$2 billion loss - tighter regulation ?

[obgyn65]

"The $2 billion trading loss disclosed last week by JPMorgan Chase shows how the tables have turned on the bank and its chief executive, an industry point man against tighter regulation."

http://www.nytimes.com/2012/05/13/bu...1&ref=business

[pb4uski]

Bring Glass-Stegall back. Ban naked CDSs to end speculation. Problem solved.

[haha]

Quote:

Originally Posted by pb4uski Bring Glass-Stegall back. Ban naked CDSs to end speculation. Problem solved.

The thing is, for a politician of either party, those huge Wall Street bonuses are a similarly huge source of campaign cash. So I think it would take more character than any of our midgets past present or future would likely muster to do what you say- which as you say, would solve the problem.

Ha

[M Paquette]

Quote:

Originally Posted by pb4uski Bring Glass-Stegall back. Ban naked CDSs to end speculation. Problem solved.

Oh, the inhumanity of it all! Think of the poor starving SuperPACs on K Street!

Imagine a world where I'm not allowed to buy fire insurance on your house just before it mysteriously burns to the ground. That's the sort of world we'd have for business without 3rd party speculative CDS (credit or bond insurance) sales.

[Midpack]

Quote:

Originally Posted by pb4uski Bring Glass-Stegall back. Ban naked CDSs to end speculation. Problem solved.

I used to think so, but if you read sections 8-10 (or more) you might question that conclusion. Not surprisingly they've already figured out how to work around the Volcker rule, before/if it's passed. I would have posted some quotes, but there's no way to do so without (maybe) justifiably provoking Porky. These things are never that simple...Glass-Steagall Act wiki

Beyond my pay grade, but I'm not saying nothing can/should be done.

[frayne]

Like any regulation, or more regulation, somebody will find a way to skirt it.

[sheehs1]

Quote:

Originally Posted by pb4uski Bring Glass-Stegall back. Ban naked CDSs to end speculation. Problem solved.

+1

[justplainbll]

Since JP Morgan's hedge operations have been referred to as betting; they need to become better card counters. Most any investment decision contains an element of risk that could be referred to as betting.
Disclosure- I've been long JPM and it's predecessors for the better part of 40 years.

[clifp]

Quote:

Originally Posted by pb4uski Bring Glass-Stegall back. Ban naked CDSs to end speculation. Problem solved.

One of characteristic of derivatives trades is it is a zero sum proposition; JPM loss is someone else's gain. Now we don't know who on the other side of these trades but odds are most everybody involved was an institution.


An alternative headline about the incident could be:

"JP Morgan, one of the nations most profitable financial institutions, shares the wealth with struggling US and European banks."

JPM made $19 billion last year, 2-3 billion while serious money (except for the government ) isn't going to make a difference to the firm other than shareholders and the size of the bonus.

When people advocate bring back Glass-Stegall I wonder if they really understand what that are asking for.

For instance one of the features Glass-Stegall was that it outlawed banks from paying interest on checking accounts. It also required banks to get regulator approval before raising interest rates. Under GS regulator generally prevented banks from competing on interest rates, hence the use of toaster and such as premium.

[audreyh1]

Things were fine living with Glass-Stegall until the late 90s. It was easy to have a check-writing money-market account or checking savings and loan account that paid decent interest, so no suffering there.

This issue just pointed out, once again, how easy it is for these "professional" investors to screw up the risk management aspect of their businesses, so maybe that "investment" (speculation) part of that business should be cordoned off from the US Govt backstopped part of the banking business.

[Nords]

Quote:

Originally Posted by obgyn65 "The $2 billion trading loss disclosed last week by JPMorgan Chase shows how the tables have turned on the bank and its chief executive, an industry point man against tighter regulation."

Sounds like he got exactly the system he's asking for. At least he's not complaining that Goldman Sachs tricked him.

[jebmke]

Quote:

Originally Posted by clifp For instance one of the features Glass-Stegall was that it outlawed banks from paying interest on checking accounts.

Losing that $.07 per month is really gonna hurt.

[clifp]

My point is that Glass-Stegall (the Wiki entry is massive) is very old and complex piece of legislation that has been amended many times. When people say bring it back what exactly are they advocating bring back the 1933,35,37, 63, 67, 88,99, versions of the bill? Some of the provisions of GS remain in effect today.

For the first 50+ years the prohibition against interest checking and interest rates ceiling were in effect. The rational for capping interest rates was that that banking offering too high interest to savers were jeopardizing their financial future. Similar to the reason that airfares used to be regulated. Uncle Sam didn't want to see either banks or airlines go bankrupt. The cost for this regulation is that savers got less money and airline passenger paid more than in a unregulated market. Obviously we have survived airlines going broke on a pretty regular basis even huge ones.

