# Vanilla to blame for global crisis in stock markets?



## moneymajix (25 January 2008)

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article3248746.ece

From The Times

January 25, 2008

*Did rogue trader set off world market panic?*

JÃ©rÃ´me Kerviel believed that he was executing a brilliant trading strategy. Instead, the trader’s activities over the past year appeared yesterday to have cost his employer, SociÃ©tÃ© GÃ©nÃ©rale, â‚¬4.9 billion (£3.7 billion), and fuelled a global crisis in stock markets.

The 31-year-old’s web of lies and trades began to unravel late on Friday, as his supervisors spotted an anomaly in his handling of futures contracts on European stock market indices. On Saturday Mr Kerviel was hauled into the bank’s Paris offices where he was questioned by Jean-Pierre Mustier, SocGen’s head of investment banking, and confessed to making a series of unauthorised bets on CAC, DAX and the EuroStoxx 50.

Working through Saturday night and Sunday, the disgraced trader helped SocGen staff to uncover his hidden punts. Most positions, mainly predicting that European indices would rise in 2008, were still open. They would have to be closed on Monday, when the markets opened. But the markets were about to deliver a surprise for SocGen’s already reeling bosses.

On Sunday night, while the bankers worked feverishly in Paris, the Australian stock market had already begun a downward spiral, taking it to its biggest one-day fall in 20 years. A few hours later in Japan shares dived almost 6 per cent and eventually closed down without a single share on the Nikkei 225 in positive territory.

The panic spread through an Asia gripped by the fear of a looming US recession and fresh worries over Chinese banks’ exposure to the sub-prime scandal. The British, German and French markets opened at 8am on Monday and, spooked by the carnage in Asia, the FTSE 100 lost 4 per cent in the first few minutes of trading. Meanwhile, SocGen was preparing to unwind the billions of euros’ worth of futures.

Futures traders are unable to see who is buying or selling contracts in their totally automated market. All trades are done through a third party, although it is possible to see the volume of trades and how many bets remain open at the end of the day.

The only tip-off that something unusual might be occurring was that the cost of some contracts was falling. David Jones, chief market strategist at IG Index, the spreadbetter, said: “There were rumours that there seemed to be an unusually big overhang, that there was a lot of selling every time the market rallied.”

While European indices continued to gyrate, the US Federal Reserve was holding an emergency conference. The policy makers were meeting against the backdrop of markets gripped by panic, but had no idea that the anonymous French bank’s actions were fuelling nervous traders’ fears. Howard Wheeldon, a senior strategist at BGC Partners, the spreadbetter, said: “It would have contributed in my view to the negative conditions on Monday. It’s like going into an estate agent, giving them ten houses and saying that you want them sold by the end of the day. It’s going to drive down local house prices.”

A futures trader agreed. “It would have exacerbated what was happening. It’s just an issue of supply and demand,” he said. On Monday traders had no idea who was selling so heavily. On a day of crazy volatility - yesterday, a far calmer day, saw 2.5 million EuroStoxx 50 March 2008 futures traded, with a total underlying value of â‚¬95 billion – SocGen’s sales would not have stood out. The only certainty was that markets were behaving oddly and the panic was pervasive.

By the close of trading on Monday, all the major European markets saw billions wiped off the value of their shares. Unknown to the wider world, SocGen was nursing a â‚¬4.9 billion loss. All the opening Asian markets saw was the blood on European trading floors and the sell-offs began again.

The next morning, with Asian markets in freefall and a nervous Wall Street about to open for business, the Fed voted for its shock rate cut.

David Wyss, chief economist at Standard & Poor’s, said: “How much did the market decline in Europe have to do with unwinding those positions? It’s hard to know, without knowing the exact positions, but it certainly looks suspicious. Itis probably not the sole cause but I am certainly not ruling it out as a significant factor.”


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## Kauri (26 January 2008)

moneymajix said:


> http://business.timesonline.co.uk/t...ectors/banking_and_finance/article3248746.ece
> 
> From The Times
> 
> ...




