't find an answer to is ... if SG lost E7b, then someone else gained. So other banks & traders now have more money to lend and/or have made a higher than expected gain on the assets they manage.

So taken as a whole, the availability of cash for the money-go-round is broadly unchanged. (Even SG's cash deficit is being rapidly made-good by a new issue).

So if they buy them cheaper and they drop further what have they won?

But they haven't gained!

The government feels generous and gives everybody in the country a share worth 1. so there are 56,000,000 of shares. There is some wheeling and dealing- some folks have 2 or 200 some folks have none. The price drops to

50p because the stock market slumps. Now there are only 28,000,000 worth of shares. Where has the other 28,000,000 gone? Just because some people have lost it it doesn't mean somebody else has gained it.

But the new issue will have to be paid for by investors who will need to put up more money or have their share in the company diluted. That takes money out of the rest of the market.

Neb

Thanks for your comments. But it's not actually the movement in the share price of one bank which intrigues me (unless that's what is supposed to have caused such a panic - which I doubt, given the overall ups and downs of SG throughout January).

Yes - but my point is that this money is balanced by the movement of money from SG to "the rest of the market", which Kerviel engineered by making large and mis-judged bets.

As several commentators have remarked - what would SG's reaction have been if Kerviel had got it right and the bank had made several billion euros ? :-)

"Martin" wrote

But he only bet such a large amount, because he'd already

*lost* such a large amount. If he'd have won that last bet, he'd have been roughly *even* overall, wouldn't he?

As with all gambling...!

Though ISTR reading that he was actually ahead in the earlier stages. And the loss when he was found out then doubled when SG unwound the deals.

I'm not talking about the movement of one bank. People make money by trading- some lose and some gain, in what is sometimes referred to as a zero sum game. You are right as far as that goes. However the market capitalisation also expands and contracts as the share prices rise and fall. In practice it can be very difficult to separate the two to get a picture of losses/gains.

Lets try another couple of examples.

Say the London Stock market is capitalised at 100 billion. There is a major slump with an overall fall of 50%. So it is now valued at 50 billion. Where has the 50 billion gone? Who has won from that?

My boss invested heavily in Marks and Spencers many years ago. They rose in value and he was so delighted with his 'gain' he took his wife to London for a weekend. The shares then fell back beneath the level he bought them at.

I'll give you a clue. A gain on paper isn't really a gain. You need to bank it before you can say you have made any money. Remember the Kenny Rogers song:-

"Never count your money whilst sitting at the table, plenty time for counting when the dealing's done."

Neb

The specifics are not the point - the point is that the games played at one level are not just money movements and gambles on account sheets. They can threaten the savings of the remaining few ordinary people who have made some provision for themselves and accepted some responsibility for their own future. They used to be called 'prudent' before the recent re-definition of the word.

Toom

That's exactly the point I'm querying. Ignoring share prices for a moment (which moved in response to SG admitting it had made huge losses) you seem to be confirming my assumption that these losses have matched someone else's gains. Now, I realise that will depress SG's share price, but why was there such alarm? I don't believe it was simply worry that internal and external controls had failed to limit SG's exposure etc (that risk is always known, if underestimated once Barings etc is forgotten).

And yes, I realise what you're saying about stock market movements generally - and I wasn't claiming that was a zero sum thing.

Market cap has always struck me as a bit of a meaningless. How can you multiply shares in issue by current price, when that price is only reliable providing only a tiny proportion of shares are being traded. As soon as people try to cash in (or buy in) on a larger scale, the price moves.

But getting back to my original query - SG's balance sheet takes a big hit. Other banks' bal.sheets strengthen. The world of high finance gets all wobbly - not just those holding SG stock. Why did this happen? Or did it?

Was it, in fact, the media making assumptions, and the financial brains actually being far more relaxed because this was, indeed, a zero-sum game? After all, SG will still post a profit for the year...!!

You were claiming that -

although you may not have recognised it as that. You then went on to cut the most important part of what I was saying.

What I was saying was that it is only a zero sum game if prices remain the same. (Being pedantic it isn't a zero sum game if commissions and expenses are taken out.

I'll try to be even clearer - losses and gains don't match if the stock market drops. If it drops losses exceed gains whoever makes them. If it stays level losses exceed gains because commissions and spreads come out of trading.

The market or a particular share needs to rise for gains to exceed losses.

So back where we started - banks have less money and reduce lending. People have less money to spend, profits go down. Shares suffer- people sell more of them and they suffer even more.

Neb

Clearly we are at cross-purposes. You keep talking about share prices and mkt cap. I don't disagree with anything you've said on that issue. (And I do realise why share prices move, including the specific SG case - although interestingly SG didn't move much in relation to the media frenzy).

But my question all through this thread is nothing to do with share price movements. It - and my argument - is about the trades, which went pear-shape for SG. For it is the trading losses they suffered, not the consequent (and subsequent) share price drop, about which the financial world went crazy for a few days. I'm saying that it is these trades which are zero-sum (disregarding the relatively trivial op costs). So why the anxiety about the SG loss? Please note again - I am NOT asking why the share price moved, nor why people might be concerned, or suffer from, the share price drop. That was a mere consequence of the trading losses.

FWIW, I haven't been able to get an answer, either, from chats with some pretty bright financiers and very bright economists. So I'm becoming more convinced than ever that this whole thing has been grossly distorted - probably through ignorance - by the media. Nevertheless, I genuinely would be glad to be shown if my conclusion is wrong.

You haven't been able to get an answer because your starting point is wrong. You have started from the point that if SG lost someone else gained. You have then built an argument based on that.

My posts so far have been an attempt to show you how he could have lost money without anyone else 'gaining' it.

He lost money because he bought shares and they lost value.

So tell me where was the corresponding gain from that? I think it is now time for you to show that your premise is true!

Neb

Thanks again for your comments. But that wasn't my understanding. His bets, surely, were on the future short-term movements of assorted derivatives (selected market indices, I gather). He simply traded with folk who thought they would move the other way - which is what these guys are doing 24/7 across the globe.

Well - I wasn't claiming I was right. Rather, that by my simplistic logic, the media and various markets had things out of proportion; I reckoned his losses on his trades were gains by those he traded with.

But you've made me look - and this (from the Adam Smith Inst) suggests I'm not alone in my thinking... "...no wealth or money was "lost" in this case: rather, it was transferred."