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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Jul 26

Written by: Donald van Deventer
7/26/2011 4:17 AM 

Today’s blog focuses on the U.S. dollar funding shortfall that took place at Societe Generale’s New York branch during the period from February 8, 2008 to March 16, 2009. With the exception of the incident with rogue trader Jerome Kerviel in January 2008, Societe Generale was in the headlines much less than many of its peers. Despite that, data from the Federal Reserve reports that Societe Generale borrowed a peak amount of $8 billion on September 19, 2009, more than Lehman Brothers borrowed from the Fed prior to the September 14, 2008 announcement that the firm would file for bankruptcy.  Societe Generale’s borrowings in the immediate aftermath of the Bear Stearns collapse, $3.5 billion, were also higher than Lehman’s $2.7 billion in borrowings during the same period.

This is the eighteenth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, Depfa Bank plc, Barclays, Goldman Sachs, the combined JPMorgan Chase, Washington Mutual, and Bear Stearns, Wachovia, State Street, BNY Mellon and HSH Nordbank AG.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Societe Generale during the credit crisis.

The data used for Societe Generale in this analysis are described in more detail below. The data consist of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the 2007-2009 credit crisis is given in these two recent blog posts:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 13, 2011.

van Deventer, Donald R. “A Credit Crisis Chronology Part 2 March 2008 Through March 2009: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 14, 2011.

Societe Generale is not mentioned specifically in the two blog posts above, but the news of its trading losses at the hands of “rogue trader” Jerome Kerviel, later sentenced to three years in jail, kept Societe Generale in the news for months and ultimately cost Chairman Daniel Bouton his job:

January 24, 2008
Societe Generale reports loss of 4.9 billion Euros due to rogue trader in stock index futures (Source: Bloomberg).


January 29, 2008
Societe Generale SA faces an insider trading lawsuit after France's sharemarket regulator said a board member sold shares worth €95 million in early January (Source: The Age).


April 29, 2009
Daniel Bouton Steps Down as Chairman of French Bank Societe Generale (Source: The Telegraph).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Societe Generale during the period February 8, 2008 to March 16, 2009. Societe Generale New York branch’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing March 25, 2008 for $521 million, and then borrowings were continually outstanding from March 31, 2008 until December 17, 2008.
Average from

2/8/2008 to 3/16/2009
$2.6 billion
Average when Drawn
$3.96 billion
Maximum Drawn
$8.0 billion from September 19, 2008 to September 29, 2008
Number of Days with

Outstanding Borrowings
263 days

The graph below shows the pattern of Societe Generale borrowings that began for one day on March 25, 2008 and then continued for months starting on March 31, 2008. Note that the first borrowings began two months after the rogue trading losses were announced on January 24, 2008.



Default Probabilities During the Credit Crisis


The graph below shows the 1 month and 1 year Kamakura Risk Information Services default probabilities for Societe Generale between February 8, 2008 and March 16, 2009.  Default probabilities rose in an erratic but persistent way in the wake of the trading losses announced on January 24, 2008.



At the time of Societe Generale’s peak borrowing of $8 billion during the period from September 19 to September 29, 2008, the bank’s cumulative default risk was modest compared to its peers.  Societe Generale’s five year cumulative default risk was 1.59%, and its 10 year cumulative default risk was 2.06%.



In the chart below, we compare Societe Generale’s consolidated funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Societe Generale’s consolidated funding shortfall, measured by average drawn borrowing of $3.96 billion, ranks 16th among the firms analyzed in this series to date.



If one ranks the same firms by largest outstanding borrowing on a single day, Societe Generale still ranks 16th, with a maximum borrowing of $8.0 billion:



Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008

If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, Societe Generale ranks much higher among the financial institutions studied so far. When measured by average borrowings during this period, Societe Generale New York branch ranks 5th. Note that European banks ranked third, fourth, fifth and sixth during this time period.



When measured by peak borrowings in the wake of the Bear Stearns collapse, Societe Generale ranks 11th at $3.5 billion, more than Lehman Brothers during the same time period.



Borrowings from the Commercial Paper Funding Facility

The Federal Reserve’s disclosure of borrowings under the Commercial Paper Funding Facility listed no borrowing by entities affiliated with Societe Generale.

Implications of Funding Shortfall Data

Societe Generale is another European institution that both kept a relatively low profile and yet needed major funding by the Federal Reserve during the credit crisis. Societe Generale, along with other large borrowers like Depfa, Dexia, Barclays and HSH Nordbank, were heavily supported by funding from the U.S. taxpayers via the Federal Reserve.  We examine total funding to major foreign institutions in a subsequent blog.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

http://www.federalreserve.gov/newsevents/reform_transaction.htm

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From www.twitter.com/zerohedge Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at info@kamakuraco.com.  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
July 27, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.

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