Banks around the world have been raising capital in the last few months. If the market is efficient, then the cost of capital for these banks should tell us something about how risky they are. Based on the relative cost of capital of banks in the U.S. compared to those in France, Germany and Switzerland, the world's riskiest banks are right here in the good old USA. The safest banks? French ones.
How so? Here is the rough (due to different capital structures) after-tax cost of capital for the banks in different countries:
The Wall Street Journal's lead (subscription required) tells the story without a hint of irony:
The French Banking Commission Friday said it fined Société Générale €4 million ($6.3 million) for failures in its internal procedures relating to the €4.9 billion loss linked to an alleged rogue trader fraud.
I'm all for regulating being tough on corporate governance, but this fine is a head scratcher. Isn't losing $7.7 billion a sufficient punishment for failures in internal procedures? Do we really need to tack on another $6.3 million. Is this supposed to serve as a deterrent? I can imagine the boardroom discussion:
"Ya know how we lost $7.7 billion?"
"Yeah! Who cares? It's just money."
"We're being fined 1/10th of 1% percent of that amount as punishment for it."
"Oh dear! We better get cracking on fixing our internal controls!"
I'm just not sure what the point of this fine and, by fining the company, the only ones who are hurt are the shareholders, albeit not on a material scale. This fine is the equivalent of giving time out to a child who just got hit by a car to teach him not to cross the street without looking both ways.
The growth of the ultra-rich is not just something happening in the U.S. It's a global megatrend, especially in light of the commodities boom in developing nations.
The trend is a big opportunity for wealth managers, such as Rockefeller Financial Services (RFS). In fact, according to a piece in Reuters, the firm has struck an alliance with Societe Generale (SocGen). To this end, SocGen has purchased a 37% stake in RFS (the dollar amount was not disclosed).
SocGen, which has a wealth management division, is no slouch in helping the ultra-rich. But with the strong growth rates and premium fees, why not expand the platform?
As for RFS, it has roughly $29 billion in assets. Oh, and to qualify as an ultra-rich person (and become a client of RFS), you'll need to show that you're worth at least $30 million. There are about 40,000 of them in the US.
Having been released from jail last month, Societe Generale's former rogue trader Jerome Kerviel is contesting his firing -- which occurred after he lost $7 billion of the firm's money in unauthorized, hidden trades.
The Wall Street Journalreports (subscription required) that Mr. Kerviel is claiming his firing was unlawful because the trades were in the black before the bank unwound them. His lawyers also claim that French law entitles him to a face to face meeting with his bosses before his firing, something that has been impossible because the terms of his bail forbid him from contact with the bank.
Hey, maybe he actually has a point. In the current environment, losing $7 billion of shareholders' money is all in a day's work. More than twice that amount of shareholder value evaporated under the leadership of James Cayne, Bear Stearns' (NYSE: BSC) chairman and former CEO.
Yeah, I know. The issue is that Mr. Kerviel didn't have the authorization to make reckless speculative bets that he didn't fully understand. But should anyone have that authority?
Just so you know: I'm being facetious. Of course Mr. Kerviel should be fired and it's hilarious that he actually has a right to a hearing to contest this. It's even more amazing that he's contesting his firing. This guy just can't seem to let go of his 15 minutes of infamy.
My collegue Zac Bissonnette posted a story about Societe Generale, the French bank that suffered a $7 billion loss at the hands of a 30-year-old trader. He points out that according to French law, the bank could not fire this big time loser without a formal explanation of the problems they have with his performance. I guess they have no dollar limit. Zac confessed to wanting to be a fly on the wall and I went into my Saturday Night Live alter-ego adding the following:
You don't need to be a fly on the wall Zac. You know what will be said:
"We find that your performance over the last year has been quite extroadinary. We have never seen or heard of anyone losing $7 billion that was not a government official. This is so far outside of our expectatations that we feel we must put you on notice that should you lose another $7 billion we will be forced to ask for your resignation. However, you should not worry because, as is blatantly obvious the government would probably jump at the opportunity to retain someone of your experience. You would need no training and could start to lose money on the first day."
When the news first broke that low-level rogue trader Jerome Kerviel had racked up $7 billion in unauthorized trading losses, many people were puzzled. What was his motive? How had he gotten away with it? Mr. Kerviel was believed to have acted alone, but did he really?
