JP Morgan Screws Up With Derivatives Trading

[Evil Captor]

JP Morgan has announced major losses associated with derivatives trading, proving once again that this is one financial instrument that is literally TOO HOT to handle and portends certain disaster for our economy if it's not cut off at the knees.

Here's a Robert Reich editorial in the Huffington Post that covers the topic quite well.

The LEAST that Washington should do is reinstate Glass-Steagall and break up the big banks. Too big to fail is too big to govern, and we need our financial institutions to serve us, not themselves.

Here is what I predict will happen: nothing. Wall Street owns, not just the Republican Party, but the Democratic Party and the Obama administration as well. The big banks just have too much money, and the politicians need that money too badly for them to hold Wall Street to account. Citizens United may well prove to be the death knell of American democracy.

[LawMonkey]

"Derivatives" refers to a rather broad spectrum of financial products, from the pork belly and orange juice futures I used to hear about when I got up to school in the morning to synthetic CDOs that nearly no one understands. Skimming the linked Reich editorial doesn't make it clear which were involved here (I'm thinking it wasn't pork bellies), but it's a mistake to broad-brush all derivatives just because the irresponsible use/creation of some has led to financial instability. Lots of derivatives--perhaps most--are perfectly legitimate, safe ways of reducing exposure to risk (and shifting that risk to those who are willing to bear it in hopes of a profit).

Past that, I don't understand the damn things well enough to comment. Carry on!

[CJJ*]

I read the Reich article and a more detailed technical analysis from the London Financial Times. I don't completely understand it, but my glib interpretation is that a JPM trader took a derivative position that basically bet against a particular credit index. This type of trade (a curve trade) involves daily management of the position--pushing funds around within the index--and the size of the position was such that it substantially impacted the present value of the index, eventually making it cheaper compared to its constituent parts. Other traders spotted this and started buying up the index (hoping for an upward correction), but the JPM trader's management of the position kept the index artificially low, i.e. he was working against the other traders. Eventually the JPM trader couldn't keep the pressure on, the index shot up and JPM took a huge loss.

What's interesting in the FT article is that the other traders suspected the index was being kept artificially low by a single trader at JPM, but since the derivatives market is unregulated they had no one to compain to about it.

[elucidator]

Originally Posted by CJJ*

.... but the JPM trader's management of the position kept the index artificially low, i.e. he was working against the other traders. Eventually the JPM trader couldn't keep the pressure on, the index shot up and JPM took a huge loss.....

Its like that old Brando movie, The Appaloosa, where Brando and a Mexican bandito are arm-wrestling Durango style, where the loser gets struck by a deadly Mexican scorpion whose sting is invariably fatal. Only real flaw, there is no such scorpion, but its entirely possible to blow away 2 billion dollars.

But as long as its not pension funds, or mortgage backed stuff, shit that impacts ordinary shmucks like me and you, fine. Let them fuck each other over to their hearts content. Not that I think thats a particularly good idea, but it might keep them busy, keep them occupied so they don't dream up some other half-assed scheme.

Scant hope of that, I fear.

[GIGObuster]

"Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." - Warren Buffett -2003

[Evil Captor]

Originally Posted by CJJ*

I read the Reich article and a more detailed technical analysis from the London Financial Times. I don't completely understand it, but my glib interpretation is that a JPM trader took a derivative position that basically bet against a particular credit index. This type of trade (a curve trade) involves daily management of the position--pushing funds around within the index--and the size of the position was such that it substantially impacted the present value of the index, eventually making it cheaper compared to its constituent parts. Other traders spotted this and started buying up the index (hoping for an upward correction), but the JPM trader's management of the position kept the index artificially low, i.e. he was working against the other traders. Eventually the JPM trader couldn't keep the pressure on, the index shot up and JPM took a huge loss.

What's interesting in the FT article is that the other traders suspected the index was being kept artificially low by a single trader at JPM, but since the derivatives market is unregulated they had no one to compain to about it.

Well even after the 2008 debacle there were financial analysts saying, "You don't have to fix the whole CDO market, if you just fix this tiny thing, the problem will go away, we promise." Problem is, the problem is systemic to American business: whenever the self-interest of the management/traders runs against the interests of the market/economy/society as a whole, the self-interest is gonna win every time, because the rewards are insanely huge and the risks insanely small. And it's gonna stay that way, because Wall Street owns Washington.

[XT]

Too technical for me (and at a guess for all the posters, including the OP, speculating about this in the thread so far), but a couple of observations from someone mostly clueless about this entire situation. First off, business involves risk. JPM took a risk and it didn't pay off. It happens. You simply can't take all risk out of the equation. Secondly, and this is from memory here, but JPM is a multi-billion dollar a year company, so while a $2 billion loss on this risk is going to hurt, I seriously doubt that they can't cover it. Again, business involves risk, and when you take risks you, well, take risks. If it pays off then you get large rewards...if it doesn't, then it can be painful, and may even drive you out of business. C'est la vie. Thirdly, is more a request for information...I know that there are some legislation being looked at for new regulation (i.e. Volcker Rule), but would it even have effected this? I've heard different takes on it, with some saying it would have prevented the trade and some saying it might not have had an effect. Anyone know? As I said, this is all too technical for me so I'm not fully grasping most of the aspects here.

