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.
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.)
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.
[QUOTE=Voyager]
Why do you think incompetent risk management is any different in Hong Kong than it is in New York? Or London?
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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?
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).
[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?
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I certainly see the ridiculous hyperbole. I question how I started it, however.
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.
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.
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.
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!
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.
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.
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.
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.
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.
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.
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!