 - with the daily mark to markets, initial margin and maintenance margin the French bank would have to have sent over several bln to the futures exchanges. Jerome Kerviel might have hidden the risk position but how could the bean counters miss the several bln needed to keep the massive position open on the exchanges - this sure could have been a way to sweep other losses under the rug. there just may be more here than is first apparent???? I thunk..  
Do any of the brilliant money men have any ideas???
Cheeping
...........Kauri


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## wayneL (26 January 2008)

From my daily "money Morning" spam:



> Dear XXXXXXXXXX,
> John Stepek
> 
> Panic’s over!
> ...


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## vishalt (26 January 2008)

I really didn't understand the Times' article, he half answered his own argument but didn't really.

But yeah, good point with the high volumes which might have been the thing to scare off markets on Monday.


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## Kauri (26 January 2008)

> But sadly, the theory that he was the sole cause of the market collapse doesn’t stand up to scrutiny. *Monday’s market collapse began in Asia,* where stocks sold off drastically overnight, before SocGen began its great sell-off. So while the idea that the Fed panicked and slashed interest rates solely because of the actions of a French Nick Leeson is quite amusing, it’s also somewhat exaggerated.




But sadly that theory doesn’t stand up to scrutiny either. Even isolated little me had caught a whiff of it on tother side of the world.. on Sat night.. in fact it smelt like a blowie left on the rocks of the Dawseville channell for a couple of days.. Alot of the Asianselling was down to peoples knowing what was coming.. I thunk..

Cheers
..........Kauri


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## wayneL (26 January 2008)

Kauri said:


> But sadly that theory doesn’t stand up to scrutiny either. Even isolated little me had caught a whiff of it on tother side of the world.. on Sat night.. in fact it smelt like a blowie left on the rocks of the Dawseville channell for a couple of days.. Alot of the Asianselling was down to peoples knowing what was coming.. I thunk..
> 
> Cheers
> ..........Kauri



So "they" knew all along. 

Bastids!


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## Kauri (26 January 2008)

wayneL said:


> So "they" knew all along.
> 
> *Bastids*!




just looked that word up in my dictionary... *capitalists   *

*Cheering*
*............*Kauri


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## Kauri (26 January 2008)

just to flesh out the story... a la blowie... some of "they" *seem to think* that Soc Gen has only unwound around 60% of its rougies so far...

and completely off that subject but... for the third day now "they" are *suggesting* that a quant fund has blown... a bit like a blowie...

 and that... no..later maybe...
Cheers
...........Kauri


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## wayneL (26 January 2008)

Jim Sinclair's take on the SocGen Fiasco 



> Dear CIGAs,
> 
> The theme concerning the recent market drop and involving Monday morning’s Fed action is that the Federal Reserve cut rates significantly assuming a freefalling equity market to be a product of panic. This theme suggests panic is capable of producing more panic and therefore furthering the potential of the fall.
> 
> ...


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## Timmy (26 January 2008)

Thanks for the posts and articles everyone - been good info, if sometimes conflicting and confusing.  

The figure quoted in one of the articles of a face value of shares to be sold of about 37 billion Euros ... that would seem to me to be of sufficient magnitude to have caused the big and rapid push lower on Monday and Tuesday in Europe (given the US didn't open fully until Tuesday afternoon Europe time).  I might have just stated the obvious there, but I had to convert that amount into DAX and emini S&P contracts to get a feel for that sort of magnitude.

Converted to DAX futures 37 billion Euro equates to around 210,000 contracts (please correct me if I am wrong).  Not that all the selling was necessarily done through that contract, just trying to get an understanding of the magnitude (and all figures are approximations and based around current levels).  In emini S&P it equates to about 800,000 contracts.  Wow...

Market already in a downswing, US holiday ... not a nice confluence for SocGen.

Going to be interesting getting the full story, might have to wait for a court case (if there is one).


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## numbercruncher (28 January 2008)

Just read an Interesting article about this incident, its just phenomenal when you think about it!




