# JP Morgan Screws Up With Derivatives Trading **URL:** \ **Category:** Great Debates\ **Created:** [May 11, 2012, 6:49pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633 "2012-05-11T18:49:42Z")\ **Posts on this page:** 20\ **Page:** 5
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 15, 2012, 6:42am UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/81 "2012-05-15T06:42:43Z")
> [@XT](#): > > How would US legislation effect offices in China?? Regardless, ISTM that the answer to this is, again, simply let them fail if they fuck up by the numbers…or, if they are ‘too big to fail’ then legislate to nationalize them if they require a federal loan to stay afloat with the proviso that the assets would be managed until they could be sold off to repay the tax payers for the bail out. I mean, that seems to have worked out well the last time this happened, and that was a systemic failure, not just one company running amok. I believe that most of the banks have repaid their bailouts, and I think we (the US taxpayer) actually ended up in the black as far as AIG went…no? > > -XT Why do you think incompetent risk management is any different in Hong Kong than it is in New York? Or London? What do you think would happen if there was another crash today? My guess is that Republicans in the House would blame the 2008 bailout, not lack of regulation, and block a repeat of TARP. Then we’d have a depression, and they would blame everyone but themselves. And for the fifth time, Mace, it is not the $2 billion, it is the bank processes that let that loss happen which just as well could have let a bigger loss happen. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [May 15, 2012, 8:09am UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/82 "2012-05-15T08:09:49Z")
> [@XT](#): > > Correct me if I’m wrong here, but wouldn’t G/S merely prevent banks from engaging in any sort of non-banking trading? How would it remove the ‘implicit guarantees’ (i.e. the federal FDIC or other protections of banks failing)? 😕 You _really_ don’t see the difference between taxpayers guaranteeing deposits in a disciplined bank, and taxpayers guaranteeing deposits that the banker takes down to the racetrack, hoping for “easy money” he can skim off to buy a Ferrari? :smack: (Yes, my remark is something of a hyperbolic caricature … but you started it.) ---
**Author:** ![Evil\_Captor](https://avatars.discourse-cdn.com/v4/letter/e/f17d59/32.png) [@Evil\_Captor](https://boards.straightdope.com/u/Evil_Captor)\ **Post date:** [May 15, 2012, 1:45pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/83 "2012-05-15T13:45:44Z")
> [@John\_Mace](#): > > I don’t have a problem with re-instating G/S, but if you think a $2B loss is all it takes to prove that more regulation is needed, then you don’t know anything about finance. So what if the CEO said his company is well run? What CEO isn’t going to say that? > > If you’re going to freak out every time a company has a big loss, I don’t want you calling the shots on regulations. (And that’s the generic “you” in both instances.) It’s not “a company” it’s JP Morgan, the company that very publicly stuffed the Volcker Rule, claiming that it wasn’t needed, that responsible bankers could be trusted not to get stung with derivatives trading. The very people you would thing would take the most effort to AVOID getting stung in a derivatives trade, and yet … here they are! If THEY get stung, you know the entire rest of the banking industry in vulnerable. What this demonstrates is that NONE of the banks can be trusted, John. NONE of them. As for “freak out” … I dunno, John, I thought the crash of 2008 and resulting worldwide depression was a big deal and recurrences should be prevented. I also think things can get worse. Maybe you don’t. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 15, 2012, 2:42pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/84 "2012-05-15T14:42:30Z")
> [@Evil\_Captor](#): > > It’s not “a company” it’s JP Morgan, the company that very publicly stuffed the Volcker Rule, claiming that it wasn’t needed, that responsible bankers could be trusted not to get stung with derivatives trading. The very people you would thing would take the most effort to AVOID getting stung in a derivatives trade, and yet … here they are! If THEY get stung, you know the entire rest of the banking industry in vulnerable. What this demonstrates is that NONE of the banks can be trusted, John. NONE of them. > > As for “freak out” … I dunno, John, I thought the crash of 2008 and resulting worldwide depression was a big deal and recurrences should be prevented. I also think things can get worse. Maybe you don’t. Arguing about the Volcker Rule is missing the point as it wouldn’t have prevented this loss or trade from happening. > [@](#): > > “The first thing to understand about these trades is that – all along – JPM has classified them as hedges. Hedges are not ‘prop trades’ and there’s no sane way to classify them as such (or more precisely: there’s no way to clearly define, for a given trade, which part/how much of it is a Kosher, Volcker-Approved Hedge and which of the rest/residual is Unkosher, Volcker-Disapproved Prop). The second thing to understand about these trades is that they were risky and dumb and didn’t work as hedges that well. We know that now because golly they have lost $2 billion dollars and hoo boy is that a lotta clams. But JPM apparently did not know that before learning it via the tried-and-true risk/control method of Noticing Large Negative P&L Emails Coming To Your Blackberry Right Before