At Bear Stearns, where Jimmy Cayne has resigned as chief executive - I have the impression that this will come as a surprise to a lot of people who assumed that he had done the decent thing and resigned a long time ago. He's staying on as non-executive chairman - which has drawn a bit of criticism.

...At BarCap, where Grant Kvalheim (you last saw him being gradually eased away from credit trading) has finally resigned, leaving Jerry del Missier in nominal charge - but in the unenviable position of having his ultimate superior, Barclays CEO Bob Diamond, doubling up as his co-president, filling Kvalheim's shoes for the moment by taking over the investment banking business. Del Missier has rates, equity and, as mentioned, credit trading. An interesting situation.

Further down the pile, DBRS has shut down its entire European operation; and there's speculation that Citigroup could cut thousands of jobs later this month.

On cue, Raghuram Rajan weighs in on executive pay in today's FT:

compensation practices in the financial sector are deeply flawed and probably contributed to the ongoing crisis...Alpha is quite hard to generate since most ways of doing so depend on the investment manager possessing unique abilities – to pick stocks, identify weaknesses in management and remedy them, or undertake financial innovation. Such abilities are rare. How then can untalented investment managers justify their pay? Unfortunately, all too often it is by creating fake alpha – appearing to create excess returns but in fact taking on hidden tail risks, which produce a steady positive return most of the time as compensation for a rare, very negative, return...

True alpha can be measured only in the long run and with the benefit of hindsight – in the same way as the acumen of someone writing earthquake insurance can be measured only over a period long enough for earthquakes to have occurred. Compensation structures that reward managers annually for profits, but do not claw these rewards back when losses materialise, encourage the creation of fake alpha. Significant portions of compensation should be held in escrow to be paid only long after the activities that generated that compensation occur.

The managers who blew a big hole in Morgan Stanley’s balance sheet probably earned enormous bonuses in the past – Mr Mack certainly did...

I'd add just one minor quibble. The managers in question may well have received enormous bonuses. It's far less certain, given what's happened since, that they truly earned them.

Unusual underlyings division - this excellent article (via Brad DeLong) discusses the microfinance business, steering neatly between the "microfinance will save the world!" and "I am a contrarian and microfinance is a waste of time" positions. Back when people could still issue innovative CDOs and nobody laughed, several were based on microfinance portfolios.

In advance of the wave of US banks' Q4 results next week, two questions are currently being asked: 1) how big will the Q4 writedowns be? and 2) how much investment will the banks manage to get from external investors (in other words, emerging-market sovereign wealth funds) to offset them?

Pimco's Bill Gross is concerned about the CDS market. At present default rates are extremely low by historical standards - the lowest since 1981, according to Moody's - and set to rise this year. Given this, Gross argues, CDS sellers are looking at the thick end of $250 billion in losses this year:

If total investment grade and junk bond defaults approach historical norms of 1¼% in 2008 (Moody’s and S&P forecast something close) then $500 billion of these default contracts will be triggered resulting in losses of $250 billion or more to the "protection selling" party once recoveries are inserted into the equation. To put that number in perspective, many street estimates ascribe similar losses to subprime mortgages, a derivative category substantially distinct from CDS insurance. Of course, "buyers of protection" will be on the other "winning" side, but the point is that as capital gains and capital losses slosh from one side of the shadow system’s boat to the other, casualties and shipwrecks are the inevitable consequence.

How did it happen? Read "Understanding the Securitization of Subprime Mortgage Credit" (81pp, pdf) by two economists from the NY Fed.

Is it different from other crises? No, only more severe, according to two NBER economists in "Is the US Subprime Crisis So Different?" (13pp, pdf)

In the FT today, David Roche puts meat on the bones:

And finally, there could be counterparty losses if financial intermediaries in the market go under...The most likely place for this to happen is among financial guarantors, the so-called “monoline” insurers...If the monoline guarantees on bonds and credit derivatives were to be removed, the rule of thumb is that every 1 per cent decline in the price of insured bonds would give rise to $10bn of losses on bond portfolios elsewhere in the system. We estimate bond portfolio losses of $150bn-200bn were this to happen – or equivalent to the impact of the subprime crisis on the US banks.
Much of this pain (loss) would have to be absorbed through the CDS markets as additional losses to the cost of defaults. Also, the decline in credit quality would also hit CDS prices to the tune of about $40bn-$50bn. In total, we estimate that global losses in CDS markets and the underlying credits they insure would be $365bn-$425bn. That is about equal to the losses likely to accrue from the current crisis in subprime and other pools of debt for global banks and non-bank financial intermediaries...

The monolines have been looking unsure for some time now - we wrote in December that they were undergoing a crisis. How soon till the first one collapses? Not long.

...announced by John Thain, in a conference call today announcing his bank's $13.7 billion writedown.

RBS research today (no link, emphasis added) -
"Now that the flaws in the model have been exposed, it is also questionable what the long-term future is for the industry. The only potential solution we can see now that would enable triple-A ratings to be retained is a co-ordinated bail-out by interested parties – banks and/or politicians. In theory the injection of relatively small amounts of capital via an “investment” may be preferred to falling ratings that would cause banks to have to recognise losses on the credit protection they purchased from the monolines. However, we have seen nothing that would indicate such a bailout is likely."

Ambac has now been downgraded (by Fitch) - looks like there was no rescue bid planned after all. (And the iTraxx Europe is at a record high as a result...)

If anyone out there is still afflicted by excess of optimism (well, there might be someone) I can recommend the World Economic Forum's Global Risks 2008 report.

The news this morning of the €5 billion rogue trading losses at SG has raised a lot of questions over the French bank's risk management. It's also drawn attention to the fact that the bank won Risk magazine’s equity derivatives house of the year award this year. The award was judged between September and December 2007, based on the business SG had done over the previous 12 months. Over this period they launched a number of products first, including a structure linked to the implied volatility smile on a basket of stocks. SG’s losses were due to fraud, apparently committed by a single person - and while the losses will (and should) put the spotlight on the bank's compliance, oversight and risk management, they should not condemn the entire equity derivatives team.
Keep checking Risk News for the latest in this developing story, including exclusive interviews and analysis.

Risk editor Nick Sawyer spoke to SG's head of equity and derivatives, Christophe Mianné, this afternoon - read the interview at Risk News.

Various sources are naming the rogue trader as Jerome Kerviel, a junior trader on the Delta One equity futures team.

Heads are rolling at SG - read about senior management changes on Risk News.

And Nick Sawyer discusses the trade with Sky News at 1830Z today - video should be online here.

UPDATE: unfortunately the Sky News video is not online - but the Channel 4 video is. Click "Watch the report".

We've made all these stories free to subscribers and non-subscribers alike...

Our coverage of the story today:
Shake-up at SG follows rogue trader losses
"He didn't want to tell the truth immediately"
Questions remain over SG rogue trader
€4.9 billion fraud at Société Générale

SG's 2007 award:
Equity Derivatives House of the Year - Société Générale

And its earlier awards:
Equity derivatives house of the year 2005 - Société Générale
Equity derivatives house of the year 2004 - Société Générale

Remember UBS warning about $10 billion writedowns? Looks like they were being optimistic. The real figure's $14 billion.

In a radical overturning of conventional wisdom, scientists in Georgia and California have found significant differences between commodity traders and chimpanzees. Chimps are, in fact, not very good at commodity trading:

the researchers found that chimpanzees often did not spontaneously barter food items, but needed to be trained to engage in commodity barter. Moreover, even after the chimpanzees had been trained to do barters with reliable human trading partners, they were reluctant to engage in extreme deals in which a very good commodity (apple slices) had to be sacrificed in order to get an even more preferred commodity (grapes)...

The report becomes particularly readable when it speculates on the reasons why:

because of their lack of property ownership norms...

...or, for that matter, pockets....

...chimpanzees in nature do not store property and thus would have little opportunity to trade commodities.

There is also significant counterparty risk in the chimp apple/grape market, which is, at present, strictly over-the-counter traded:

chimpanzees lack social systems to enforce deals and... punish an individual that cheats its trading partner by running off with both commodities...These norms are especially costly to enforce, and for this species the game has evidently not been worth the candle. Fortunately, services can be protected without ownership norms, so chimpanzees can and do trade services with each other. As chimpanzee societies demonstrate, however, a service economy does not lead to the same degree of economic specialization that we observe among humans...

There you are. Only the lack of a centrally cleared market in bits of fruit prevents the awful prospect of a flourishing chimp commodity business, which would lead, inevitably, to Planet of the Apes.

(via Mark Thoma)

The FT today looks at SG from a headhunter's point of view, and finds it a hard target:

A head of equity derivatives at one rival says it has always been harder to hire from SocGen than anywhere else, including its domestic rival and main competitor in equity derivatives, BNP Paribas. This was in spite of offering higher pay.

He says: "I have been calling them all week, and they are not coming. It's not just that they are very French, since they are recognisably different from BNP. There are a lot of career-lifers at SocGen. From day one they believe they are at the best bank in the world. Because equity derivatives is so big at SocGen, and SocGen is so powerful in France, they have a strong and unique culture that helps them with staff retention."...