Market Rumors Attack: 2008 Redux… Bear Stearns to Lehman to Societe Generale

If you know one thing about the meltdown that took place in 2008 and then again in 2009, you know that rumor mongering exacerbated the situation massively.  To say whether or not Bear Stearns or Lehman Brothers could have ultimately survived may be a different issue entirely.  Ultimately, death row inmates face the end one way or another.  Our take is that to say that those institutions would have survived might be more than or equally naive as the belief that simply letting the big banks and ‘too big to fail’ financial institutions fail would have been the right exit.

Now the rumor-mongering has spread not just to overseas nations but to large overseas banks.  Part of the panic today was on reports that Societe Generale was on the verge of collapse after talk that France could be the next to lose its prized “AAA” rating after the United States.  The ratings agencies have defended France.  Moody’s and Firch reaffirmed the “AAA” variations, and S&P has effectively said that France was improving its metrics.

Societe Generale has also defended itself,  What is so odd is that it just gave its financial report two days ago showing higher capital levels.  Societe Generale even ran an apology from the Daily Mail correcting its reports that the bank “was in a ‘perilous’ state and possibly on the ‘brink of disaster’.”

The problem is that the rumor-mongers can create panic faster than a reaction can be made and they can tank a system.  In short, they can create self-fulfilling prophecies.  By the time regulators figure it all out, it is all too late.  Societe Generale shares were at one point down more than 20% in Paris trading on triple the normal trading volume.  Shares even hit a new year low of 21.00 Euros.

Now, for the other ‘problem’ and ‘sadness’ out there… whether rumors are exaggerated or not, the concerns about the sovereign nations in Europe and the concerns regarding the real financial health of the banks there do have real merit.

In all seriousness, what is a “AAA” rating now?  If you think that the notion of sovereign nations losing the prized Triple-A ratings is new, guess again.  We already were operating under the assumption that S&P would downgrade the United States and that Fitch and Moody’s would affirm the “AAA” ratings with a negative outlook.  At the same time, we also gave a synopsis of the “AAA” nations that are at risk of losing their prized “AAA” ratings.  France was one of them.

At 11:17 AM EST, the DJIA was down about 400 points at 10,839 and the NASDAQ was down another 73 points at 2,409… Rumors, and reports, still can kill markets.  As of now, yesterday’s huge market gains are gone.

JON C. OGG