What I do know though is that you simply can't take all risk out of business, not if you expect your economy to actually be responsive and grow. You could, of course, regulate things to death, but what you are going to get is a shitty economy if you set the bar too high. By the same token, you need to have a bar, and this might be a case where the bar was just to low. I really don't know, to be honest...and I doubt the OP does either. Hopefully some 'dopers will wander in who know a bit more about the technical aspects here and will be willing to edjumacate the rest of us on at least the basics of what happened, why, and what should have been done to 'fix' this issue...or if anything 'should' have been done at all, considering that doing business is risky, and that sometimes you take risks and they simply don't pay off.

-XT

[septimus]

Originally Posted by Evil Captor

Well even after the 2008 debacle there were financial analysts saying, "You don't have to fix the whole CDO market, if you just fix this tiny thing, the problem will go away, we promise." Problem is, the problem is systemic to American business: whenever the self-interest of the management/traders runs against the interests of the market/economy/society as a whole, the self-interest is gonna win every time, because the rewards are insanely huge and the risks insanely small. And it's gonna stay that way, because Wall Street owns Washington.

Yes. AFAICT, the position is not yet unwound and the loss may exceed $2 billion. Now you might ask why the public should care if Jamie Dimon and his stockholders lose a few billion. Well, maybe it will work out OK in this case, but similar episodes could lead to a credit crisis or more bailouts by Treasury.

And for what? Why did Jamie and his boys (and girl!) need to do this? It was so they could drive Ferraris of course, but what public service do they claim to serve? If you break it down, you discover that some piece of paper was selling for 101.3 that "should" have been priced at 101.4 and the "public service" provided by the investment bank's activity was to attempt to move that price to its more appropriate level (while pocketing most of the difference). Bah!

Wall Street bankers are greedy? That's well and good and in the category of "Dog bites man."

However, that U.S. policy makers have sold the public down the river so that the Wall Street boys can keep buying their Ferraris is a travesty. The OWS movement should have focused on abuses like this, but got diverted by mainstream apathy.

(BTW, there's something about this story the Thai government doesn't like. When I first clicked in OP, one link worked, the other took me to the Thai censorship rejection page. A few minutes later ... both links are rejected. And, a forbes.com link to the story is also disallowed by Thailand's censors.)

[elucidator]

Got their knickers tied up in a knot, do they?

[Absolute]

Originally Posted by XT

Too technical for me (and at a guess for all the posters, including the OP, speculating about this in the thread so far), but a couple of observations from someone mostly clueless about this entire situation. First off, business involves risk. JPM took a risk and it didn't pay off. It happens. You simply can't take all risk out of the equation. Secondly, and this is from memory here, but JPM is a multi-billion dollar a year company, so while a $2 billion loss on this risk is going to hurt, I seriously doubt that they can't cover it. Again, business involves risk, and when you take risks you, well, take risks. If it pays off then you get large rewards...if it doesn't, then it can be painful, and may even drive you out of business. C'est la vie. Thirdly, is more a request for information...I know that there are some legislation being looked at for new regulation (i.e. Volcker Rule), but would it even have effected this? I've heard different takes on it, with some saying it would have prevented the trade and some saying it might not have had an effect. Anyone know? As I said, this is all too technical for me so I'm not fully grasping most of the aspects here.

What I do know though is that you simply can't take all risk out of business, not if you expect your economy to actually be responsive and grow. You could, of course, regulate things to death, but what you are going to get is a shitty economy if you set the bar too high. By the same token, you need to have a bar, and this might be a case where the bar was just to low. I really don't know, to be honest...and I doubt the OP does either. Hopefully some 'dopers will wander in who know a bit more about the technical aspects here and will be willing to edjumacate the rest of us on at least the basics of what happened, why, and what should have been done to 'fix' this issue...or if anything 'should' have been done at all, considering that doing business is risky, and that sometimes you take risks and they simply don't pay off.

-XT

No one is arguing that an ordinary business taking risks is bad, or should be regulated. And there is nothing wrong with derivatives themselves - they are certainly complex, can be risky, and hard to understand, but if an ordinary business wants to take on that risk, that's their problem.

The problem is that these large banks and financial institutions are not ordinary businesses. They have become so large, and have their fingers in so many parts of the economy, that the failure (e.g. bankruptcy) of any one of them would cause massive, widespread economic devastation. As a result, these institutions are essentially protected from failure by the government. If they make a series of risky investments which blow up and threaten them with bankruptcy, taxpayers will bail them out.

So, there is a strong push for much tighter regulation of these "too big to fail" institutions, that would prevent them making risky investments in order to minimize the chance of future failures and future bailouts. Wall Street's response is essentially, "Nah, we don't need that, we're smart and competent people, we know what we're doing, we're not going to do anything stupid ever again!"

In particular, JP Morgan and Jamie Dimon have been some of the strongest opponents of increased regulation, and until now, have largely been able to back up their protests with a record of relative competence. This is a black eye for them, and a huge setback for the claim that these too-big-to-fail institutions will be able to avert future failures by self-policing.

I disagree with Evil Captor that there is anything wrong with derivatives themselves. If some hedge fund wants to go hog wild with complicated, risky investments, that's fine with me. The problem is when these large superbanks, that are essentially backstopped by US taxpayers, want to be able to play in that game.

[Tamerlane]

Total arachnid hijack, please disregard:

Originally Posted by elucidator

are arm-wrestling Durango style, where the loser gets struck by a deadly Mexican scorpion whose sting is invariably fatal. Only real flaw, there is no such scorpion,

Durango Scorpion. Invariably fatal, no. But I wouldn't juggle them.

[billfish678]

Seems to me the safest and easiest thing to do that still allows risks and the "free hand" of the market to work is to just to limit the SIZE of any institution. And WHY do these things need to be SO big? Is there really an economy of scale at these sizes when its just paper pushing? I can see why just a few automakers are going to be much more efficient than a hundred. Banks and such, not so much.

[The Tao's Revenge]

Originally Posted by Tamerlane

Total arachnid hijack, please disregard:



Durango Scorpion. Invariably fatal, no. But I wouldn't juggle them.

No, no hijack. Depositing a few of those in the right places would be good for the banking industry.

[John Mace]

Originally Posted by Evil Captor

JP Morgan has announced major losses associated with derivatives trading, proving once again that this is one financial instrument that is literally TOO HOT to handle and portends certain disaster for our economy if it's not cut off at the knees.

Here's a Robert Reich editorial in the Huffington Post that covers the topic quite well.

Actually, it doesn't explain anything and reads more like a scare tactic than anything else.

Perhaps you can explain to all of us why "derivatives" have to be "cut off at the knees".

I'm all ears (or eyes, really).

[elucidator]

Here's what has to happen. First off, to fix the financial industry, you have to consult a lefty-type hippy. You're welcome.

Banking and finance has to be boring. Dull. Plodding along with modest but reliable investment returns. Maybe not the kind of career that attracts greed-ridden young people who cannot wait to get their business degrees so they can get out there and trade, trade, trade! and die at fifty rolling around in piles of hundred dollar bills with cocaine and supermodels. Not that I fault them for their ambitions, except that its stupid. A golden vacuum.

But this is always the problem, isn't it? Wall Street isn't a means of investment, its a casino. Read Mark Twain's Gilded Age and tell me whats different? They called it "speculation", but its pretty much the same. Its not investment, its not even predatory capitalism, its barely capitalism. Its gambling by experts who fleece the noobs and then play against each other. Its like prison where sociopathy is a survival skill, but the rapes are all strictly cash.

We need to regulate the living shit out of it. Make it dull. Boring. I recognize this will put a lot of traders and salesmen out of work. Plenty of jobs for barristas and bicycle messengers. Or they can stand by the freeway entrance in three piece suits and signs that say "Will lie for food".

But lest this be taken to mean that I have little respect for people who have devoted their lives to greasing the treads of the machine, let me make myself clear. Fuck 'em.

[waterj2]

Here's a bit simpler of an explanation http://www.marketplace.org/topics/bu...loss-explainer

As far as I can tell, this was technically considered hedging, which banks are allowed to do with depositors' money, while it looks an awful lot like proprietary trading, which would be banned under the Volcker Rule.

[China Guy]

It was one massive proprietary bet using derivative instruments. Derivatives in and of themselves are neutral, but sometimes in the sense that a loaded handgun lying around is neutral. One thing to know about derivatives is that they are a zero sum game. For every winner, there is an equal loser.

A challenge with some derivatives is that they are highly leveraged. A loss is magnified.

Another challenge is that the big banks have implicit and explicit US government/taxpayer guarantees.

Repealing Glass Steagle was the dumbest thing done in the past 80 years and should be re-instituted to remove system risk in the banking industry.

What happened to JPM was classic. The trader went long and wrong, and the entire market lined up against them. No institution and no government can stand up to the market lining up against them. Ask the Bank of England when they tried to defend the pound back in 1993-ish. I wonder how many billions the final loss will be recorded at. $2billion is just the tip of the iceberg

[Chimera]

Unless the problem is very very much larger than has so far been reported, we certainly cannot expect anything to happen before the election, and probably not after it either.

[Whack-a-Mole]

Perhaps someone can explain it to me because I do not see the problem here.

Someone made a bet on the markets and they lost.

Unless they want another tax payer bailout seems to me this is how markets are supposed to work.

If they suck at their job and lose billions well tough shit for them.

Playing in the markets is all about risk. Derivatives are explicitly about buying/selling/managing risk. The whole point is to transfer risk from one to another.

If you get burned then sucks to be you. That is the game you played and you fucked up.

Take your lumps and move on...or fail if it comes to that.

[waterj2]

But if JP Morgan fails, we're pretty much all fucked. Remember when Lehman Brothers failed? It would be a lot worse than that.

[Whack-a-Mole]

Originally Posted by waterj2

But if JP Morgan fails, we're pretty much all fucked. Remember when Lehman Brothers failed? It would be a lot worse than that.

Too big to fail so regardless what they do we are stuck with their mess?

If that is so then we do have socialism. Just not what we usually think of it. Privatize profit and socialize loss.

If that is where we are then we need to let them sink and tough it out.

[Shayna]

AND NOW WE KNOW THE TRUTH ABOUT WALL STREET: It's Just Kids Playing With Dynamite

... [The bankers said,] Well-run banks should be trusted not to be so colossally reckless and stupid. Well-run banks should be allowed to manage their own risks. Well-run banks should not be hammered with straight-jacket regulations that would stymie their marvelous and creative innovation. Well-run banks should be free to look after themselves, like responsible adults.

And the banking lobbying engine rushed this message to Washington and threw money around. And the lobby quickly persuaded Congress that Wall Street was fine, that the financial crisis was an aberration, that Wall Street should be left alone.

JP Morgan was the prime engine of this message. And its brilliant CEO, Jamie Dimon, was Wall Street's defiant Adult-In-Chief.

[The problem is]

... the gambling instruments the banks now use are mind-bogglingly complicated. Warren Buffett once described derivatives as "weapons of mass destruction." And those weapons have gotten a lot more complex in the past few years.

... Wall Street's incentive structure is fundamentally flawed: Bankers get all of the upside for winning bets, and someone else—the government or shareholders—covers the downside.

The second reason is particularly insidious. The worst thing that can happen to a trader who blows a huge bet and demolishes his firm—literally the worst thing—is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm.

... now that JP Morgan has proven that even "the best" banks haven't the faintest idea what they're doing (or don't care), it's time for Congress to finally make it happen.

That nothing changed after the financial crisis is outrageous. But if nothing happens now, our entire government should resign in shame.

I think Henry Blodgett is kinda pissed.

[waterj2]

Originally Posted by Whack-a-Mole

Too big to fail so regardless what they do we are stuck with their mess?

Basically, yes, that's what “too big to fail” means. An institution that is so big that if it fails, it's a catastrophe for the rest of us. Yes, that's basically an implicit guarantee of a bailout if things go sour. Ideally, we wouldn't allow this sort of systemic risk, but it works out well for the banks, and they have a lot of political power. And when people got a whole bunch of populist rage at the situation, they blamed the government and elected a bunch of anti-regulation Tea Partiers to Congress. Which didn't exactly solve the problem.

[Whack-a-Mole]

Originally Posted by waterj2

Basically, yes, that's what “too big to fail” means. An institution that is so big that if it fails, it's a catastrophe for the rest of us.

True but we could unwind them to something smaller (break them into pieces).

I agree though that there is no way in hell the bought politicians (and make no mistake both parties are bought) will let that happen.

I fear 2008 was just a preview. We may hang in awhile but things will get worse before they get better if congress does nothing (and this is about as much of a do-nothing congress as has ever been seen in this country...I really think they know this and are playing musical chairs and aiming to be sure they have a seat when the music stops...the rest of us are fucked).

[Voyager]

Originally Posted by XT

Too technical for me (and at a guess for all the posters, including the OP, speculating about this in the thread so far), but a couple of observations from someone mostly clueless about this entire situation. First off, business involves risk. JPM took a risk and it didn't pay off. It happens. You simply can't take all risk out of the equation. Secondly, and this is from memory here, but JPM is a multi-billion dollar a year company, so while a $2 billion loss on this risk is going to hurt, I seriously doubt that they can't cover it. Again, business involves risk, and when you take risks you, well, take risks. If it pays off then you get large rewards...if it doesn't, then it can be painful, and may even drive you out of business. C'est la vie. Thirdly, is more a request for information...I know that there are some legislation being looked at for new regulation (i.e. Volcker Rule), but would it even have effected this? I've heard different takes on it, with some saying it would have prevented the trade and some saying it might not have had an effect. Anyone know? As I said, this is all too technical for me so I'm not fully grasping most of the aspects here.

What I do know though is that you simply can't take all risk out of business, not if you expect your economy to actually be responsive and grow. You could, of course, regulate things to death, but what you are going to get is a shitty economy if you set the bar too high. By the same token, you need to have a bar, and this might be a case where the bar was just to low. I really don't know, to be honest...and I doubt the OP does either. Hopefully some 'dopers will wander in who know a bit more about the technical aspects here and will be willing to edjumacate the rest of us on at least the basics of what happened, why, and what should have been done to 'fix' this issue...or if anything 'should' have been done at all, considering that doing business is risky, and that sometimes you take risks and they simply don't pay off.

-XT

I suggest you read "The Black Swan" which gives a lot of reasons why these things happen.
Yes, business involves risk. And there are entire groups within banks to analyze and control risks - groups which totally screwed the pooch in 2007-2008. However I am having a hard time imagining the upside of a bet that could cause a downside of $2 billion, and I'm having a hard time imagining why a risk group would go ahead and authorize it. There are also groups monitoring trades. As far as I can tell, the guy who screwed up here was not rogue. In fact I believe his actions were well known. What the hell were they thinking not to unwind sooner?