> By Friday, January 18, JÃ©rÃ´me Kerviel, a junior suit in the banking world, was on the hook for â‚¬50 billion - the equivalent of about half of all the gold and currency reserves held by France. The sum also exceeded the entire value of the bank at which he worked.




http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3257468.ece


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## Temjin (28 January 2008)

> Fed's Folly: Fooled by Flawed Futures?
> 
> In The Financial Times today the inside headline is "Markets ask if the Fed was duped?" It seems that a rogue trader (interesting how a lone trader who loses a lot of bank money is always a rogue) lost Societe Generale $7.1 million (4.9 million euros). Seems he knew how to override the risk control systems, had other employees' passwords, and built up a massive long position which was down about $2.2 billion by the time SocGen management found out. He produced the losses in just a few weeks. SocGen started selling everything to cover the loss on Monday morning, and the markets moved away from them, growing the loss to the $7.1. That constitutes a bad day at the trading desk. (As an aside, I have worked with SocGen from time to time over the years, and have always been impressed.)
> 
> ...




Here is another one from John Mauldin.


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## Temjin (28 January 2008)

numbercruncher said:


> Just read an Interesting article about this incident, its just phenomenal when you think about it!
> 
> 
> 
> ...








> On Facebook, the social networking site, his home page had accumulated only 11 friends before the scandal was uncovered. Those who were there trickled away as the news of his problems broke. By Thursday night he had just four. The next morning there were none.





LOL!!!!!!!!! That's what FB friends are for! hahahah


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## ithatheekret (28 January 2008)

And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete."

Got to giggle here with Rick , because the process was called extinction which is treated with a process called systematic desensitization .

It proved that conditioning formed the basis on which nearly all human behaviour can be accounted for , inclusive of which is fact that it showed that behaviour can be manipulated by stimulus .

His statement ( Ricks ) has me believe he has a higher accumen and intellectual wit to match .

Steve Leisman would have had a reply to match Ricks wit .

Did anyone catch it ?


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## Timmy (28 January 2008)

numbercruncher said:


> http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3257468.ece




Numbercruncher - thanks for the link, but the article shows mainly that the lack of substantive information around this event continues.  Don't get me wrong, I enjoyed that page, but the best things were the link to Jeremy Clarkson's column on the upper right and the jokes at the bottom.

Just a few points:
"JÃ©rÃ´me Kerviel, a junior suit in the banking world, was on the hook for â‚¬50 billion - the equivalent of about half of all the gold and currency reserves held by France."  What?  That's called leverage guys and gals.  Shock, horror, even some aussie mums and dads use it (I have seen them discussing it on a forum on that evil thing called the internet).

"“I did my duty and decided to unwind these positions,” said Daniel Bouton, the chairman."  Since when has a no-brainer been confused with duty?

"Soc Gen was a forced seller in plummeting markets – during that day leading shares in London collapsed 5.5% and in Paris 6.8%. This only compounded Soc Gen’s losses."  And the award for statement of the bleedin' obvious goes to ...

"Neighbours around his modest apartment in the Parisian suburb of Neuilly-sur-Seine said Kerviel lived quietly and kept to himself."  Are we sure he isn't a serial killer?

"He had reportedly not had a holiday for eight months."  Sorry, what?

"Kerviel was involved in “Delta One” trading, which involves massive amounts of money but is regarded as relatively low risk."  Doesn't this contradict the opening paragraph of the article?

"Yesterday Sarkozy criticised a financial system that was “out of its mind”. “The point of a financial system is to lend money for economic activities which, in turn, generate profits,” he said. “It is not to go and speculate on different activities which create enormous flows and profits in a few hours.”"  Such sweet naivety, maybe its what makes him attractive to ex-models.

Entertaining article, and entertainment is what the media is all about.