Dinner And Ruining The Rest Of Your Evening. > > What this establishes, I think, is that trades can be risky and dumb and lose money without being ‘prop trades’. A trade can serve a ‘legitimate’ purpose – like it’s intended as a hedge, to ‘legitimate’ activity – and yet still lose a lot of money. Now you and I and Paul Volcker all agree that all else equal we don’t want banks to lose a lot of money. So a ‘rule’ like, say, Don’t Put On Trades That End Up Losing Money might make sense (if you also had a time machine and could check the future), but a rule saying Don’t Do Prop Trades makes no sense as a way to prevent risk, because it simply does not ‘prevent banks from taking on risk’. Exhibit A: JP Morgan. Right now.” from [here.](http://rwcg.wordpress.com/2012/05/11/im-pretty-sure-jp-morgan-lost-2-billion-just-to-spite-me/) I’m not arguing that there isn’t a problem, but rather that the Volcker Rule isn’t some kind of magical solution. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [May 15, 2012, 3:27pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/85 "2012-05-15T15:27:56Z")
[QUOTE=Voyager] Why do you think incompetent risk management is any different in Hong Kong than it is in New York? Or London? [/QUOTE] Well, I don’t think that. Nor did I mention that. Perhaps what I wrote was confusing, or maybe I’m the one confused here. China Guy was talking about working in Hong Kong. Regulations in the US wouldn’t effect operations of even a US company operating in Hong Kong…which would be under Chinese regulatory rules. No? > [@](#): > > What do you think would happen if there was another crash today? My guess is that Republicans in the House would blame the 2008 bailout, not lack of regulation, and block a repeat of TARP. Then we’d have a depression, and they would blame everyone but themselves. And the Democrats would blame the lack of regulation and Big Business…and both would be right. And wrong. I’m not opposed to additional or new regulation…but to me this is knee jerk reaction territory, especially since the proposed regulation that was discussed earlier (i.e. Volcker Rule) wouldn’t have had any effect on this from what I understand. From my perspective here this was a company fucking up, making a poor decision, and who will be paying a price for that…including personal prices, since the last article I saw said the CEO (Dimon) is under huge pressures from the shareholders, and may lose some or all of his power over this. Folks have already been fired over it as well, and the company has taken it in the shorts wrt their stocks, market share and confidence of the market. To me, this is a text book example of how the market is SUPPOSED to work…no need for knee jerk regulations (especially since the regulations being pushed for prior to this wouldn’t have prevented this from happening). -XT ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [May 15, 2012, 3:29pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/86 "2012-05-15T15:29:18Z")
[QUOTE=septimus] You really don’t see the difference between taxpayers guaranteeing deposits in a disciplined bank, and taxpayers guaranteeing deposits that the banker takes down to the racetrack, hoping for “easy money” he can skim off to buy a Ferrari? [/QUOTE] I certainly see the ridiculous hyperbole. I question how I started it, however. -XT ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 15, 2012, 4:26pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/87 "2012-05-15T16:26:42Z")
> [@XT](#): > > Well, I don’t think that. Nor did I mention that. Perhaps what I wrote was confusing, or maybe I’m the one confused here. China Guy was talking about working in Hong Kong. Regulations in the US wouldn’t effect operations of even a US company operating in Hong Kong…which would be under Chinese regulatory rules. No? I can’t speak for **ChinaGuy** , but what I saw as his excellent point is that the fundamental problems with the banking system are worldwide. Once you accept that there is a problem, then you can think about solutions. If China want to spend its money bailing out its banks, let them. And as most parents have said to their kids, just because your friend Johnny can stay up all night eating ice cream and watching infomercials doesn’t mean that you are allowed to. > [@](#): > > And the Democrats would blame the lack of regulation and Big Business…and both would be right. And wrong. I’m not opposed to additional or new regulation…but to me this is knee jerk reaction territory, especially since the proposed regulation that was discussed earlier (i.e. Volcker Rule) wouldn’t have had any effect on this from what I understand. From my perspective here this was a company fucking up, making a poor decision, and who will be paying a price for that…including personal prices, since the last article I saw said the CEO (Dimon) is under huge pressures from the shareholders, and may lose some or all of his power over this. Folks have already been fired over it as well, and the company has taken it in the shorts wrt their stocks, market share and confidence of the market. To me, this is a text book example of how the market is SUPPOSED to work…no need for knee jerk regulations (especially since the regulations being pushed for prior to this wouldn’t have prevented this from happening). > > -XT It is not clear that a good implementation of the rules wouldn’t have prevented the problem. First, as I understand it, the corporate bond holdings which were protected by the first layer of hedge was owned by JPM, and perhaps a ban on proprietary trading would have eliminated