France’s second largest bank, Société Générale, revealed in a shocking revelation that one of its trader had lost 4.9 billion Euros in illegal trades, which mirrors and dwarfs Nick Leeson’s losses of US$1.4 billion that led to the collapse of Barings Bank.

Barings ended up being bought over by another party, which I believe will be the exact fate of Société Générale. This has led to losses for the shareholders of the French bank, who suffer losses due to the mistake of other people who place bets on their behalf.

Traders in investment banks trade in the foreign exchange markets, commodities, stock futures, etc. More importantly is the fact that derivatives have grown so fast and furious that they outstrip demand and have outlived their initial usefulness of hedging against other exposures in the financial markets. For example, foreign exchange trades today have grown enormously in volume so much so that it is one hundred times of daily import and export requirements. For every dollar of goods that changes hands, one hundred dollars worth of foreign exchange change hands in the market.

This is pure speculation and nothing more than that.

The US collateral debt obligation (CDO) is also a form of bet that went wrong, as major banks package these debts and sell them so as to diversify their risks.

What these banks did not realize was that the “heavily packaged” deals went severely wrong leading to huge losses.

What can we do about this?

We can do nothing but blame ourselves for our bad luck.

Apart from the US sub-prime problem, stock prices have jumped too high for comfort and, thus, it has to fall because a lot of investors are holding onto huge paper gains and are waiting to realise their profits. It is those who go in late and go in high that suffer the consequences of the falling stock market.

Are you one of those that have sold off your portfolio for huge profits? When the stock market falls, what kind of stocks do you buy first? Do you buy early during the fall or late in the fall?

Currently, the US government is doing its best to rescue the market by reducing tax rates and cutting interest rates. The former requires the approval of the US Congress, which is controlled by the Democrats who are unwilling to push through the rate cuts.

This is the year of the US presidential election and the Democrats will be unwilling to give credit to the Republican government for rescuing the market in times of emergency. It is easier to cut rates but the US Federal Reserve, too, are cautious of being too aggressive in lowering interest rates for fear of dragging the US Dollar lower.

The US government has issued astronomical levels of treasuries denominated in US Dollar. Once investors lose confidence in the US treasury bills, huge problems will arise.

Now that the US is in trouble, we can only depend on China, India, Russia and Brazil to drive the global economy because these are the countries that have experienced the highest growth rate over the past few years. Brazil is dependent on the US consumer market while Russia, which expects large amounts of oil, will face a slowing economy if demand for oil falls. India’s dependence on the global software market is still pretty much safe for the time being, but problems will soon arise if the global economy slows.

China’s economy stands tall and proud, as the government is encouraging domestic spending and reduce reliance on exports. However, the Chinese government is still trying to cool the overheated economy and this is not good for the short-term horizon.

I am placing my hopes on the latter half of this year.