Yes, JPM can afford it - though I doubt the stockholders are going to be pleased. So who else pays the consequences? And how do we ensure that this kind of thing doesn't repeat in an amount which will bring down a company. Like Corzine's company, for instance.
Saying "oh well, you can't work without risk so nothing to see here" is just like saying that losing a nickel betting on heads or tails is the equivalent of Russian Roulette.

[CoolHandCox]

so what does this one line JP Morgan headline mean to me: joe dude?

[Rune]

Originally Posted by Evil Captor

Here is what I predict will happen: nothing.

Nothing should happen. It’s a private bank. They can squander their money on risky trading, unprofitable investments, or booze and prostitutes. Whatever they find most appropriate. As long as no taxpayer money is going to be involved then it’s their own problem. And the bank is still going to post a multibillion profit. Even with the write down it is four billion dollars in black according to one account.

Originally Posted by Evil Captor

Citizens United may well prove to be the death knell of American democracy.

No big loss. American democracy wasn’t all that to begin with.

Originally Posted by CJJ*

What's interesting in the FT article is that the other traders suspected the index was being kept artificially low by a single trader at JPM, but since the derivatives market is unregulated they had no one to compain to about it.

So it appears that it is just a matter of other banks having earned on JP’s loss. That’s what capitalism is about. The ineptly run businesses gets run over by more adapt and better managed businesses.

[ralph124c]

AS long as we have a SOT like Tim Geithner, all is well-we can just print up an extra $2 billion-and back up JP Morgan Chase.
With "oversight" like this, why would any banker care? The US Government will always come to the rescue, and (after all) its only taxpayer's money.
Jon Corzine is proof of that -he's now a "bundler" for Obama's campaign-he dumped about $1.5 billion-and he isn't facing any indictments.

[Esox Lucius]

--The most, and only, specific reason I've heard bankers give for opposing the regulation of derivatives (usually it's just general cries of "disastrous" and "it'll never work") is that money would go off-shore to countries that don't regulate them. What that would mean for the economy, I have no idea.

--Last I heard, the Volcker Rule had been watered down so much by bankers in the negotiations that they'd have no trouble getting around it.

Originally Posted by LawMonkey

Lots of derivatives--perhaps most--are perfectly legitimate, safe ways of reducing exposure to risk (and shifting that risk to those who are willing to bear it in hopes of a profit).

If they need an instrument to reduce exposure to risk, doesn't that imply that they're taking too much risk in the first place?

[John Mace]

Originally Posted by Shayna

I think Henry Blodgett is kinda pissed.

Probably a hold-over from when he was banned from the securities industry about 10 years ago over a charge of securities fraud.

But I'm sure all the folks who defended the Solyndra blow-up will be here shortly to remind us that you can't judge an investment strategy by one deal gone bad.

Call me when JPM asks for a bailout. Until then, this is what markets do. They punish you for mistakes. And as long as that punishment sticks, then they sink or swim based on how they learn from these mistakes.

[XT]

And they are already being punished by the market...IIRC, their stock was down over 9% on Friday and they have gotten a lot of negative lash back from their investors.

-XT

[septimus]

Many jurisdictions have laws restricting the fires property owners may start on their own property. This isn't babyish hand-holding. The government doesn't care if you burn down your own assets; the concern is that the fire will spread to one's neighbors.

(Some libertarians will argue that one should be free to start fires and, if they get out of control, well ... that's what lawsuits are for. Even ignoring that the arsonist's assets may not be enough to cover damages, the confused different model a libertarian has of economic society means I will be unable to engage him in debate.)

In this case, the fire started at JPM seems likely to be well-contained, causing merely a few billions of damage to JPM's own stockholders. Does anyone seriously need examples that such egregious bets could affect the public interest, even if this one did not? Don't forget that, due to Treasury generosity a few years ago, JPM is already playing, in effect, with taxpayer dollars. Their gambles are one-sided: no limit on profits, but at some point (much higher than $2 billion certainly) it is Joe Q. Public, not JPM stockholders, who will be left picking up the tab.

Extreme libertarianism now has such a stranglehold on American intellectual thought that there seems to be confusion about why the government issues charters to banks and corporations at all. Here's a hint, from one law topic I'm familiar with, patent law. Many think the purpose of patent law is to reward inventors. Wrong (or at least, not quite right):

Originally Posted by Article I, Section 8, of the US Constitution

The Congress shall have Power ... To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries ..."

That's right. Patent law is about promoting general welfare. And that's also the reason why banks are chartered etc., contrary to the confused thinking we see upthread.

[Capt. Ridley's Shooting Party]

Article in the Independent here. Apparently the loss was down to a single French trader operating out of a JPMorgan division in the City of London who had become famed throughout the financial sector for his massive bets.

[Linden Arden]

Originally Posted by ralph124c

AS long as we have a SOT like Tim Geithner, all is well-we can just print up an extra $2 billion-and back up JP Morgan Chase.
With "oversight" like this, why would any banker care? The US Government will always come to the rescue, and (after all) its only taxpayer's money.
Jon Corzine is proof of that -he's now a "bundler" for Obama's campaign-he dumped about $1.5 billion-and he isn't facing any indictments.

