July 13, 2020

Global Jitters Gather Over State of Société Générale

But Société Générale, France’s third-biggest bank, has been stirring financial markets once again on concerns about its big holdings of the debt of shaky European neighbors like Greece.

Although its shares closed slightly up on Friday, Société Générale’s stock has fallen more than 40 percent since mid-July and helped pull European bank stocks down earlier in the week. That volatility is a big reason that France on Thursday night imposed a temporary 15-day ban on short-selling — negative bets — against financial and insurance company stocks.

Why does Société Générale matter?

Jitters about the bank’s stability reverberate in New York and around the world because, among other things, Société Générale is one of the biggest global players in equity derivatives — financial instruments meant to protect investors against price plunges in stocks. It does business regularly with the likes of Goldman Sachs, JPMorgan Chase and Deutsche Bank.

“They have significant outstanding derivative exposures, which makes them systemically important,” said Kian Abouhossein, an analyst covering European banks for JPMorgan Chase. “They are important to the financial system, not just in the U.S. or Europe, but globally.”

What’s more, Société Générale has something of a history. It achieved notoriety during the last financial crisis when a rogue trader for the bank, Jérôme Kerviel, lost his employer 4.9 billion euros, or $6.7 billion.

Société Générale may be even better remembered for its disastrous entanglement of derivatives contracts with the giant insurer American International Group.

The A.I.G. contracts protected Société Générale from its large stake in troubled American mortgage securities — but only after the United States government bailed out A.I.G. in 2008 and agreed to pay companies like Société Générale 100 cents on the dollar. When Société Générale was eventually revealed to be one of the largest recipients of the A.I.G. bailout funds, some critics questioned why a French bank was allowed to cart home $11.9 billion in American government money.

The French government now, as it did back then, is playing a big role in trying to calm markets and protect Société Générale. Investors’ main fear is that the company’s exposure to Greece — it even owns the majority of a Greek bank — and other troubled European countries might cause a panic that drives away its trading partners and disrupts the derivatives market.

Some investors even worry that Société Générale’s holdings of French government bonds might become a problem if ratings agencies downgrade France’s sovereign debt. So far, though, the ratings agencies have been nearly as loud in their denials that they plan such a downgrade as the French government and Société Générale’s executives have been vociferous in insisting that the bank is on solid footing.

In any case, the rumor-driven run on Société Générale is already costing the company money. It has been forced to pay significantly more than some of its sturdier European banking peers to borrow, according to several market participants.

Analysts point out that Société Générale has a strong balance sheet, but they say that panic in the markets can undermine even strong financials.

Mr. Abouhossein, for one, says he thinks the market fear is overblown — as is the risk to Société Générale, even if it were forced to take write-downs on the debt of other troubled euro countries, like Italy and Spain.

“French banks can always borrow money from the European Central Bank,” he said.

In fact, many European banks were doing just that this week. On Wednesday, commercial banks’ requests for short-term loans from the central bank spiked to a three-month high.

Société Générale officials have spent much of the week arguing that the market’s fears were unfounded. On Thursday, the bank’s chief executive, Frédéric Oudéa, described rumors that Société Générale was having trouble raising money as “fantasy.”

And in fact, on Thursday Société Générale was able to raise $2 billion in overnight money — although it reportedly paid higher interest than a more stable European bank like Barclays or Rabobank would have had to. The bank is also still lending out money in the overnight market, which is typically interpreted as a sign of strength.

Société Générale’s direct exposure to Greece is not nearly as large as the exposure it had to the American housing market going into the panic of 2008. Nonetheless, it has been unnerving investors with write-downs like the 268 million euro charge on its Greek holdings the bank announced early this month.

Just as many other large European institutions did, Société Générale bought into sovereign debt at a time when those purchases looked mostly risk-free.

It amassed about 18.2 billion euros of exposure to Portugal, Ireland, Italy, Greece and Spain — almost as large as the bank’s 19.2 billion euros in holdings of French debt, according to the European Banking Authority. The sovereign debt of most of those other countries has recently been downgraded, hitting the bank’s portfolio.

