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.
I think Henry Blodgett is kinda pissed.
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.
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).
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.
so what does this one line JP Morgan headline mean to me: joe dude?
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.
No big loss. American democracy wasn’t all that to begin with.
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.
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 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.
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?
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.
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
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 [del]confused[/del] 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):
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.
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.
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.
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?
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.
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.
A $2B loss by JPM isn’t going to bring down the banking industry.
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 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: