Sneaky Business

Doing A Kerviel

News today of a catastrophic display of "rogue trading" that threatens to land Société Générale with the mother of all write-downs.

According to the Journal, Mr. Kerviel stitched together an "elaborate string of fictitious transactions" that could result to a $7.2B loss for the bank. If that's not bad enough, the 31-year old trader now seems to have gone missing. Société Générale Chairman and Chief Executive Daniel Bouton said Thursday that the bank didn't know Mr. Kerviel's whereabouts, though it was still trying to mop up the path of destruction he had left behind.

No doubt about it – this is a huge loss; and one that dwarfs the sneaky dealings of the infamous Barings trader Nick Leeson in 1995. His escapade led to the phrase "doing a Leeson" entering into the English vernacular. It's unclear whether "doing a Kerviel" will go the same way. Or for that matter, whether Kerviel will see a made for TV movie sometime in the near future along the lines of Rogue Trader.

ECB president talks markets down from “le panic”

European Central Bank President Jean-Claude Trichet sought to reassure European markets Tuesday after another day of turbulence. Speaking from the steps of his office, with Mr. Ruffles, his West Highland terrier in his arms, Mr. Trichet said that Euro-zone market conditions have "progressively gone back to normal".

"As I did after our last meeting, I call on all parties to keep their composure" said Mr. Trichet. He went on to say that recent market "nervousness" had brought about a significant reappreciation of risk. The full statement is available from the Journal here.

Mr. Trichet appeared ill at ease during the announcement, and attempted in vain to avoid reporters' questions. Speaking in broken English, visibly perspiring and displaying a pronounced facial tick, he stonewalled most queries with, as Alan Greenspan has described, his "pseudo-financial Eurobabble".

Later, in an unusual move, the ECB president sought to reassure investors through his Facebook homepage. A video showed a smiling Mr. Trichet speaking from his office about the "return of financial harmony" and the "rupture of sub-prime market having been healed". Sometimes through verse, and on one occasion through song, Mr. Trichet spoke of happier times ahead for the Euro-zone markets.

Talking to reported later Ben Bernanke said he was "relieved" about the calming of the European markets, but "scared as hell" by Mr. Trichet's singing. "He should stick to the knitting" said Bernanke, "And focus on the fundamentals"

Subprime worries continue; homeowners seek advice and spare cash

Fears over subprime mortgages and the health of the broader loan industry contributed to a turbulent week on Wall Street. Countrywide, the nation's largest mortgage lender warned of subprime default rates approaching 20%, leading many to refer to the high risk end of the market as a "toxic mess".

So what advice do the experts give concerned homeowners? Sneaky Business spoke with Russell Gant, a mortgage expert from Leeward Stochs, on his sailboat in Chelsea Harbor. "My basic advice is don't panic……unless things get worse. If you already have a loan, then focus on making the payments. If you're looking for a new loan – then consider renting for another five to ten years."For owners facing mounting payments on adjustable rate loans, Gant's advice was practical but sanguine. "Cut costs on non-essential items such as your live-in chef, stables' staff and any personal pet psychologists. But don't go too far – it's important to maintain good mental health, even in times of financial stress."

A new source of help may also be at hand for homeowners at risk of defaulting. RoomLoan.com, a Tacoma-based startup, is offering to buy out high risk loans – one room at a time. "We provide a capital injection for homeowners who just need a little extra cash to get through the monthly payments." said co-founder and CEO Sarah Tully, "We usually take ownership of a lesser-used room such as the spare bedroom or spare bathroom. All that we ask in return is full access to the space, and a proportional share in the home-equity for the dwelling."

Early customers seem pleased by the novel service that RoomLoan offers. "It's a weight off" said one owner, speaking under anonymity, "We get to afford the monthly payments – and don't have to worry about redecorating the upstairs bedroom". Another customer was less enthusiastic, "They come in at all hours – storing boxes in my bathroom. It's just not right. But it does pay the bills."

RoomLoan currently operates in the greater Seattle area, but hopes to expand nationally by the end of the year.

Dow swings again in final hour; keeps headline writers guessing

The Dow Industrials continued its recent trend of final hour fireworks today, giving up most of its triple-digit gains before grabbing them back in the closing minutes. Sneaky Business reported last week on the unusual final hour volatility that the markets have been exhibiting. Today's wild ride had headline writers even more confused as they shaped their closing bell stories.

A timeline of some of the headlines is offered below:

Source	Time	Headline
Blogging Stocks	3.20pm	"Markets bouncing out of correction"
Forbes.com	3.26pm	"Stocks Rise on Upbeat Technology News"
Forbes.com	3.49pm	"Wall Street Gives Up Gains"
WSJ	3.50pm	"The Dow Industrials lost much of their forward momentum in the final hour of trading"
CNN.com	4.20pm	"Bulls make it 3 in a row"
WSJ	4.35pm	"The Dow Industrials gained 153.56 points to 13657.86, rebounding after a late-day swoon"

Our advice to business headline writers stands – don't even think about writing your roundup of the day's events until the closing bell has stopped ringing.

Fed leaves rate unchanged; no sign of any future decisions

The Federal Reserve decided to stay above the financial fray today and held its benchmark rate unchanged at 5.25 percent. The move is seen as further confirmation of Ben Bernanke's hands off approach to decision making – a position that contrasts sharply with that of his predecessor.

