The Black Swan emerges...

And he looks like a geek. Author/trader Nassim Taleb has asserted for years of the danger of the black swan - an unexpected incident of high impact. In fact, he believes almost all consequential events in history come from the unexpected.

It is safe to say the idea of junior trader bringing down one of Europe's largest banks - Societe Generale (SocGen) - by virtually uncontrolled transactions wasn't on anybody's radar.

In its most detailed public explanation of the scandal to date, SocGen acknowledged on Jan. 27 that the trading positions taken by Kerviel had reached more than $73 billion, far exceeding the bank's roughly $50 billion market capitalization, by the time the bank learned of the problem over the weekend of Jan. 19-20. The bank said Kerviel took advantage of his knowledge of the bank's internal control systems, gained during his five years in back-office jobs.

The bank's explanation, however, didn't mention the warning flags raised earlier. According to prosecutor Marin, SocGen's middle office, accounting department, and risk department had raised questions about Kerviel's trades in recent months, as had Eurex, the derivatives exchange operated jointly by Deutsche Börse (DB1GN.DE) and the SWX Swiss Exchange stock markets.

The fact that even a relatively junior trader could wreak such mayhem has spurred urgent calls for banks to toughen their internal controls. "Every bank in this area will be overhauling their compliance arrangements, their IT security…all of the nuts and bolts stuff," says Howard Davies, the dean of the London School of Economics who formerly headed Britain's Financial Services Authority. Some relatively simple measures might have prevented the debacle, Davies says, such as changing computer passwords more frequently or requiring traders to take two-week vacations during which other employees handle their trading portfolios. [More]

It's hard not to dismiss this financial debacle with barely suppressed giggling. First, they are French, and hence fair game for ridicule. Second, it wasn't my money. Third, who doesn't enjoy really, really, rich people and snooty institutions falling on their faces. Finally, it doesn't change the price of corn or the rainfall in Brazil, so I'm bored already.

Only Taleb may be right for not just banks but commodity funds and US derivatives as well.
The rogue trader scenario seems to keep popping up, despite solemn assurances by financiers that they have learned their lesson. As the scandal deepens it seems this was anything but the truth.

While I am not busy looking for what can go wrong to our happy little boom in grain farming, I am curious about the wild and unprecedented action in our commodity exchanges. This level of free-wheeling trading is not all that dissimilar from derivatives action, and we have more new entrants wandering around the pits than ever.

If companies like Cargill are concerned about the nature of grain futures trading and the National Grain and Feed Association is increasingly more alarmed by unexpected events, the idea of serious breakdown in the soy pit during August, say, suddenly crosses the line from preposterous to hmmmm.

More interesting is the realization that we are running out of reliable institutional risk merchants. It may be that grain bins and prompt settlement upon delivery will become a grain producer's soundest defense from any flock of black swans.