The system also is ok with small and medium banks going bust, even the hundreds that have failed since the crisis. The situation is different with Megabank who's failure could have a dangerous ripple effect on the whole financial system.

Derivatives play an important role in a modern economy. While it is certainly true they are often used for speculation which increase risks, they are also used as hedges. In my options trading 75% of my trades are hedges and 25% speculations.

JP Morgans primary business is commercial lending to the Fortune 500. Jamie Diamond say that this trade was designed as hedge, and since the position was an index of Credit Default Swaps of 100 odd major corporation, and not bet on Beaver Cheese Future I am inclined to believe him.

I agree that we need a system in place that prevents "too big to fail" banks from doing risky things that would cause US taxpayers to have bail them out. I don't think that reviving an almost 80 year old law, from the It's a wonderful life era is the right approach.

[pb4uski]

Quote:

Originally Posted by audreyh1 Things were fine living with Glass-Stegall until the late 90s. It was easy to have a check-writing money-market account or checking savings and loan account that paid decent interest, so no suffering there. This issue just pointed out, once again, how easy it is for these "professional" investors to screw up the risk management aspect of their businesses, so maybe that "investment" (speculation) part of that business should be cordoned off from the US Govt backstopped part of the banking business.

I agree. Separating the FDIC backstopped business from other banking activities was the main thing I had in mind when I suggested bring Glass-Stegall back. If an entity wants to raise capital and make big financial bets that is fine with me as long as the investors know that they are investing in an entity that will make bets and they could lose their entire investment. But it doesn't make sense to combine these speculative activities with taxpayer backstopped business.

I'm more familiar with insurance companies which are highly regulated and prohibited from investing in derivatives speculatively.

BTW, I think JPM is a great company and the blow they had last week is being a bit overblown. While the $2b is serious coin, in perspective it is only about 12% of annual earnings. I also don't think Dimon has received enough credit for his candor in conceding that they screwed up, would learn from it and carry on.

[TargaDave]

Portion of Jim Grants recent speech to the NY Fed:


Many now call for more regulation—more such institutions as the Treasury's brand-new Office of Financial Research, for instance. In the March 8 Financial Times, the columnist Gillian Tett appealed for more resources for the overwhelmed regulators. (Intervention begets ever more intervention.). Inundated with information, she lamented, they can't keep up with the institutions they are supposed to be safeguarding. To me, the trouble is not that the regulators are ignorant. It's rather that the owners and managers are unaccountable.


Once upon a time—specifically, between the National Banking Act of 1863 and the Banking Act of 1935—the impairment or bankruptcy of a nationally chartered bank triggered a capital call. Not on the taxpayers, but on the stockholders. It was their bank, after all. Individual accountability in banking was the rule in the advanced economies. Hartley Withers, the editor of The Economist in the early 20th century, shook his head at the micromanagement of American banks by the Office of the Comptroller of the Currency—25% of their deposits had to be kept in cash, i.e., gold or money lawfully convertible into gold. The rules held. Yet New York had panics, London had none. Adjured Withers: "Good banking is produced not by good laws but by good bankers."

Well said, Withers! And what makes a good banker is more than skill. It is also the fear of God, or, more specifically, accountability for the solvency of the institution that he or she owns or manages. To stay out of trouble, the general partners of Brown Brothers Harriman, Wall Street's oldest surviving general partnership, need no regulatory pep talk. Each partner is liable for the debts of the firm to the full extent of his or her net worth. My colleague Paul Isaac, who is with me today—he doubles as my food and beverage taster— has an intriguing suggestion for instilling the credit culture more deeply in our semi-socialized banking institutions.

We can't turn limited liability corporations into general partnerships. Nor could we easily reinstate the so-called double liability law on bank stockholders. But what we could and should do, Paul urges, is to claw back that portion of the compensation paid out by a failed bank in excess of 10 times the average wage in manufacturing for the seven full calendar years before the ruined bank hit the wall. Such a clawback would not be subject to averaging or offset one year to the next. And it would be payable in cash.

The idea, Paul explains, is twofold. First, to remove the government from the business of determining what is, or is not, risky—really, the government doesn't know. Second, to increase the personal risk of failure for senior management, but stopping short of the sword of Damocles of unlimited personal liability. If bankers are venal, why not harness that venality in the public interest? For the better part of 100 years, and especially in the past five, we have socialized the risks of high finance. All too often, the bankers who take risks don't themselves bear them. By all means, let the capitalists keep the upside. But let them bear their full share of the downside.

