People are talking $4 billion. The problem is, the hedge is getting worse and worse, and since they are the market they have no way of getting out of it, since even the suckers know it is a bad deal. Not that a $4 billion loss if fundamentally worse than a $2 billion loss in terms of the need for regulation.
The page I just got here from said
“JP Morgan Screws Up With…”
“Evil Captor”
What, did they make you CEO just before the bubble burst?
Sorry, carry on…
Isn’t it obvious? They were looking for a chump to hold the bag when the balloon went sour!
The issue is that these banks have an explicit and implicit US government and taxpayer guarantees. These guarantees do not encourage risk management. Back when most of the investment banks were investment banks, and Glass Stegal was still in place, places like Goldman Sachs, Morgan Stanley et al were partnerships. It was partner money at risk and not “shareholders” and there was a natural incentive to manage risk because the partners would lose their homes if it went south. Now all that happens is Uncle Sugar bails you out for 10% a year, no one goes to jail, and bonuses were “honored by existing contract.”
The biggest fault I have with the great bailout is that we (US taxpayers) essentially gave sweethart deals to the banks to stay in business, when the gubmint should have acted like a loan shark and taken at least one testicle for the privledge of the banks not going bankrupt like they would have.
Now, I’m off of my soapbox. There is no evidence that the banks have ringfenced their commercial and investment banking operations (UK, bless their hearts, are putting this in place). That means a “hedge” on the bank going south and costing billions could actually impact commercial banking deposits, trigger deposit insurance, and cause systemic banking risk. Long-Term Capital Management (LTCM) lost 4.6 billion U.S. dollars in fixed income arbitrage in September 1998, and damn near triggered a serious financial crisis. JPM could easily lose more than that by the time all their positions are unwound. The JPM competitors and counterparties are all salivating at just how badly they can fuck over JPM and maximize their bonuses. After all, who cares if the financial system collapses as long as I get my bonus in hand before that happens.
JPM have hinted that they will claw back bonuses of those in the chain, which would raise maybe 1 or 200 million. I’d say there was a chance at self regulation if JPM clawed back the entire loss from the general employee bonuses paid. I mean, no big whoop if JPM lose $2 billion or if that increases to $5 billion since the 2010 employee payout was $10 billion. Cite: Anger as JP Morgan bankers get $10bn pay and bonus pot | JP Morgan | The Guardian
John Mace, net net, the problem is that a) banks don’t self regulate, b) the casino arm can destroy the deposit base (which is at least partially guarantee by Uncle Sugar) c) a big enough loss can cause systemic risk to the banking industry, and d) if enough banks act like lemmings then there is a systemic incident.