the underlying investment. After all, why hedge on someone else’s investment? Second, the department that did the hedging was responsible for not only risk reduction through hedging but making a profit. Which makes no sense, really, since if the base investments are doing well the hedge should lose some money by definition. Third, the second level hedge, which lost the money, was put in because the bonds were doing better than expected so the first level hedge was losing money. But they went overboard, so when the economy weakened in March it lost more money then expected. At least some people quoted in the Times said that this second level hedge probably would qualify as proprietary trading under the rules. Fourth, Dimon and friends lobbied hard for the loopholes which might have made some of the hedges okay under the rules. That’s not an argument that the new rules are inherently no good, it is an argument that we should eliminate the loopholes. Finally, the Times reported today on the front page (and I just had a chance to skim the article) that there were warnings about the problem from inside JPM which were rebuffed. Sound familiar? **China Guy** clearly travels in good company. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 15, 2012, 4:27pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/88 "2012-05-15T16:27:44Z")
> [@Trom](#): > > I’m not arguing that there isn’t a problem, but rather that the Volcker Rule isn’t some kind of magical solution. That’s certainly true when the foxes are on the chicken coop security committee. ---
**Author:** ![Evil\_Captor](https://avatars.discourse-cdn.com/v4/letter/e/f17d59/32.png) [@Evil\_Captor](https://boards.straightdope.com/u/Evil_Captor)\ **Post date:** [May 15, 2012, 5:45pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/89 "2012-05-15T17:45:39Z")
> [@Trom](#): > > Arguing about the Volcker Rule is missing the point as it wouldn’t have prevented this loss or trade from happening. I’m not arguing about the Volcker Rule, I’m arguing that JP Morgan took a VERY public position that banks like THEMSELVES did not need oversight … and that they just PROVED that was not true. I agree the Volcker Rule as now constituted protects nothing. As one commentator put it: “Under the current Volcker Rule, ANYTHING is a hedge.” I’d prefer to see Glass-Steagall reinstated and, at the very least, SOME reserves required to make naked credit default swaps less appealing. ---
**Author:** ![Evil\_Captor](https://avatars.discourse-cdn.com/v4/letter/e/f17d59/32.png) [@Evil\_Captor](https://boards.straightdope.com/u/Evil_Captor)\ **Post date:** [May 15, 2012, 5:48pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/90 "2012-05-15T17:48:53Z")
> [@Voyager](#): > > That’s certainly true when the foxes are on the chicken coop security committee. Wall Street owns both parties in Congress AND the Obama Administration. It’s actually a symptom of the gambling den that derivatives have become. By playing their little games, Wall Street has been able to amass so much money that they can easily buy governments. Their computer run a program against other programs, and suddenly Congress is not just affordable, but cheap! ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [May 15, 2012, 6:34pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/91 "2012-05-15T18:34:28Z")
> [@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. Remember when trustbusting was something Republicans did. The problem with these complex dynamic hedging programs is that there is this HUGE temptation to try and take advantage of perceived opportunities for trading gains. Its hard to stare at interest rate spreads all day and not think you have some sense of where things might be heading. Same for any of the really complex esoteric stuff and the more complex or esoteric, the more others defer to you. This is much less of a problem when this occurs in an environment with a lot of small banks rather than a handful of really large banks. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [May 15, 2012, 6:56pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/92 "2012-05-15T18:56:45Z")
> [@Evil\_Captor](#): > > It’s not “a company” it’s JP Morgan, the company that very publicly stuffed the Volcker Rule, claiming that it wasn’t needed, that responsible bankers could be trusted not to get stung with derivatives trading. The very people you would thing would take the most effort to AVOID getting stung in a derivatives trade, and yet … here they are! If THEY get stung, you know the entire rest of the banking industry in vulnerable. What this demonstrates is that NONE of the banks can be trusted, John. NONE of them. > > As for “freak out” … I dunno, John, I thought the crash of 2008 and resulting worldwide depression was a big deal and recurrences should be prevented. I also think things can get worse. Maybe you don’t. You keep saying that you think it could get worse, but you don’t say exactly how. JPM made a mistake, which they discovered themselves, and which they will be paying for. Every investment has risk, and risk always means you can lose money. No one in this thread has explained why this particular risk “proves” that more regulation is needed. Look, I’m not saying that I think more regulation isn’t needed. Maybe it is. But I need more than someone screaming “derivative” to convince me. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 15, 2012, 8:57pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/93 "2012-05-15T20:57:43Z")
