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.
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.
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.
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 was just going off the Wall Street Journal article:
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.
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.
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.
I’m guessing it mostly worked out quite well for the people that were making that argument.
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.
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
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.
The March decline was due in large part to Europe, so this is true in a sense. However everything is connected, and it is not directly true, the way it was for MF Global.
The whole trick here is what is a hedge and what isn’t. My understanding is that this was a hedge in part against proprietary trading in the corporate bond funds. And, as I said, trade visibility would have helped, and that should be true for hedges or non-hedges. Though one of JPM’s problems seemed to be that everyone knew who the market was here,
BTW, remember that this didn’t happen because of an unexpected swing in the market. Stocks went down in March, but hardly by a lot. The hedges were seemed to be designed to amplify the impact of losses. Dimon admits that they were stupid, but the regulations should protect us from their stupidity.
I’m sure Dimon will do everything possible to let them do what they want. But he was a bit full of himself for having ridden out the 2008 crash so well. SEC protect us from CEOs who think they can do no wrong. If we weren’t on the hook to bail them out I wouldn’t care as much. MF Global went bust, too bad, except that someone should go to jail for stealing client money.
Nah, lots of bankers lost their nannies. :dubious:
The basic problem here is pretty simple. It is not that JPM lost $2 billion - that is, relatively speaking, chickenfeed. (Though this is a paper loss and is likely to get worse as the hedge funds pound on this market they can’t get out of.) The problem is that even after 2008 JPM, supposedly the smart, well-run bank, made the same damn mistake. They still don’t know how to manage risk adequately.
JPM pioneered a metric which tells them the maximum amount they could lose a day on an investment. They just had introduced a new algorithm, which told them that these investments were pretty much average for the company. After the problem, they went back and tried the old algorithm - and came up with a risk twice as high. I’m not saying they did it deliberately, or that they are incompetent. I don’t think calculating risk is easy. For instance, did they include a factor for being the market?
Given this, how can you or anyone else guarantee that the 2008 meltdown won’t repeat itself, perhaps worse, later? You think you could get TARP through this Congress? What kind of depression would we be in if TARP hadn’t passed?
The Volcker rule is not micromanaging investments, which would never work. It is distinguishing the two roles of banks - to grease the economy through loans and other such things, and to make money by proprietary investing. There is no reason I could see that these should be in the same house. So I agree with you in splitting them up, but that is a far more radical solution than what we have. You think Dimon would like that?
You contradict yourself. If it was “chickenfeed”, then it wasn’t the same damn mistake. The problem with what happened in 2007 was the magnitude of the mistake.
Like I said, most folks around here brushed off a $.5B loss on Solyndra. And they (we) were right. It was chickenfeed, just like this.
That’s like saying that the problem last time was that the roulette wheel came up 00 three times in a row, not that you were playing roulette in the first place. So you’ve got enough money to cover your losses unless something completely improbable happens. Great. But if you’ve got, for some weird reason, my mortgage on the line in the event that you can’t cover your losses, I’m going to tell you that you shouldn’t be in the business of playing roulette.
In Solyndra, the risks were easily managed. Absolute worst case scenario, every dollar in the whole loan program (what was it, like $13 billion) is lost with nothing to show. Very unlikely, the people in charge ought to lose their jobs, major political scandal, but the whole mess is pretty easily contained. Derivatives trading seems to be a different matter. I think I saw that the trader responsible for this mess had around $100 billion of JP Morgan’s money involved in this trade. I don’t know how much their total risk was, as some trades, like short sales have theoretically unlimited downside. And if there are enough other companies making similar bets, then you can get widespread financial devastation. The whole point of regulation is to keep it so that sort of thing can’t happen, not to allow absolutely as much as possible up until the very edge of the cliff.
