Sarkozy And His Incredible Shrinking Banks, Continued

As an update to Sarkozy And His Incredible Shrinking Banks , Societe Generale, one of France's oldest banks and the no. 2 bank behind BNP Paribas, was down 12% today.

As I began to do a little digging for this post, I found this must-read story from the New York Times:

Global Jitters Gather Over State of Société Générale

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.”

Hold it. Derivatives?

Who cares about bad loans when you're talking about derivatives. Derivatives dwarf bad loans.

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, just warned about this in May. "The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10," he said.

And notice who is weighing on Soc Gen's derivatives exposure: it's a JPMorgan analyst.

The good folks at JP Morgan know a thing or two about derivatives. According to Reggie Middleton, Soc Gen doesn't even come close to JP Morgan's derivatives exposure, which in 2008 was nearly 6 times the GDP of the United States and outstrips the entire world's economy by $21 billion.

So you can probably sense the bank's nervousness behind the analyst's words "systemically important."

There's much, much more in the story, plus a ton of inevitable PR to calm you down. But it seems to me the real reason why Soc Gen matters might be bigger than I had originally thought.

Maybe that's why that Wall Street Journal story caused such a ruckus story after reporting that the Federal Reserve was scrutinizing the ability of European banks’ U.S. units to fund themselves.

Europe’s sovereign debt crisis led the Federal Reserve Bank of New York to seek information from European banks about their access to funds to maintain operations in the U.S., the Journal reported today, citing people it didn’t identify. An undisclosed euro-area lender borrowed $500 million from the European Central Bank on Aug. 17, the first such bid in six months.

Thanks to derivatives and a shortage of actual cash, one bank in today's world is just as broke as another. Soc Gen might only be this moment's weak link in the chain.