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## Kauri (28 January 2008)

All the pressI have read over the weekend assumes that the problems in SG were kept in-house and that they had to sell into an already falling market.. compounding thier losses. Personally I find that assumption, along with a few others incidentally, rather hard to swallow.. the markets falling, starting in Asian zone and spreading to the Euro zone, was down to the SG problems being in the market already.. unequivecally.. as I have stated earlier even _humble _I heard on Sat. that there were problems at SG.. and in a PM to another member here was even able to quote a probable loss of 4-5Bln and mention of 45-50Bln involved.. now if I had heard why wouldn't the Fed have heard??? before thier 0.75% panic??
  All the talking heads on those venerated cable channells and thier self-agrandiosing statements/rants are either self-serving twaddle... or else they are toeing someone elses line??  Which is probably giving more credence to them than they deserve. The news was filtering into the market over the weekend, enabling those that had heard it to position themselves for some impressive gains by being pro-active rather than reactive... and that obviously was more important to the "media experts come fund managers" than anything else.. as such, anything they spruik should be looked at closely.. very very closely... and no, I don't have or want cable....
    I thunk...
Cheers
.........Kauri


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## Kauri (28 January 2008)

and ( at the risk of sounding like a demented conspiract theorist  ), I wonder if Soc Gen, reputed to be the largest stock derivatives trading bank globally, didn't take the opportunity to position/unposition itself in other lines to possibly mitigate some of the losses they were getting set to take??? Surely not, that would put them on the same level integrity-wise as poor old Jerome...    (not to mention the afore-mentioned "talking heads/media experts)...   
  I thunk...
Cheers
..........Kauri


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## wayneL (28 January 2008)

Kauri said:


> All the pressI have read over the weekend assumes that the problems in SG were kept in-house and that they had to sell into an already falling market.. compounding thier losses. Personally I find that assumption, along with a few others incidentally, rather hard to swallow.. the markets falling, starting in Asian zone and spreading to the Euro zone, was down to the SG problems being in the market already.. unequivecally.. as I have stated earlier even _humble _I heard on Sat. that there were problems at SG.. and in a PM to another member here was even able to quote a probable loss of 4-5Bln and mention of 45-50Bln involved.. now if I had heard why wouldn't the Fed have heard??? before thier 0.75% panic??
> All the talking heads on those venerated cable channells and thier self-agrandiosing statements/rants are either self-serving twaddle... or else they are toeing someone elses line??  Which is probably giving more credence to them than they deserve. The news was filtering into the market over the weekend, enabling those that had heard it to position themselves for some impressive gains by being pro-active rather than reactive... and that obviously was more important to the "media experts come fund managers" than anything else.. as such, anything they spruik should be looked at closely.. very very closely... and no, I don't have or want cable....
> I thunk...
> Cheers
> .........Kauri



Causative, catalytic, or symptomatic?

It's rather a big position size to be merely symptomatic. On the the other hand, if the SocGen unwind was causative, that whole down-leg would appear to be totally unwarranted and we inhabit an undervalued market.

Personally, don't buy that; not even for a microsecond. No doubt SogGen precipitated the severity of the sell-off... Buu-uut... there is no way while our @rses point to the ground that the market is undervalued, in fact, it remains substantially and chronically overvalued as we go forward into a recessionary/low growth environment.

So my conclusion is that it was simply the catalyst to bust Goldilocks' grip on the market. Of course the spin will be that Pierre Froglegs caused the crash of 2008, but the reality of course will be somewhat different.


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## Kauri (28 January 2008)

wayneL said:


> Causative, catalytic, or symptomatic?
> 
> It's rather a big position size to be merely symptomatic. On the the other hand, if the SocGen unwind was causative, that whole down-leg would appear to be totally unwarranted and we inhabit an undervalued market.
> 
> ...




 The assumption that the market is under-valued was never made, neither was the assumption that the "crash of 08" was/is caused by Pierre... simply the rather ??severe?? 3 day downleg starting Mon last was due to Pierre.. not some sudden fear plucked out of thin air that Mon. morning was the day the worlds punters woke up to the problems facing the worlds economies... _but maybe this Mon_.  