But analysts say Société Générale, like other European banks, can count on the support of regulators.

In the recent agreement for the latest Greek bailout, Société Générale was among the banks that agreed to forgive about one-fifth of the value of the country’s debt. As part of that deal, a pan-European fund is supposed to make money available to help banks that may need assistance covering their losses on Greece — although each of the 17 euro zone nations’ governments must still vote on whether to finance the bailout fund.

Société Générale, in other words, may be as solid — or not — as the euro union itself.

“I don’t think the euro is in danger,” Mr. Oudéa, Société Générale’s chief executive, said Thursday. “The governments are very attached to the single currency and lucid about the efforts that must be made.”

Eric Dash, Nelson Schwartz and Jack Ewing contributed reporting..

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DealBook: Regulator: Wall Street Not Too Big to Fail

3:22 p.m. | Updated

Michael H. Krimminger, the Federal Deposit Insurance Corporation's general counsel.Daniel Barry/Bloomberg NewsMichael H. Krimminger, the Federal Deposit Insurance Corporation’s general counsel.

Bailouts are no longer an option for Wall Street, a top Federal Deposit Insurance Corporation official told Congress on Tuesday.

Michael H. Krimminger, the F.D.I.C.’s general counsel, said in testimony before a House Financial Services Committee panel that regulators now have “the tools to end too big to fail.”

His position is a sharp turnaround from 2008, when the nation’s economy teetered on the brink of collapse. At the time, Washington enacted a $700 billion bailout for banks, the automotive industry and the giant insurer American International Group. Policymakers argued that they had no choice but to rescue the firms because they were so large and interconnected that their collapse would have caused the nation’s economic downfall.

“Such a presumption reduced market discipline and encouraged excessive risk-taking by firms,” Michael S. Barr, a former assistant Treasury Department secretary who is now a law professor at the University of Michigan, told the committee.

In the aftermath of the financial crisis, Mr. Barr was a leading architect of the Dodd-Frank Act, which aimed to rein in derivatives trading, mortgage securities and other risky Wall Street businesses.

The law, according to Mr. Krimminger, ended the era of bailouts, too.

“There is no statutory authority in the Dodd-Frank Act for us to bail out a failed financial institution.” he told lawmakers.

Instead, Dodd-Frank created the Financial Stability Oversight Council, a panel of regulators who will keep an eye on the nation’s biggest and riskiest companies. The council will designate specific financial firms — including mutual funds, insurance companies and hedge funds — that pose a systemic risk to the financial system. These firms, and banks like Goldman Sachs that have more than $50 billion in assets, will face tougher federal oversight and higher capital requirements.

The so-called systemically important financial institutions, or SIFIs, must also create a “living will” that spells out how the firms could be unwound through bankruptcy if they fall on hard times. And if the F.D.I.C. or Federal Reserve concludes that a firm’s plan is insufficient, the regulators may force the company to shed some of its riskier assets or operations, according to Mr. Krimminger.

The plan, regulators say, will prevent a repeat of the chaotic Lehman Brothers bankruptcy.

“Resolution plans are essential to ending too big to fail,” Mr. Krimminger said. “These plans will provide the analysis, information and advanced planning that was lacking in 2008.”

But some Republicans and financial industry executives say that labeling a company as “systemically important” only reinforces the too-big-to-fail problem. Others note that when complicated and huge institutions file for bankruptcy, as in the case of Lehman, markets can panic.

Dodd-Frank does offer an alternative: “orderly liquidation authority.” Under the law, the F.D.I.C. has receivership power over firms that are on the brink collapse, similar to the agency’s role when a local bank fails.

Critics contend that the process would give the government the arbitrary authority to decide when a firm lives and dies. Some also say it will force a fire sale of a failing firm’s assets.

But Mr. Krimminger reassured lawmakers that the failed firm’s shareholders and creditors would bear the brunt of the losses, protecting taxpayers from another massive bailout. The government would remove the firm’s executives, and claw back some of their compensation.

“This would be critical to avoid a future financial meltdown,” he said.

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