In this case, it seems that the idea is to prevent the “too big to fail” banks from prop trading. The rules aren’t finished yet, but that’s the basic objective. They’re decidedly not saying “prop trading is OK, as long as you can afford the losses,” because every gambler thinks they can afford their losses until they can’t. Right now, JP Morgan looks like it lost $2 billion doing something it called hedging that looked an awful lot like prop trading. They look like they’re sitting back at the roulette table with a bunch of chips in play. Probably not enough for a meltdown of epic proportions, but are you going to let a gambling addict loose in the casino (when you’re still hurting from the last time his creditors came knocking at your door) as long as he isn’t losing too much money?
I’m not getting you. Are you saying that it was different because the magnitude of the loss was different? Are you saying it is different because the exact mechanism of the loss was different?
The root cause is in fact the same. Risk management in these banks is unwilling or unable to prevent large bets which can go very, very wrong. The drive for short term gain overwhelms the risk of long term loss, which, after all, hasn’t happened yet. (No one has seen the black swan.) No CEO is going to survive long if he tells his stockholders that their returns are lagging because his risk people say an investment everyone else is doing is to dangerous.
That is what regulation is all about - having someone who doesn’t lose money by being safe make the rules. (That’s why Fannie and Freddie were such a disaster - they went from no incentive to take risks to high incentive when they got semi-privatized.) The role of the regulator is to tell the banks begging to take just a few more risk to go to hell.
Any parent knows about setting limits. This is the same thing.
Except we haven’t established that anyone was playing roulette here. The OP was a knee-jerk response to seeing the word “derivative” and warns us that we need to cut them off at the knees. Well, the puts I bought to lock in some stock prices when I bought my house were “derivatives”. This case was obviously more complicated than that, but anyone claiming it automatically requires us to increase regulation on banks has to offer a lot more than a roulette analogy to convince us.
Go back to my first post. I said I saw nothing in the linked article that explained why this obviously necessitates some drastic new regulations. If anyone has proof that it does, bring it. To be fair, you’ve done much more than most people here to do so, but even you say (in the very post in which you claimed they were playing roulette):
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As a former derivatives professional, the risk management at JPM failed. This is definately a cause for concern for global regulators.
It doesn’t really matter if the risk management failed because the risk management model was wrong or if it was proprietary trading in disguise. Either way, it’s a problem.
The word “derivative” in and of itself is misleading. Exchange traded options that are covered is a whole lot different from naked OTC options, right?
I was involved with derivative hedging for risk management back in the 90’s. It is pretty easy to make a big bet by a “partial” hedge. We are talking big sums of money, so if you neutral hedge 80% of 100 billion dollars of risk then that leaves 20 billion unhedged (add a zero if the numbers are too small).
I worked in the Lehman Bros fixed income business in Hong Kong for a year. They had a complete culture of bet big or go home. I raised some concerns in the run up to the 97 crash. The response was “noted and don’t ever think about raising this again.” No surprise that Lehman and Bear blew up.
And for those playing at home, JPM was Bear Sterns biggest shareholder and widely considered within the industry as a swashbuckling unit of JPM. IN other words, any dodgy stuff JPM didn’t want on the balance sheet, it got routed through Bear as a proxy. And when I was in the biz, if there was a deal floating around that Bear wouldn’t touch, then you KNEW it was horribly radioactive shit with a half-life of abou 30 seconds after the deal closes.
Dumbest thing ever done was a repeal of Glass-Stegal. The banking industry cannot help themselves and will always take greater risk until it ends in tears, and the taxpayers on the hook.
China Guy, interested in your take on this. It has been described a a failed hedge strategy. To me (a non-expert) that implies a strategy to minimize risk, not a “roll the dice, let’s make a lot of money” strategy. The fact that it didn’t (in spades) says a lot about the effectiveness of their hedging and their overall governance.
Is this “corporate greed run wild, without the regulatory tethers that would have prevented it”? Or just some seriously shitty hedging in a firm with a crappy control environment as it relates to oversight? Or something else?
And that restriction takes effect before the fire crosses the property line.
:smack: Maybe this quote from Spy Game will make things easier to understand: