Jamie and his .01% butt buddies on Wall Street will be circling the wagons and trying to deflect the blame to a ROGUE trader or some other bullshit excuse. They’ll be paraded on CNBC and fed softball question from the brainless bimbos. The Obama administration will make concerned declarations and do nothing. The dumbass Republicans in Congress will hold out their hands for more campaign contributions and then blame the problem on too much regulation. If Jamie just had the freedom to fuck the country once again, everything would be fine. This plutocracy is a disgusting example of what we’ve become. I bet less than 2% of the American people even know about JP Morgan’s $2 billion “mistake”. But 75% of them know who got eliminated from American Idol last night.
11 May 2012
JP Morgan Failure Shows the Incompetency of the Fed As Regulator And a Corrupted Government
A craven Congress, dominated by a hard core of one-percenter bully boys, an Obama Administration intimately tied to Wall St. cronies, and the Federal Reserve, which is a private institution of banking insiders, have failed the public once again.
Simon Johnson points out what many may miss in all this. The regulators have failed once again, and the side effects of the continuing campaign by the banks’ lobbyists to weaken reform have already given us a hint of the next financial crisis.
JP Morgan Debacle Reveals Fatal Flaw In Federal Reserve Thinking
By Simon Johnson
May 11, 2012Experienced Wall Street executives and traders concede, in private, that Bank of America is not well run and that Citigroup has long been a recipe for disaster. But they always insist that attempts to re-regulate Wall Street are misguided because risk-management has become more sophisticated – everyone, in this view, has become more like Jamie Dimon, head of JP Morgan Chase, with his legendary attention to detail and concern about quantifying the downside.
In the light of JP Morgan’s stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model. But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed.
JP Morgan claimed to have great risk management systems – and these are widely regarded as the best on Wall Street. But what does the “best on Wall Street” mean when bank executives and key employees have an incentive to make and misrepresent big bets – they are compensated based on return on equity, unadjusted for risk? Bank executives get the upside and the downside falls on everyone else – this is what it means to be “too big to fail” in modern America.
The Federal Reserve knows this, of course – it is stuffed full of smart people. Its leadership, including Chairman Ben Bernanke, Dan Tarullo (lead governor for overseeing bank capital rules), and Bill Dudley (president of the New York Fed) are all well aware that bankers want to reduce equity levels and run a more highly leveraged business (i.e., more debt relative to equity). To prevent this from occurring in an egregious manner, the Fed now runs regular “stress tests” to assess how much banks could lose – and therefore how much of a buffer they need in the form of shareholder equity.
In the spring, JP Morgan passed the latest Fed stress tests with flying colors. The Fed agreed to let JP Morgan increase its dividend and buy back shares (both of which reduce the value of shareholder equity on the books of the bank). Jamie Dimon received an official seal of approval. (Amazingly, Mr. Dimon indicated in his conference call on Thursday that the buybacks will continue; surely the Fed will step in to prevent this until the relevant losses have been capped.)
There was no hint in the stress tests that JP Morgan could be facing these kinds of potential losses. We still do not know the exact source of this disaster, but it appears to involve credit derivatives – and some reports point directly to credit default swaps (i.e., a form of insurance policy sold against losses in various kinds of debt.) Presumably there are problems with illiquid securities for which prices have fallen due to recent pressures in some markets and the general “risk-off” attitude – meaning that many investors prefer to reduce leverage and avoid high-yield/high-risk assets.
But global stress levels are not particularly high at present – certainly not compared to what they will be if the euro situation continues to spiral out of control. We are not at the end of a big global credit boom – we are still trying to recover from the last calamity. For JP Morgan to have incurred such losses at such a relatively mild part of the credit cycle is simply stunning.
The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control what is going on. The breakdown in internal governance is profound. The breakdown in external corporate governance is also complete — in any other industry, when faced with large losses incurred in such a haphazard way and under his direct personal supervision, the CEO would resign. No doubt Jamie Dimon will remain in place.
And the regulators also have no idea about what is going on. Attempts to oversee these banks in a sophisticated and nuanced way are not working.