"Greenspan wasn't afraid of knocking heads together" admitted a Fed insider, speaking under the pseudonym of Bennett, "His Yoda-like exterior can be misleading. Once he has an Espresso and a chocolate donut inside of him he can come at you like a pit-bull."

Another insider spoke of Greenspan's infamous run-in with Dick Cheney at last year's Davos meeting. "They'd been drinking, for sure, and Alan was looking for a fight. Before we knew it there they were rolling around in the snow. Then Dick pulled out his Uzi, and things calmed down pretty quickly."

By contrast, the atmosphere in the Fed's policy setting meetings has become positively becalmed under Bernanke's stewardship. Today's decision marks the ninth consecutive time that the Fed has decided to leave the rate unchanged.

"Things have definitely changed under Ben", continued Bennett, "Everyone sits around sipping herbal tea and talking about their vacations. We don't usually get around to discussing the rate change until the last few minutes. And even then, the default is always to leave things the same unless anyone has any really good reasons to do otherwise."

Decision frameworks have also changed at the Fed. Bernanke is known to favor alternative approaches to policy setting including games of chance, feats of strength and the occasional tug of war. Last Christmas Bernanke famously introduced a Wheel of Fortune in to the policy meeting. "After some initial reluctance, most folks at the table got into the spirit of things. It really brought the policy team together," Stated Bennett, "So much so that no-one noticed that all but one segment of the wheel contained the phrase: no change."

Neither Ben Bernanke nor Alan Greenspan was available to comment for this article.

Dow slides again; is there no end to the pain?

After another wild ride the Dow capitulated in the final minutes before the bell Friday, closing down over 2%. Final hour fireworks have become quite a feature of the markets this week, with frantic activity seen on four of the five trading days. In fact the trend is so pronounced that a financial aphorism might be in order, such as "Best buy or sell an hour pre-bell". Or how about "In that hour before close anything goes".

Sneaky Business believes that such rules of thumb should have a hand in helping investors to get their arms around the timing of transactions. To further aid our readers we present some of our other favorites in the following list:

• Sell in May then walk away
• Sell in June then pimp your Zune
• Sell in The Fall, get rid of it all
• Buy in July and crank your stress high
• Shorts in the summer can be quite the bummer
• Hold in the spring while Russell has his fling
• Sell short every REIT and you'll sleep well at night

Perhaps we will be adding more by the end of next week.

US housing market slows, stalls then stops; where to next?

[The following article launches a major new series from Sneaky Business examining the state of the US housing market]

The release of a key report Friday confirmed the scale of the crisis engulfing the US housing market. Derek Martin of the Homebuilders and Remodelers Association (HRA) confirmed the worst, "The market ran off the rails last year, moved into a prolonged skid and has now hit a brick wall. Sales fell to a trickle in June and then actually stopped for most of July."

As sales ossified, Dayton resident Peter Benedict became the only person to complete a home purchase during the month. "I knew things were tight" responded Benedict, "but I had no idea how important my purchase would be". Area builder Beaston Homes threw in a long list of incentives to win the deal, including a 30% price reduction, a hot tub and the adjoining house for free. "To be honest we don't really need the second house" continued Benedict, "But Beaston insisted on it".

The slow-down in housing has been more wide spread and prolonged than many in the industry had predicted. Jitters in the sub-prime market, a tightening of mortgage approvals to the under eighteens and a reluctance to grant home equity loans for "tasteless" renovations have weakened the market considerably.

News of Benedict's purchase propelled housing stocks upwards. "This is the turning point" declared Leeward Stochs analyst Jennifer Lee, "The housing market can start rebuilding momentum now". Word that Benedict may have already lined up a buyer for his free home energized stocks even further.

However, talk of a rebound may be premature. Sneaky Business has learned that further sales may be hard to come by. "There is still a chance that the market will move into negative territory during August" stated Martin of the HRA, "Builders may start paying prospective owners to move into their homes. And some have threatened to start tearing down houses under construction".

Keep reading Sneaky Business for more up to date analysis of the slump in housing.

[The next article in this series will be released during Fall 2008]

Dow plummets, tumbles, washes out; what’s a headline writer to do?

The Dow had a downer today, losing 2.3%. Not one of its best, for sure.

But headline writers had a field day as they dug deep into their kit-bags of metaphors. Following Sneaky Business' observations on Google earlier in the week, we feel obligated to share some of the more dramatic headlines that have graced the web during the last few hours. Sit back and enjoy:

Headline	Source	Sneaky Business Score (1-5)
"Stocks tumble on credit worries"	WSJ	2 – Safe, marginally dramatic
"Washout for the Dow"	CNN	3 – Nice metaphor; images of soggy days at Wimbledon
"Stocks plunge on credit concerns"	USA Today	2 – Come on, you can do better than that
"The time to invest is now"	Leeward Stochs	4 – Inspired attempt to stay on message
"Dow plunges more than 300 points"	CBS News	2 – Surprisingly safe
"Dow disappears from radar. Doomed."	National Inquirer	4 – splendid effort

Now the real dilemma, of course, is what to write if the Dow falls even further tomorrow. Headline writers may be forcing themselves into a corner by describing a 2% drop as a "plunge". Once there they face an ever increasing vicious circle of adjectives that may just mushroom out of control.

We shall see.