> [@John\_Mace](#): > > You keep saying that you think it could get worse, but you don’t say exactly how. JPM made a mistake, which they discovered themselves, and which they will be paying for. Every investment has risk, and risk always means you can lose money. No one in this thread has explained why this particular risk “proves” that more regulation is needed. Every investment has a risk. Investments with greater risk yield greater returns when they are going well - and also crash harder. Management, who want to increase returns, clearly are going to move to investments with higher risk. It is the job of the risk management departments to stop them. Okay so far? 2008 and this situation have clearly demonstrated that risk management departments are not up to the job. The $2 billion loss was **not** an acceptable result of trading - it got the manager responsible fired. That is different from it not blowing up the company. Why did risk management fail? It might be the pressure to make a better return, it might be because the products are so complicated that they aren’t understood, or the models might be wrong. But it is clear that banks cannot regulate themselves, even well-run ones, thus we need regulations imposed by someone who doesn’t have a duty to increase their short run profitability. I can’t think anyone but the government who can do this, can you? If by “this particular risk” you mean whether there should be a regulation to stop the exact thing they did, then no one I’ve seen agrees. If we ban one trading strategy five more will pop up. What this particular risk did was falsify the claim that much of the proposed regulation was unnecessary because the banks wouldn’t make that kind of mistake again. Glass-Steagall worked so well not because it tried to regulate specific strategies, but because it implemented a very clear barrier between banks out to make money through investing in whatever, and which are unregulated and unprotected, and banks making money through loans and such for others, which make less money on average but which are regulated and whose clients are protected. ---
**Author:** ![Hbns](https://avatars.discourse-cdn.com/v4/letter/h/8edcca/32.png) [@Hbns](https://boards.straightdope.com/u/Hbns)\ **Post date:** [May 15, 2012, 9:23pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/94 "2012-05-15T21:23:03Z")
> [@John\_Mace](#): > > It’s a $2B loss that JPM is going to absorb. > [@John\_Mace](#): > > JPM made a mistake, which they discovered themselves, and which they will be paying for. No they aren’t. Nobody at JPM is going to kick in any cash to cover it. There is no secret reserve stash to replenish the funds that were traded to take this losing position. Those people with IRA’s and 401k’s in JPM administered funds are most likely who are going to cover it. This isn’t JPM’s loss, this is a loss to those who invested their money with JPM. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 15, 2012, 9:33pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/95 "2012-05-15T21:33:27Z")
> [@Hbns](#): > > No they aren’t. Nobody at JPM is going to kick in any cash to cover it. There is no secret reserve stash to replenish the funds that were traded to take this losing position. Those people with IRA’s and 401k’s in JPM administered funds are most likely who are going to cover it. > > This isn’t JPM’s loss, this is a loss to those who invested their money with JPM. This is 100% false. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [May 15, 2012, 9:35pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/96 "2012-05-15T21:35:09Z")
Well, no, they won’t directly cover the loss with their own funds, naturally, but like all Wall Street bankers, they are suffused with integrity, and will surely turn away any bonuses or salary. Me? Tequila and bongwater, why do you ask? ---
**Author:** ![Hbns](https://avatars.discourse-cdn.com/v4/letter/h/8edcca/32.png) [@Hbns](https://boards.straightdope.com/u/Hbns)\ **Post date:** [May 15, 2012, 9:47pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/97 "2012-05-15T21:47:13Z")
> [@Trom](#): > > This is 100% false. In the spirit of GD, would care to substantiate your claim? ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [May 15, 2012, 10:04pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/98 "2012-05-15T22:04:05Z")
Many a time in the past, when an active operator in the Street, he had done things to the Small Investor which would have caused raised eyebrows on the fo’-c’s’le of a pirate sloop - and done them without a blush. - P.G. Wodehouse October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. - Mark Twain What has been will be again, what has been done will be done again; there is nothing new under the sun. - Ecclesiastes 1:9 ---
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [May 15, 2012, 10:05pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/99 "2012-05-15T22:05:00Z")
Why doesn’t the government encourage banks to invest in state lottery tickets? They could buy up huge blocs, ensuring a steady return…and they would be helping with state finances. Sounds like a plan! ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [May 15, 2012, 10:15pm UTC](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633/100 "2012-05-15T22:15:10Z")
> [@Hbns](#): > > In the spirit of GD, would care to substantiate your claim? Uhhh, you made the claim. How do I cite something that hasn’t happened? Cite back at you. [Previous page](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633.md?page=4) [Next page](https://boards.straightdope.com/t/jp-morgan-screws-up-with-derivatives-trading/621633.md?page=6)