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Wednesday, August 10, 2011 12:16 PM

European Banks Hammered; Societe Generale "Denies All Rumors"; French Bank Option Prices Soar; Credit Default Swaps on France Under Attack

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Today we saw yet another wild reversal in the markets led this time not by the US or Asia-Pacific but by Europe. When I went to bed this morning around 3:00 AM central, European futures were solidly in the green.

This is what European markets look like now.

European Stock Markets

Carnage Everywhere

There is carnage everywhere and all of those indices were in the green not that long ago. Here is a chart I picked up from Andrew Horowitz on The Disciplined Investor.

click on chart for sharper image

I added the box in red to highlight the year-to-date losses.

Last night I was on Coast-to-Coast AM for a few minute live chat update on the economy.

I told host George Noory and the listeners that daily volatility in stocks and banks was so wild I could not help thinking there was an immediate major problem at some bank (or banks) that was not yet disclosed. Here are some headlines that suggest just that.

Record Plunge in French Bank Societe Generale

SocGen Stock Tumbles, Leads Fall in French Banks

Societe Generale (GLE) SA posted a record decline and led a drop in French banking shares as the cost of insuring the country’s government bonds increased. UniCredit SpA (UCG), Italy’s biggest bank, paced a retreat in Italian banks after the country’s credit-default swaps widened.

Societe Generale shares slumped as much as 23 percent and were down 16 percent at 21.89 euros at 4:27 p.m. in Paris. Credit-default swaps on the bank rose 29 basis points to a record 299 basis points.

“If credit default swaps on France are under attack, that’s not a good sign,” said Yves Marcais, a sales trader at Global Equities in Paris. “That means that France is under attack and that’s worrisome. French banks hold a lot of French bonds.”

The cost to insure French government debt against default rose 10 basis points to a record 171 basis points, according to CMA.

The FTSE Italia All-Share Banks Index fell as much as 9.4 percent, the most since May 2010. UniCredit dropped as much as 9.1 percent, and was down 8.9 cents to 98 cents by 4:40 p.m., giving the bank a market value of 19 billion euros ($27 billion). Intesa Sanpaolo SpA (ISP), the second-largest lender, lost as much as 13 percent, and was down 17 cents to 1.14 euros.
Bank Options Surge to Six-Year Highs

French Bank Options Prices Surge to Six-Year Highs; Shares Fall
Credit Agricole SA (ACA) and BNP Paribas (BNP) SA options prices rose to the highest level since at least 2005 and Societe Generale SA’s reached a two-year high as the cost of insuring French government bonds increased. The shares plunged.

Implied volatility, the key gauge of option prices, for at- the-money BNP options expiring in 30 days jumped to 129.44 as of 5 p.m. in Paris, triple the 40.24 average over the past four years. Credit Agricole’s surged to 194.23. SocGen’s rose to 100.35, the highest since March 2009, as the lender’s stock had a record decline and led a drop in French banking shares.

Societe Generale SA, Credit Agricole SA and BNP Paribas SA slumped more than 9.9 percent, leading France’s CAC 40 Index down 4.5 percent to 3,032.28 at 5:01 p.m. in Paris.

Societe Generale (GLE) plunged a record 15 percent to 22.08 euros, while Credit Agricole tumbled 14 percent to 5.92 euros, its lowest price ever, and BNP fell 11 percent to 35.15 euros, its lowest level since April 2009.

The cost of insuring debt of Societe Generale SA rose 29 basis points to a record 299 basis points, according to CMA prices for credit-default swaps.
Societe Generale Denies Everything

Societe Generale Denies All Market Rumors, Spokeswoman Says
Societe Generale (GLE) SA “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the French bank said. Societe Generale shares have declined as much as 23 percent today.
Societe Generale did not even say what they were denying. The bank simply denied everything. Whatever the rumors are, I assure you at least some of them are true. This denial sounds just like Lehman's denial to me.


Reuters has more on the rumors in SocGen shares plunge on rumor whirlwind
Between the three top French banks, nearly 10 billion euros ($14.2 billion) in market value was wiped out. SocGen stock has lost 45 percent over the past two and a half weeks, while BNP is down 29 percent and Credit Agricole has plunged 38 percent.

"The rumors on the French triple-A rating are having a catastrophic impact, despite the denial from credit agencies. Shorts are on a rampage; it's a calamity. This has nothing to do with fundamentals," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.

The three major rating agencies confirmed on Wednesday their French sovereign rating outlook was stable, while a Societe Generale spokeswoman categorically denied all the rumors.

Wild trading in SocGen and the other banks appeared to be inflamed by a perfect storm of rumors fueled by Twitter postings, market blogs and a now debunked newspaper report.

SocGen's website mentioned an apology by Britain's Mail on Sunday for a story claiming the bank was in a "perilous" state and possibly on the "brink of disaster."

"We now accept that this was not true, and we unreservedly apologize to Societe Generale for any embarrassment caused," the newspaper said.
I am sticking with my previous comments. There is a major undisclosed problem. Banks do not plunge 45% on unfounded rumors. Moreover, this decline started two-and-a-half weeks ago, not with "Britain's Mail" three days ago.

Mike "Mish" Shedlock
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