[FIRE'd@51]

IMO, until we know exactly what the trades involved were, nothing can be concluded. Here is my guess as to what may have happened. Suppose JPM initially bought CDS to hedge the credit risk in its loan book. As the economy appeared to be improving (and the credit risk in the loan portfolio decreasing), JPM tried to sell a portion of their CDS to reduce the hedge. Suppose their CDS position was so large (the "London whale") that selling the CDS would drive down their prices. So rather than sell CDS, they chose to put on a "hedge of a hedge" by purchasing some other deivative security (e.g. a forward contract on one of the CDS indexes or something similar). Evidently, this "hedge of the hedge" was very imperfect, ultimately resulting in a $2 billion loss. If something like this is what happened, it seems to me that it wouldn't have violated the Volcker rule.

[MichaelB]

From Barry Ritholtz The Big Picture “Everything is a Hedge” | The Big Picture

Quote:

Looking at the question a little differently, what isn’t a hedge? There is always the other side of the trade, and that side (if not position) is what you can theoretically claim to be hedging. Hence, for a huge bank with trillions on its book, there is the rationale that any trade, any position, any financial transaction, is potentially a hedge against some other position the bank is holding. Recall that Goldman Sachs, who has been rather silent on the JPM trade, used the same logic when arguing they were not betting against clients; rather they were “hedging other bank positions.” Poppycock. Both the JPM and GS arguments fail, for a simple reason: If we are going to define this trade as a hedge, then there is no other conclusion to reach except that everything at a huge bank is a hedge.

My sentiment is with those voices here that point to the need for Glass-Steagall, but I also side with Mr Ha.

[Texas Proud]

Quote:

Originally Posted by FIRE'd@51 IMO, until we know exactly what the trades involved were, nothing can be concluded. Here is my guess as to what may have happened. Suppose JPM initially bought CDS to hedge the credit risk in its loan book. As the economy appeared to be improving (and the credit risk in the loan portfolio decreasing), JPM tried to sell a portion of their CDS to reduce the hedge. Suppose their CDS position was so large (the "London whale") that selling the CDS would drive down their prices. So rather than sell CDS, they chose to put on a "hedge of a hedge" by purchasing some other deivative security (e.g. a forward contract on one of the CDS indexes or something similar). Evidently, this "hedge of the hedge" was very imperfect, ultimately resulting in a $2 billion loss. If something like this is what happened, it seems to me that it wouldn't have violated the Volcker rule.

+1 So far there has been no official disclosure on what went wrong and what they were trying to hedge... I read on article where they said JPM does NOT want to disclose that info because they still have a lot of 'hedge' in their book that others could exploit if they knew...

One business reporter said that they heard there were a total of $100 billion in securites and that the loss was due to 'only a 2% change'....


But I do agree that IF the hedge was done properly, this loss would have been covered by gains in other assets that would have been an offset...

Also, since all indications are they were trying to hedge securites they held, under any proposed regulation they would be able to hedge... I wonder what any of these rules would do it you tried to hedge something and did it wrong From what I have heard, this seems to be what happened... problem is, nobody outside the bank knows for sure.... and it probably will take regulators awhile to figure it all out...

[Midpack]

Quote:

Originally Posted by Texas Proud One business reporter said that they heard there were a total of $100 billion in securites and that the loss was due to 'only a 2% change'.... But I do agree that IF the hedge was done properly, this loss would have been covered by gains in other assets that would have been an offset...

I heard this yesterday also, I think it was on Meet the Press. I think it was Andrew Ross Sorkin who said it was $100 billion with a $2B (loss) that might grow to $3B (worst case implied).

They had taped interviews with Jamie Dimon the Monday before the $2B loss was announced and another from last Friday the day after the announcement. Whatever else you might think, Jamie Dimon is impressive IMO, smart seemingly direct comments on business and politics. And he makes no bones that they really screwed up, no excuses. I saw a news crawl this morning saying 3 execs involved with the losses were expected to "resign" today.

Probably everyone on this thread knows it but JPM will still have a profitable quarter overall, I think I heard they were estimating $4B.

And I think it was Sorkin who also pointed out that most of the too big to fail CEOs simply wouldn't have even announced this loss. They'd just have come up short on earnings for the quarter and probably provided "guidance" between now and the end of the quarter to lower earnings expectations - which was exactly what I was saying to myself before NBC made the point. Interesting stuff indeed...

[pb4uski]

Not sure on the last part. I suspect that the emerging loss was a significant enough event that they were probably required to disclose it under securities laws rather than wait and have an earnings surprise. Nonetheless, I agree that it was smart to get out in front of it and that Dimon's candor is refreshing compared to typical CEO babble.