The MFG trustee, Giddens, has located all the missing funds. Sorry, you will get no indictment there although the GOP now wants a special prosecuter to string this along for political purposes.

Morgan was hedging against their massive long position in the market so $2 billion is fairly light for them.

They stress test at $56 billion in losses before capital concerns are raised. Thanks, Geithner, for the stress tests. TG will be rememebered as of the best Treasury Secs ever. We were headed to financial Armageddon in Jan 2009.

[John Mace]

Originally Posted by Capt. Ridley's Shooting Party

Article in the Independent here. Apparently the loss was down to a single French trader operating out of a JPMorgan division in the City of London who had become famed throughout the financial sector for his massive bets.

Yes, he's some hot-shot trader who lives in Paris and commutes to London. Which isn't as crazy as it seems, as London and Paris are actually pretty close-- only a bit farther away than NYC and DC. I mean, I wouldn't want to do it, but if you have a pied-à-terre in London, it wouldn't be so bad. Back home in Paris for the weekend. in less than 3 hrs by train.

Which begs the question... would US regulations apply to the London branch of a US Bank?

[Capt. Ridley's Shooting Party]

I don't think so. IIRC, American banks were opening up offices in London to perform an end-run around American regulators, as British financial regulations had become so lax under Brown. The Vickers Report is due to be implemented in full in the next few years, however, which will hopefully completely stamp out this sort of behaviour (retail and investment banking now need to be completely separated).

[John Mace]

Originally Posted by Capt. Ridley's Shooting Party

I don't think so. IIRC, American banks were opening up offices in London to perform an end-run around American regulators, as British financial regulations had become so lax under Brown. The Vickers Report is due to be implemented in full in the next few years, however, which will hopefully completely stamp out this sort of behaviour (retail and investment banking now need to be completely separated).

That's what I thought. And if they get kicked out of London, they'll open shop somewhere else. That is not to say that we should just throw up our hands and forget about meaningful and effective bank regulation, but we should not be naive about it. We in the US have this terrible habit of thinking that everything important in the world either does or should happen here.

[waterj2]

Originally Posted by John Mace

Probably a hold-over from when he was banned from the securities industry about 10 years ago over a charge of securities fraud.

But I'm sure all the folks who defended the Solyndra blow-up will be here shortly to remind us that you can't judge an investment strategy by one deal gone bad.

Call me when JPM asks for a bailout. Until then, this is what markets do. They punish you for mistakes. And as long as that punishment sticks, then they sink or swim based on how they learn from these mistakes.

Call you when banking deregulation leads to some sort of global financial meltdown and JP Morgan needs to be bailed out with taxpayer money? Like happened in 2008? I think the idea is to get a handle on systemic risk in the financial industry before then. And if that history is a guide, you'll just be back to saying “no big deal; call me next time” within a few years after that, too.

The government (and all of us, really) has a huge stake in JP Morgan's stability, which isn't exactly amenable to a market solution. I'm not sure that I buy the idea that JP Morgan can operate the same in any other country and that there's nothing the US can do about it. We can certainly reinstate Glass-Steagall, and refuse to provide FDIC insurance for banks in the US that engage in proprietary trading anywhere in the world.

[John Mace]

Originally Posted by waterj2

Call you when banking deregulation leads to some sort of global financial meltdown and JP Morgan needs to be bailed out with taxpayer money? Like happened in 2008? I think the idea is to get a handle on systemic risk in the financial industry before then. And if that history is a guide, you'll just be back to saying “no big deal; call me next time” within a few years after that, too.

A $2B loss by JPM isn't going to bring down the banking industry.

The government (and all of us, really) has a huge stake in JP Morgan's stability, which isn't exactly amenable to a market solution. I'm not sure that I buy the idea that JP Morgan can operate the same in any other country and that there's nothing the US can do about it. We can certainly reinstate Glass-Steagall, and refuse to provide FDIC insurance for banks in the US that engage in proprietary trading anywhere in the world.

Good luck regulating the actions of Banks in other countries. These guys are smart, and there's tons of money to be made. Like I said, I'm not against reasonable regulation, just don't be naive about it.

[Martin Hyde]

The real story here isn't really derivatives, and certainly not derivatives in general. Over in Europe JP Morgan basically had Iksil trying to hedge against the mess in Europe. That in itself isn't invalid or bad. Unfortunately he got caught up in a complicated scheme and made many mistakes along the way. Improperly hedging an existing hedge, making mistakes in the amount he was offsetting existing trades and etc.

He was basically playing with too much money in a risky, complicated environment. Most likely nothing he did would have been prohibited by the Volcker Rule had it been in place.

