Archive for September 21, 2011

EYE-BALL’s Herman on – “Materialism III – Sheep”

September 21, 2011 Comments off
Herman O'Hermitage
“Materialism III – Sheep”
By: Herman O’Hermitage
Herman O'HermitageAsheep’s brain as a proportion of its body mass means that it is one of the dumbest of all animals. With such a tiny brain it’s proportion of cerebellum left after motor neurone capacity is tiny compared to dolphins, or bees or even ants. If we observe sheep grazing they will stay in the same corner of pasture long after the luscious grass is eaten, too silly to leave the fold (or flock) to go to another luscious part of the enclosure. Therefore we call followers sheep.It is interesting when we use the collective noun of fold for church worshippers. The financial markets behave like sheep. Their axiom is the trend is your friend. That manifests in various ways. I could be called counter trend, but want to perceive it (or rationalise it) in a different way. Searching for something extra.This week in Europe I am seeing the first rays of hope. Every night the press goes to new levels of despondency to explain the panic in the market.Last week the Norse countries made it clear they were not going to bail out the continued nonsense coming out of Southern Europe.

Then on Thursday we started to hear reports of the latest rogue trading scandal this time affecting UBS. FINMA, the Swiss banking regulator is really starting to take notice. Beyond that real action is gaining momentum. Finma’s Chairperson, Professor Anne Heritier Lachat a board member since 2009 and recently in the Chair is truly making some wonderful initiatives. Last Thursday in a joint statement with the UK Financial Services Authoritya 3rd party independent enquiry was launched into the UBS rogue trading scandal. The press release includes;


  • on the details of the unauthorized trading activity,
  • on the control failures which permitted the activity to remain undetected, and
  • will include an assessment of the overall strength of UBS’s controls to

prevent unauthorized or fraudulent trading activity in its Investment Bank The figurative head of UBS Investment Bank Mr Oswald Grübel has denied in the press any intention to take ultimate responsibility for lack of probity, and step down. This external enquiry of probity should have occurred in 2008 when UBS provided 50 billion against their holdings in Collaterised Debt Obligations (CDO’s). If something similar was to occur in France, (and possibly Germany) I truly believe genuine stability and order will be restored. Stress here “an assessment of the overall strength of UBS’s controls…”

I have spoken slightly on Soc Gen over the last week. The upshot is in 2008 just before Sub Prime they had a trading scandal involving Jerome Kerviel.

Now as the second largest International French Bank they are at the heart of all scuttlebutt regarding the viability of the French Banking system.

Siemens has withdrawn 6 billion from French banks and deposited it with ECB.

In August this year Soc Gen provided for loan losses and produced (see my post of September 15 – Democrazy Part IX – a company slide titled “Low, Declining & Manageable exposure to GIIPS”. After provisioning 395 million in Q2 of 2011, they admit, that 0.4 billion needs to be provisioned to bring book value to current market. This has created massive speculation on various levels that Societe Generale needs recapitalisation.

There are European blogs sites dedicated to Soc Gen rumours. Rumours include; Soc Gen have not provisioned for Italy or Spain. 78% of term funding is due for rollover in the next twelve months. The liquidity portfolio is overly invested in Spanish or Italian Sovereign debt. The only liquidity for such debt is to ECB on repo.

A French regulator (or Euro Union) actually stepping in to investigate could too restore some credibility.

In Australia in 2001 NAB was forced to write off $2.2 billion on its purchase of Homeside USA, and not long after it was further affected by it’s FX rogue trading scandal. Thereafter APRA launched an equivalent independent (Price Waterhouse Coopers) enquiry into NAB and it’s controls, and thereafter APRA forced the NAB to seriously correct their internal systems and change their culture. APRA threatened to withdraw NAB’s banking license.

This soul searching saw a whole reporting line of managers all the way to the Chairman of the Board ultimately lose their jobs. The rogue traders were gaoled. (The 4 NAB Traders were sentenced to 30 months minimum (Luke Daffy),

16 months (David Bullen), 15 months (Vince Vicarra) and 8 months (Gianni Gray) (all minimum time served) for frauds less than 10% of the Soc Gen fraud losses).

Today Jerome Kerviel (ex Soc Gen) is on bail awaiting appeal from the harshness of his gaol sentence. He pleaded guilty to one charge and was found guilty of a further two charges and sentenced to 3 years (minimum) in prison. What is really sad is that the Soc Gen Management never accepted any responsibility, and worse still, state that obtaining a worthless order for Jerome Kerviel to repay 4.9 billion to the bank, endorses their position.

This lack of internalisation (or introspection) continues to resonate in the latest scuttlebutt about Soc Gen’s viability. Have they written off this debt as worthless?  Maybe it too is on their books at face value!

About sheep, Soc Gen are generally considered to be followers of BNP Paribas (France’s largest international bank). Whatever the BNP does strategically Soc Gen follows. This is not uncommon in other countries banking systems. It is true of Banks and traders and much more generally fashion. In Australia the 4 NAB traders were poached from the CBA as a trading team. Legend

(scuttlebutt) has it that there was trading irregularity noted by CBA after those 4 went to NAB, and CBA phoned the NAB to advise them about it, and the NAB management dismissed it as sour grapes. We have then now, good on you.

We must internalise on, the western world 21st century boom (including the housing bubble) fuelled a fashion in reckless consumption on credit. It comes out in a myriad of ways. Throughout, southern Europe 5 countries (possibly exclude Italy) went on giant spending sprees courtesy of the European Union allowing them access to cheaper sovereign costs of funds.

Italy is still on the skids.

The hardline taken by the Norse creditors appears to have taken a turn for the better in Athens. Last June my diagnosis was that Greece would ultimately default. It remains the same, but the Greeks are now taking the consequences very seriously. Importantly each day as they go closer to default, panic is setting in. This does not cause any joy, but there is light at the end of the tunnel. Should the French and German Banks (more generally European Bank’s be fully cognisant (and provisioned) against the Greek (PIGS/PIIGS) issues, then reality is upon us. The Greeks can take their medicine, and so too the other players. Probity is Scarosanct. Trend following is exactly what it is, mindless. Simply sheep.

This European outlook has a parallel to the US debt ceiling issue in early August. Sadly the latest news coming out of Washington is not so positive.

That all said, Wall St will soon have to take the lead. The inability to sustain any rally will sooner or later turn things around. Only when their sheep mentality of wanting to restore bullish conditions, becomes a sobering up process, might sanity prevail. The squabbling in America is a disgrace, only last night, there were rumours of leaks coming out of the Obama Administration of dissent.

It is one thing to not follow mindlessly, and another to flatly refuse to work on compromise and search for an enlightened way forward. Greed and self interest must give way to collective or common good. That is Sanity.

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