The SAFE Banking Act, re-introduced by Senator Sherrod Brown on Wednesday, exactly hits the nail on the head. The discussion he instigated at the Senate Banking Committee hearing on Wednesday can only be described as prescient. Thought leaders such as Sheila Bair, Richard Fisher, and Tom Hoenig have been right all along about “too big to fail” banks (see my piece from the NYT.com on Thursday on SAFE and the growing consensus behind it).
The Financial Services Roundtable, in contrast, is spouting nonsense – they can only feel deeply embarrassed today. Continued opposition to the Volcker Rule invites ridicule. It is immaterial whether or not this particular set of trades by JP Morgan is classified as “proprietary”; all megabanks should be presumed incapable of managing their risks appropriately.
Read the rest here.
Administrator says:
Imperfect, OverReaching, Bonus-Driven Bankers
By Barry Ritholtz – May 11th, 2012, 7:00AM
The disclosure by once future Treasury Secretary and current JP Morgan CEO Jamie Dimon of a sudden and previously undisclosed $2 billion dollar derivative loss should be a wake up call. It unwittingly reveals much about the present state of finance:
• The inherent tension between traders using leveraged risk with Other People’s Money in the pursuit of enormous bonuses is still weighed heavily towards excess risk taking;
• There is no bank in the United States that has demonstrated the ability to manage proprietary trading risks — if they use derivatives and/or leverage;
• It took less than 3 years after the financial crisis peaked for traders to engage in the same sorts of highly leveraged reckless speculative bets that helped crash the economy last time. Imagine the sorts of risks these mis-incentivized desks will be doing when the memories of the crisis fade 10 years after.
• Trades that are so enormous as to be “credit index distorting” are not hedges, but pure speculation. Within banks, apparently the word “Hedging” loosely translates as “speculation.” Actual hedging of existing positions appears to be nonexistent.
• VaR remains a mostly useless concept as applied by banks today. It is a false model of reality whose deviations have devastating consequences. (Call it physics envy)
• At these size trades, the asymmetrical preference for bonuses over risk management is such that even clawbacks won’t work;
• Jamie Dimon, formerly praised as the Capo di tutti capiof bank CEOs, apparently has been more lucky than brilliant. This quarter, his luck ran out.
• Derivatives, because of their enormous built in leverage, are inherently dangerous. They are still financial weapons of mass destruction;
• Too big to fail banks remain a threat to the stability of the global economy.
While this was “only” a $2 billion loss it easily could have been much greater. That banks such as JPM are still putting on trades that distort indices is quite bluntly, astonishing.
The solution to this risk is very very simple: The USA should reinstate Glass Steagall, and repeal the Commodity Futures Modernization Act.
Until that occurs, the risk of catastrophic failure remains present in the financial system.
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11th May 2012 at 8:25 am
Administrator says:
Long and the Short of JPMorgan
Submitted by rcwhalen on 05/11/2012 06:43 -0400
A couple of thoughts on the debacle with JPMorganChase yesterday. Scheduled on CNBC Squawk Box at 8:00 ET today. — Chris
1) Not surprised by the size of the loss or source. You cannot be consistently right when you trade derivatives. There are times when the relationships you think exist are badly wrong, with disastrous results. But I wonder how much Dodd-Frank, Volcker Rule contributed to this outcome. Lot of change underway inside JPM.
2) The irony here is that the media and investors alike have attributed magical, super human powers to Jamie Dimon and his colleagues. But JPM is like everyone else, just a partial monopoly. The interesting thing though is to see them screw up in structured products. Again, given the risks the bank takes, not at all surprised to see this type of event. Just shows how volatile and unpredictable is the investment side of the house.
3) The other point is that these losses by JPM are entirely a function of the way that exotic derivatives for which there is no cash basis (like oil or gold) create risk that would not otherwise exist. The losses by JPM are, indeed, self inflicted as Dimon said, and entirely speculative.
Over the past couple of weeks, we have been hearing of a “change of direction” for the CIO group at JPM. As I noted here, dozens of people have been let go from this area in the past 6 months due to the Volcker Rule. The media does not get this part of the story for some reason.
The JPM CIO area had traditionally positioned the book to make money in volatile markets net short to align with the net long book of the CIO in JPM’s vast securities portfolio.