> Reuters report.. Bert Heemskerk, chief executive of Dutch bank Rabobank said in Davos that European banks faced yet worse losses from the credit crisis saying: "Quite a few banks are heavily involved, and in particularly if you look at European banks, *we have not seen the worst*. The *news has not been spreading* out about the losses that the European banking system has to take."
> Rumours were swirling in the markets on Friday that ING and Fortis (*read/heard about this anywhere lately in the press/expert Jims??)* might be forced to issue profit warnings at some stage and this was one of the reasons for the EUR weakening and equity markets closing the week on a sour note.






> CNN report... global finance chiefs drove home warnings over the market crisis on Saturday, as concerns of a possible recession continued to trouble the World Economic Forum meeting in Davos. IMF Director- General Dominique Strauss-Kahn said the current turmoil had reached levels never seen before. Strauss-Kahn said not even emerging economies touted as safe bets for short-term growth would escape the impact of problems that drove the Federal Reserve to deliver an emergency rate cut.
> AFP reported that Strauss-Kahn said a "serious" response was required to counter the risk of a US recession and slowing global growth, including both monetary and fiscal measures. Former US treasury secretary Larry Summers said that the _*suggestion from the IMF that countries should increase their public spending, even countries with deficits, was seen as "an indication of the gravity of the situation we face". Summers added: "In the first time in a quarter century, the managing director of the IMF has called for an increase in budget deficits ... traditionally it's all been fiscal consolidation."* _


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## Timmy (28 January 2008)

Kauri said:


> I wonder if Soc Gen, reputed to be the largest stock derivatives trading bank globally, didn't take the opportunity to position/unposition itself in other lines to possibly mitigate some of the losses they were getting set to take???




They would be remiss if they had not.


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## wayneL (28 January 2008)

Kauri said:


> The assumption that the market is under-valued was never made, neither was the assumption that the "crash of 08" was/is caused by Pierre... simply the rather ??severe?? 3 day downleg starting Mon last was due to Pierre.. not some sudden fear plucked out of thin air that Mon. morning was the day the worlds punters woke up to the problems facing the worlds economies... _but maybe this Mon_.




Not by you, but the implication is being made in the medja. i.e. "It's all ok now, the selloff was all caused by some frog in a cubicle in the mail room of some unpronounceable French bank. Come back in, the water's fine."


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## Timmy (28 January 2008)

wayneL said:


> No doubt SogGen precipitated the severity of the sell-off...




Wayne ... the information coming out is incomplete, but based on what is said it appears the bulk of the position was built in 2008?  If so, then SocGen must have been a net buyer in the first few weeks; now everything else being equal (which it never is) their buying would have provided support for the market, right?  How much, for how long, etc. - how long is a piece of string - don't know, but the simple mathematics of supply and demand would tell you the market would have fallen faster in early 2008 if SocGen were not buying (which, if the current reports are accurate - question mark - they must have been).

When the time came to sell, it was with urgency ... which, like you concluded, precipitated the severity of that particular downleg.

My thoughts are the SocGen episode shifted the downmove to the right, as it were, and exacerbated the sharp leg down on the 21st and 22nd.     But it was an episode played out with much bigger normal market forces in the background.

In a sense one can view the episode as a case-study of how a plunge protection team might impact on the market.  On another thread there was an article that explained the PPT could buy time, and that is all, they could not halt moves that had the force of global macreconomics behind them.  

I reckon that is   worth.


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## Timmy (28 January 2008)

This from a report in the SMH:

"Societe Generale chairman and chief executive Daniel Bouton described Kerviel as a "crook, fraudster and terrorist" "

I would have thought that those who have lost family and friends to the actions of terrorists might find this comparison somewhat insensitive and offensive ... I know I did.


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## Kauri (28 January 2008)

wayneL said:


> Not by you, but the implication is being made in the medja. i.e. "It's all ok now, the selloff was all caused by somefrog in a cubicle in the mail room of some unpronounceable French bank.* Come back in, the water's fine*."




said the simmering pot to the lobster.. 


