Markets and politicians panic about the huge write-offs major financial institutions have to make in the face of this subprime mortgage mess. I am all for market readjustments from time to time. I do not think this one is particularly bad, as it was pretty much expected that subprime mortgages have a higher risk. What worries me more is what just happened in France.
A single broker at Société Générale, a major French financial institution, managed to generate a trading loss of US$7,000,000,000 (seven billions). And according to Société Générale, he did that all by himself. What do I learn from this? That a financial institution that has had a particularly good reputation about its management, audit and control practices could not detect $7 billion being wagered by one of its employees, that no one else knew about it. What about all the other, less reputable institutions? Imagine the risks there.
Now, would this employee just be a scapegoat? If so, this would be a very poor choice by management, as the fact that a single employee can do so much damage shakes my confidence in the institution more than if fraud was committed by several.
Banking circles worry quite a bit about systemic risk. It is time to reevaluate the idiosyncratic risk, especially as it can get into proportions that can measure up with systemic risk.