Serial crisis: the price of boom-bust capitalism

PARIS (Reuters) - Apart from its sheer enormity, what is stunning about the $7 billion trading scandal unfolding at French bank Societe Generale is the impression that financial market excess knows no bounds, never has, and maybe never will.

Equally disconcerting is the fact that politicians declare each time trouble strikes that, this time something must and will be done to prevent it happening again.

Yet history repeats itself with such frightening regularity that Pierre Cailleteau at Moody's Investors Service, the credit rating agency, says governments have essentially done a deal with the devil.

Political leaders, he argues, quietly accept the notion that there is no gain without risk and occasional financial failure or crisis is the price to be paid for the risk-taking that creates wealth and economic growth the rest of the time.

"Accepting the existence of crisis is the Faustian pact that policymakers have made with the financial industry," Cailleteau, whose own company is among those accused of failing to flag the subprime crisis and the credit crunch that ensued.

The alternative, he argues, would have to be drastic, such as obliging banks to boost capital reserves tenfold, in which case the risk would no longer be one of failure but of stifling innovation and growth.

"You will no longer have financial crises, but you will not have an irrigation of the economy either," he says.

PAYBACK TIME

Right now it looks like payback time after five years or so of bumper economic growth and rockbottom interest rates that fuelled a carefree investment climate.

Ten years back one of the big failures was LTCM, a hedge fund revered on Wall Street as the quintessence of financial genius, until it collapsed.

Then there was a brief boom that led to the dot-com bubble, which burst. Now it's the meltdown and fallout from the over-extended subprime mortgage market in the United States.

It snowballed into a global credit crunch when banks and other professional investors realized that they don't quite know the scale of anyone's exposure to the masses of debt that has been carved up, repackaged and sold on as tradeable securities.

The icing on the cake came last week when Societe Generale said it lost 4.9 billion euros and blamed a 31-year-old trader it accused of gambling with share index futures worth ten times that amount.

It revived memories of other similar scandals even if it outdid them all in size, including that of rogue trader Nick Leeson, who bankrupted Britain's Barings bank in 1995.

Leeson says rogue trading is rife and he was shocked only by the scale of the losses at Societe Generale.

"I think rogue trading is probably a daily occurrence amongst the financial markets," Leeson told the BBC in an interview.

"It's exactly the same story as Barings in 1995, the same story as Allied Irish Banks a couple of years after and then National Australia Bank."

Leeson spent several years in jail in Singapore and has set up a new life in the west of Ireland where he is chief executive of Galway United Football Club and runs a business charging fees to talk about his rogue trader days.

Willem Buiter, a professor at the London School of Economics who served on the Bank of England's interest rate-setting Monetary Policy Committee, agrees that things look ugly again.

"The demi-gods of high finance have got too big for their boots," he says.

British Prime Minister Gordon Brown hosted talks on Tuesday with the leaders of Germany, France and Italy, which he arranged in December to discuss the threat from the credit crunch.

By the time they met they had Societe Generale to worry about too.

"What they should really do is start outlining some simple but concrete steps towards a stronger supervision system," says Marco Annunziata, chief economist at investment bank UniCredit.

"Otherwise, the danger is that more vague statements of intent might seem like fiddling while there is smoke coming from both the economy and the financial system."