The real story is basically that the big banks are still running loose ships. JP Morgan escaped a lot of the negativity of the big financial crisis because they were the healthiest American bank during that time. What is really scaring the in-the-know analysts is this is evidence that JP Morgan is willing to let guys like Iksil go crazy with a shit ton of money, and from that we get to the core issue: banks like JP Morgan are taking risks that other banks wouldn't because they feel the government will bail them out if these risks go sour. As long as the 4-5 biggest banks (the $1tn + asset banks) in America continue to behave with the expectation that the government will not let them actually fail, they will take risks inappropriately and beyond what a regular business would be willing to take.

In terms of JP Morgan as a company, it should be pointed out that even with the $2.3bn loss from this they are still profitable on the quarter, so this by itself doesn't actually put JP Morgan in danger of going under or anything, it didn't even make them go into the red for the quarter. But it's more the attitudes this represents than anything else that should have people concerned.

I've advocated in the past for a bank asset tax levied quarterly or annually against large banks to try and discourage their existence. I said this in a thread some time ago:

Implement a Bank Tax that is assessed on the value of the bank's holdings. Banks with under $50bn in holdings would be assessed no tax. It would be around 0.15% (0.0015) on banks > $50bn, so Goldman Sachs would owe about $1.4bn a year. Banks above $1tn would owe 0.35%, so Bank of America would owe almost $8bn a year. This is both a revenue gain and designed to make being so large a less competitive proposition, we should not want overly large banks. Obviously like all taxes it is passed on to consumers, but since pretty much all credit unions, most small municipal banks, and even many regional banks will not have more than $50bn in holdings it means ordinary consumers will have little to be worried about if they bank with those entities. The very fact that those alternatives will exist for ordinary consumers means even the big banks will probably pass these costs on to large institutional clients who may be too big for a smaller bank to server and who are the reason some of these super banks have such large holdings in the first place.

[The Tao's Revenge]

Originally Posted by John Mace

Good luck regulating the actions of Banks in other countries. These guys are smart, and there's tons of money to be made. Like I said, I'm not against reasonable regulation, just don't be naive about it.

You completely missed his point. If banks are operating in the US then they have exposure to US law. If they wish to continue to operate in the US then they could be made to observe US regulations even abroad.

The problem is people accept companies as amoral. This needs to change.

[Voyager]

Originally Posted by XT

And they are already being punished by the market...IIRC, their stock was down over 9% on Friday and they have gotten a lot of negative lash back from their investors.

-XT

Bank stock prices went down even more in 2008. That made those who became unemployed due to their screwing up feel much better, no doubt.

[Voyager]

Originally Posted by Martin Hyde

He was basically playing with too much money in a risky, complicated environment. Most likely nothing he did would have been prohibited by the Volcker Rule had it been in place.

From what I read in the Times today the first level investment was in corporate bonds, and the second level was on insurance on the companies in that list going bankrupt. The hedge against that was what got them into trouble. Europe was not mentioned - the market drop in March was what got them into trouble.

JPM was lobbying for regulations which would allow these trades, so I assume that at least some would not be legal under certain implementations of Volcker. The visibility that would be added would have helped unwind this deal sooner, with fewer losses.

The lesson here isn't that JPM is in any danger, but that market forces and poor risk management can cause even well manged companies to make big mistakes - which become our problem if they are big enough.

[Voyager]

Originally Posted by John Mace

Good luck regulating the actions of Banks in other countries. These guys are smart, and there's tons of money to be made. Like I said, I'm not against reasonable regulation, just don't be naive about it.

The argument against Glass-Steagall was that London was going to eat our lunch unless we let the banks do everything, they would no longer be competitive, and there would be horrible consequences for the economy. How did that work out?

[Martin Hyde]

Originally Posted by Voyager

From what I read in the Times today the first level investment was in corporate bonds, and the second level was on insurance on the companies in that list going bankrupt. The hedge against that was what got them into trouble. Europe was not mentioned - the market drop in March was what got them into trouble.

I was just going off the Wall Street Journal article:

J.P. Morgan Chase JPM -9.28% & Co. told traders several months ago to make bets aimed at shielding the bank from the market fallout of Europe's deepening mess. But instead of shrinking the risk, their complicated bets backfired into losses of as much as $200 million a day in late April and early May, people familiar with the situation said.

JPM was lobbying for regulations which would allow these trades, so I assume that at least some would not be legal under certain implementations of Volcker. The visibility that would be added would have helped unwind this deal sooner, with fewer losses.

I've heard it is very ambiguous, again from a WSJ article.

Basically JPMorgan's CEO says it would not have violated the Volcker Rule because it was not an investment of the bank's money but a hedge, which is not an investment. One of the co-sponsors of the bill that contained the Volcker Rule says it would have violated the rule. Independent analysts say the text of the bill is not written as clearly as you'd hope for something like this.

Of course the problem is neither sides view will just automatically prevail. Once the Volcker Rule goes into effect whichever regulatory agents have to enforce it will put their own interpretation on it (or rather their agency will) and CEOs like Jamie Dimon may be willing to go to court to contest the specifics of the wording.

[waterj2]

Originally Posted by John Mace

A $2B loss by JPM isn't going to bring down the banking industry.