Press reports recently have claimed that JPM was shifting the trading book run by “the Whale” in London to a net long position. If so, then JPM obviously wouldn’t be hedging the portfolio anymore, and would actually be increasing the overall risk of the group.
Not only would this put them at risk for a big loss, but if the Whale’s activity wasn’t a hedge anymore, and rather “trading” risk — then it’s not clear that this activity would be permitted under Volcker.
Press reports on JPM and the Whale badly underestimate the impact of the Volcker rule on the trading operations of the large banks. But Jaimie Dimon seems to have handed his head to Chairman Vocker and the advocates of regulation with this error.
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11th May 2012 at 8:58 am
Administrator says:
Consumer Sentiment Highest Since January 2008
Submitted by Tyler Durden on 05/11/2012 10:02 -0400
77.8 on expectations of 76.0. Highest since January 2008. Yup: the US “consumers” (of what? Patek Philippes? Cristal? 8 balls? Dorsia deserts?) polled by Reuters, have not had it better in 4 years. After all what is there not to be confident about: record number of people on disability, foodstamps, out of the labor force, market sliding, banks imploding, Europe about to fall apart, gas near record highs, home prices quadruple dipping, and the prospect of much, much higher taxes next year to boot. Whatever – just charge it.
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11th May 2012 at 10:31 am
ThePessimisticChemist says:
We are not at the end of a big global credit boom – we are still trying to recover from the last calamity. For JP Morgan to have incurred such losses at such a relatively mild part of the credit cycle is simply stunning.
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Relatively mild part of the credit cycle? Insanity, and yet the MSM will completely gloss over this.
Poor person holds up a convenience store for $50 and goes to prison.
Rich guy steals millions and costs the country billions and gets paid more millions and retains his job.
Fuck this world.
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11th May 2012 at 10:43 am
JP Morgan Failure Shows the Incompetency of the Fed As Regulator And a Corrupted Government - Alternative News London Ontario - News, sports, entertainment, business, travel, homes and auto sections containing features of interest in North America says:
[...] Let the .01% Spin Begin (theburningplatform.com) [...]
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11th May 2012 at 10:51 am
Muck About says:
I have no idea why anyone is upset about this situation.. $2 billion? P_E_A_N_U_T_S_!
With perhaps $800 TRILLION or more of derivatives scattered around vaults world wide of which probably 40% will end up with no counterparty to pay them off, $2 billion is less than a fart in a hurricane.
Beside, when JPM hollers, “The sky is falling! The sky is falling!” , Bendover Ben will just shovel another $10 billion of funny money into the maw and that’ll put out the fire, right? Right? Tell me that’s right!
MA
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11th May 2012 at 10:52 am
Colma Rising says:
What’s more important is that anyone who writes anything bad about any of these people on a sign and protests this activity:
A) Get a permit
B) Wear their Sunday’s best
Anything but this conduct by the peons should be met with a sound beating….
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11th May 2012 at 10:55 am
Administrator says:
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11th May 2012 at 12:48 pm
Golden Tool says:
My question would be who’s the next wannabe big bank MFG who goes under running a copycat trade. JPM will realize who is riding their coat tails and short. JPM is tbtf but I’m wonder who isn’t that will take the hit…
“Do unto others.”
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11th May 2012 at 1:26 pm
Thinker says:
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11th May 2012 at 1:52 pm
Ron says:
They have no souls.Evil.
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11th May 2012 at 2:05 pm
Kill Bill says:
So, JPM lost 2 billion in what is basically just accounting entries.
Clearly these toxic assets must be bailed out 5 times over.
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11th May 2012 at 3:56 pm
Bob says:
Just saw a quote about the JP Morgan deal worth sharing:
“When something happens for no damn reason then it is happening because someone knows something you don’t.”
It appears that we haven’t seen the last of this — the market involved is widening out, and apparently the position is not fully closed (or closable — not clear which). There is speculation that this could wind up costing ol’ JP Morgan up to $20 Billion! And aren’t they supposed to be the BEST bankaround?!
Drink XX and “Stay short, my friends!”
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11th May 2012 at 4:59 pm