Now The New York Times is reporting that French police have arrested Manuel Zabraniecki in connection with the case. We're wondering what his role in this disaster might have been and, perhaps more interestingly, what possible motive he might have had. As bizarre as it was that Kerviel had lost $7 billion worth of the bank's money without profiting personally, it's even more difficult to fathom a conspiracy involving more than one person committing a motive-less financial crime.
In the meantime, you'll be happy to know that, as of early February, Mr. Kerviel had not been fired because, The Wall Street Journal reported, "French law stipulates that to do that, the bank must first call him in for a sit-down meeting and explain its dissatisfaction. He has the right to bring along a trade-union official, a lawyer or anyone else he'd like."
I'd love to be a fly on the wall for that meeting.
MOST NOTEWORTHY: Northrop Grumman, Groupe Danone and MercadoLibre were today's noteworthy upgrades:
Oppenheimer upgraded shares of Northrop Grumman (NYSE: NOC) to Outperform from Perform after the Pentagon selected the company over Boeing (NYSE: BA) for the newly designated KC-45A Aerial Refueling Tanker with a potential value of $35B.
Citigroup upgraded shares of Groupe Danone (OTC: GDNNY) to Buy from Hold on valuation, as they believe the sell-off on commodity cost concerns is overdone.
MercadoLibre (NASDAQ: MELI) was raised to Outperform from Sector Perform at RBC Capital, as they believe MELI's long-term thesis is more compelling now vs. six months ago and notes favorable reaction to Mercado Pago v2.0.
MOST NOTEWORTHY: Pfizer, Dell, Quest Diagnostics, and Societe Generale were today's noteworthy upgrades:
Lehman upgraded Pfizer (NYSE: PFE) to Equal Weight from Underweight on valuation.
Friedman Billings raised Dell (NASDAQ: DELL) to Outperform from Market Perform, citing expectations for improved margins next quarter, and valuation.
Quest Diagnostics (NYSE: DGX) was upgraded to Outperform from Neutral by Credit Suisse, which cited valuation.
Lehman upgraded shares of Societe Generale (OTC: SCGLY) to Overweight from Underweight to reflect a potential takeover by BNP Paribas and limited downside.
OTHER UPGRADES:
Bayer (OTC: BAYRY) was raised to Overweight from Equal Weight by Lehman.
Deutsche Telekom (NYSE: DT) was upgraded to Hold from Sell by Citigroup.
Public Storage (NYSE: PSA) was raised to Buy from Hold by Deutsche Bank.
UBS raised Entergy (NYSE: ETR) to Buy from Neutral.
Societe Generale, in trouble because of losses suffered due to transactions by one trader, will raise almost $8 billion. The rights offering is at an astonishing 39% discount to the price as of the Friday close.
According toThe Wall Street Journal, "the bank also said write-downs linked to fallout from the U.S. subprime-debt crisis would be €2.6 billion, compared with the €2.05 billion announced in January." In other words, it is in deep distress.
A sale of shares at a 39% discount raises a question about the valuation of US banks, should they be put in a position to raise more money due to larger subprime write-offs or write-downs in their LBO portfolios. American money center banks may have to take more losses in the early quarters of this year as a recession further devalues some of their assets.
To put it in stark relief, a rights offering at Citigroup (NYSE:C) at a 39% discount would price shares at $16 compared to their current $26 level which is down from a 52-week high of $55.55.
Douglas A. McIntyre is an editor at 247wallst.com.
Interesting article this week in the MIT Technology Review (OK, so I don't understand most of it, but I still aspire to be a geek) in the wake of the trading losses announced by Société Générale at the hands of rogue trader Jérôme Kerviel.
Last week, the French bank disclosed the $7.2 billion loss. In the wake of the disclosure, Bank of France chairman Christian Noyer declared to a French senate finance committee, "None of the controls within Societe Generale seem to have worked as they should have." Interviewed in the article, MIT's Andrew Lo, head of the university's Laboratory of Financial Engineering, said that given the fact that all software systems have a human interface, "I would argue that it is impossible to prevent these disasters with 100 percent certainty."
While investors on the west side of the Atlantic lament the corruption in the U.S. banking system, it could be that the French system takes home the gold medal. Reports out of the Paris prosecutor's office indicate that rogue trader Jerome Kerviel told investigators, "I can't believe that my superiors were not aware of the amounts that I was committing, it is impossible to generate such profits with small positions."