I'm in a negatively stirring mood today... 


Carrying on with his well worn cry US Paulson has urged the US senate to *quickly* approve the $150bln stimulus package. *Reuter"s* reports that in a television interview Paulson said the plan was carefully crafted to be *temporary* and should be kept simple to *get the money out as fast as possible.* The urgency of the stimulus plan underlines the *dodgy nature of the US economy* and coincides with the IMF at the Davos shindig that a "serious" response was required to counter the risk of a US recession and slowing world growth, and as a former  Treasury Secretary points out, this is the first time in a quarter of a century that the IMF has called for an increase in budget deficits....traditionally its all been about fiscal consolidation.* This is hardly a great environment to be long stocks* or anything else that follows the markets, which is most everything that re-acts to, correlates with, or has risk aversion possibilities built in.
   Barclay"s Capital have just released estimates showing that if the American monoline insurance companies have their credit ratings downgraded across the board  the world"s banks could wind up needing to *raise as much as USD 143bn*  .  Barclay"s reckons that about 75% of the USD 820bn in financial products with monoline guaranties are held by banks across the globe (which banks??  ) . If the products carrying monoline guaranties are lowered by one rank from the top AAA rating, the banks would need to raise USD 22bn, while a downgrading to single A would necessitate six times more capital.

Cheers
............Kauri


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## Yeti (28 January 2008)

I keep wondering what JÃ©rÃ´me Kerviel was hoping to gain from his actions and how. If his alleged trading had been profitable and instead of losing Billions had earned Billions or even just mere Millions, how would he have benefited? Surely he could not have simply transfered the funds into his own or any other account, or have walked out with a few Millions in his briefcase each day after work.


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## Timmy (28 January 2008)

Yeti said:


> I keep wondering what JÃ©rÃ´me Kerviel was hoping to gain from his actions and how. If his alleged trading had been profitable and instead of losing Billions had earned Billions or even just mere Millions, how would he have benefited? Surely he could not have simply transfered the funds into his own or any other account, or have walked out with a few Millions in his briefcase each day after work.




If he made loads he may well have earned a pay rise, promotion, bonus.


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## Trembling Hand (28 January 2008)

Yeti said:


> I keep wondering what JÃ©rÃ´me Kerviel was hoping to gain from his actions and how. If his alleged trading had been profitable and instead of losing Billions had earned Billions or even just mere Millions, how would he have benefited? Surely he could not have simply transfered the funds into his own or any other account, or have walked out with a few Millions in his briefcase each day after work.




Nah these things happen by digging a bigger hole trying to get back to zero rather than trying to make Billions. A huge profit should of also triggered the risk warnings. Classic averaging down.


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## Timmy (28 January 2008)

trembling Hand said:


> Nah these things happen by digging a bigger hole trying to get back to zero rather than trying to make Billions. A huge profit should of also triggered the risk warnings. Classic averaging down.




Yes, I think I answered the wrong question.  His motivation for digging the hole would have been something like : "Oh sh*t, how am I going to get out of this?"

I wonder how many potential rogue traders are created each day as they average down, only to be saved by a blip back up or the firm's risk controls?


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## IFocus (28 January 2008)

Kauri said:


> I'm in a negatively stirring mood today...




Caused by late nights playing with pips?


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## Kauri (28 January 2008)

IFocus said:


> Caused by late nights playing with pips?




  How did you know that    ... Pippa and I lived in Riverside Gardens by the Serpentine until recently..   

 IG's platform is down today.. having to trade through my back-up dealer and not up to speed with it... yet.. 
Cheers
..........Kauri


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## IFocus (28 January 2008)

Kauri said:


> How did you know that    ... Pippa and I lived in Riverside Gardens by the Serpentine until recently..
> 
> IG's platform is down today.. having to trade through my back-up dealer and not up to speed with it... yet..
> Cheers
> ..........Kauri




Crack me up


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