Thanks for pointing out the obvious. The point isn't how big the loss was, it was how they manage their risk. Every once in a while, like 1929 or 2008, a whole bunch of things all go south together. That's what we're trying to look out for. How much of the banking industry's money is on the hook in deals like this, and what happens if one couple billion dollar loss leads to another, and things snowball. It's not a common occurrence, maybe once every 70 years (maybe less in the absence of New Deal era banking regulation) or something. But the point is to have plans in place ahead of time.

Good luck regulating the actions of Banks in other countries. These guys are smart, and there's tons of money to be made. Like I said, I'm not against reasonable regulation, just don't be naive about it.

There's always international regulations like Basel III. It's not like the financial industry is going to decamp to Lagos. There's only a handful of countries that realistically need to be on board.

But I'm trying to point out that to the extent that financial firms are systemically important to the US economy, the US can address those risks. As I said, deposit insurance in the US could only be available to banks that stick to commercial banking. If a US investment bank wants to offer commercial banking services in the UK, then the UK is on the hook for that. US depositors are safe. The US can't keep JP Morgan from making dumb proprietary trades in the UK, but it can, to some extent, keep the US's exposure to those risks minimized. If the banks want to play around in the US economy, we can certainly set rules for how they do it.

[waterj2]

Originally Posted by Voyager

The argument against Glass-Steagall was that London was going to eat our lunch unless we let the banks do everything, they would no longer be competitive, and there would be horrible consequences for the economy. How did that work out?

I'm guessing it mostly worked out quite well for the people that were making that argument.

[John Mace]

Originally Posted by waterj2

Thanks for pointing out the obvious. The point isn't how big the loss was, it was how they manage their risk. Every once in a while, like 1929 or 2008, a whole bunch of things all go south together. That's what we're trying to look out for. How much of the banking industry's money is on the hook in deals like this, and what happens if one couple billion dollar loss leads to another, and things snowball. It's not a common occurrence, maybe once every 70 years (maybe less in the absence of New Deal era banking regulation) or something. But the point is to have plans in place ahead of time.

Knock yourself out. And then get back to me when they ask for a bailout. I'm not seeing it in the cards here, and this is what the thread is about. The OP claims that: " proving once again that this is one financial instrument that is literally TOO HOT to handle and portends certain disaster for our economy if it's not cut off at the knees." It proves no such thing. It's a $2B loss that JPM is going to absorb.

[XT]

Originally Posted by Voyager

Bank stock prices went down even more in 2008. That made those who became unemployed due to their screwing up feel much better, no doubt.

Well, two things (again, from my uneducated perspective on all this). First, banks were shielded somewhat by the fact that they got bailouts in 2008, so that is a market distortion. JPM is unlikely, in the extreme, to get a bailout over this, so they are going to feel more of the brunt of the markets displeasure. Secondly, unlike what happened in 2008, the focus here is going to be almost completely on JPM...at least that's my take (IOW, there aren't a bunch of banks having problems and teetering the entire financial system on the edge of a cliff, with a bunch of other factors happening such as the real estate melt down, recession, etc etc etc). Could be wrong, but I've certainly not seen much indication that this is the start of a general meltdown of the market.

What I'm getting out of all of this so far is that JPM screwed up and is going to take a pretty large loss over it...and that people seem to automatically want to leap on regulation as the answer to all our problems and the way to take 'risk' out of any equation. And this after watching freaking Europe in a slow meltdown that has a large non-zero government aspect to it. To me, the 'answer' to this 'problem' is to categorically state that the US government will not bail out any banks that screw the pooch, as this seems a large market distortion to me (banks are changing their risk equation because they know that the government will bail them out if they fuck up too much). Maybe this takes to form of 'if the government DOES have to step in and bail out a given bank due to a threat to our core economic system, that this banks assets will be temporarily nationalized and it's assets broken up and sold off in a similar manner to AIG, but with the provision that all upper managements contracts will be null and void in this eventuality'.

Possible more regulation is also in order, but not some knee jerk heavy regulation attempting to close the barn door after the latest 'disaster', but focused and intelligent regulation that looks at the bigger picture. Maybe these huge mega-banks do need to be broken up into separate (or at least compartmentalized) companies, maybe new regulation needs to be drafted, maybe we need to learn that companies take risks and sometimes they pay off and a lot of money is made, but sometimes they don't and consequently a lot of money is lost...or, maybe all of the above, or some combination. It's not my field, so I really don't know the specifics enough to even speculate on what is the right or best course.

-XT

[billfish678]

Originally Posted by XT

Maybe this takes to form of 'if the government DOES have to step in and bail out a given bank due to a threat to our core economic system, that this banks assets will be temporarily nationalized and it's assets broken up and sold off in a similar manner to AIG, but with the provision that all upper managements contracts will be null and void in this eventuality'.
-XT

That would be a good start IMO. These folks always claim they are worth more money than God because they are so smart and make everybody so much money, but when the feces hits the air accelerator they bail out with a golden parachute (or ven worse keep the same damn job and still get bonuses). Perhaps if THEIR PERSONAL millions were at risk they would be a bit more careful. And even if they weren't, at least they would get the same financial fracking over everybody else does when they screw the pooch.