If this is true, and SocGen knew what was happening all along, then former CEOs like Citigroup's (NYSE: C) Chuck Prince and E*Trade's (NASDAQ: ETFC) Mitch Kaplan will look like choir boys in comparison.
One company that has actually gained from all of this, especially on the heels of the SocGen announcement, is the Israeli security company NICE Systems (NASDAQ: NICE). They recently purchased a company called Actimize which has a anti-fraud product for banks, to help prevent situations like this recent debacle.
What to make of all of this? There will always be banks, and they will always get a little too piggy and screw things up. It's NICE to know that there are some company's out that can try and reign in these guys and save the investor some money.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has a position and is long NICE and ETFC. He has no positions in any other stock mentioned as of 1/29/08.
Prosecutors investigating the fraudulent trading scandal involving Jérôme Kerviel and his antics at French bank, Société Générale, have determined there is strong evidence that a crime has been committed and are asking for preliminary charges to be filed. The filing of preliminary charges by a judge would clear the way for investigators to dig deeper into the matter to determine if the case shall be dropped or continue on to trial.
Defense attorney Elisabeth Meyer, speaking on behalf of Kerviel stated that he is being "thrown to the lions before being able to explain himself." Defense attorneys believe that Kerviel is being made a scapegoat in the wake of losses tied to the U.S. sub-prime mortgage meltdown. They claim that Kervial was just trying to be an exceptional trader. Too bad he couldn't have accomplished that above board.
The bank's CEO, Daniel Bouton rejects the notion that Kerviel is being used for cover. He called the idea "stupid", declaring that you can't "hide a hole by another hole." I would tend to agree with that thinking. The judge's pending approval of the filing of charges could clear the way to proving that Kerviel did indeed act with fraudulent intent. It is of no consequence whether or not Kerviel sought personal gain through his alleged misdeeds. It is of no help to him if he thought his actions were noble. What matters here is that he seems to have acted independent of the rules and then sought to cover his tracks in doing so.
As criticism mounted Friday that the U.S Federal Reserve may have at least partially 'jumped the gun' with a large 75-basis-point rate increase after U.S. stock markets plunged early Tuesday, economists and analysts say the Fed is unlikely to deviate from its easing monetary policy path, even though some evidence suggests Societe Generale's unwinding of a rogue bank trader's unauthorized trades may have contributed to Tuesday's plunge.
The Dow plunged more than 400 points in the first hours of trading Tuesday, following massive sell-offs in Asia in Europe on Monday, and the Fed, concerned about the impact of potential market crash on an already weakened U.S. economy and financial system, responded with an emergency-meeting, 75-basis-point rate cut for both the Fed Funds rate, to 3.50%, and the discount rate, to 4%.
Societe Generale factor
However, on Thursday Societe Generale, France's second largest bank, announced that on Monday and Tuesday it had unwound trades of a rogue trader's unauthorized -- and losing -- trades, which cost the bank almost $7.2 billion, The Associated Press reported.
French bank Société Générale says that it has uncovered a "fraud" by a single trader which lost the bank $7.1 billion. According toMarketWatch, the fraudulent trades were made in 2007 and 2008. The trader, whose role at the bank was to make "plain vanilla" hedges on European stock-market indexes, used his knowledge of the bank's control procedures "to conceal these positions through a scheme of elaborate fictitious transactions."
Société Générale plans to raise €5.5 billion to help offset the loss.
The French bank did not disclose much about how the loss happened or what the trader's motivation might have been. Perhaps that does not matter. What does matter is the the actions get to the heart of risk management at big banks. At a number of U.S. financial companies, traders clearly took huge positions in subprime instruments. That has cost some of the largest banks in this country billions in write-offs. No one has offered an adequate explanation of who was minding the store when those risky decisions were made.
The Société Générale news is just more of the same. Managements at big banks have not learned the lesson.
Douglas A. McIntyre is an editor at 247wallst.com.
The growth of the ultra-rich is not just something happening in the U.S. It's a global megatrend, especially in light of the commodities boom in developing nations. 
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Societe Generale, in trouble because of losses suffered due to transactions by one trader, will raise almost $8 billion. The rights offering is at an astonishing 39% discount to the price as of the Friday close. 
Interesting article this week in the 
Prosecutors investigating the fraudulent trading scandal involving Jérôme Kerviel and his antics at French bank, Société Générale, have determined there is 
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