Pour a cup of strong Joe, get comfortable in your favorite chair, and enjoy these longer form articles –they are what I am reading this weekend:

• The brain… it makes you think. Doesn’t it? (The Guardian)
• How Wall Street Killed Financial Reform (Rolling Stone)
• Zuckerberg: The Maturation of the Billionaire Boy-Man (NY Mag)
• How the Corvair’s rise and fall changed America forever (Reuters)
• Joe Weisenthal vs. the 24-Hour News Cycle (NYT Mag)
• How Hewlett-Packard lost its way (CNN Fortune)
• Hedging is a Tricky and Mercurial Thing (The Epicurean Dealmaker)
• Complex Philosophical Theories Explained in Basic Shapes (My Modern Met)
• The Duke Ellington collective  (The Times Literary Supplement)
• The Inquisition of Mr. Marvel: On the surprisingly complicated legacy of Stan Lee (Grantland)

Whats on your tablet?
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At JPMorgan Chase, a Complex Strategy That Backfired
click for much larger infographic

Source: NYT

Category: Financial Press

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “10 Weekend Reads”

  1. TLH says:

    JPMorgan strategy. Just like everything in life, if you make it too complicated, you lose. Simplify, simplify, simplify. Until our government gets this message, it will not work.

  2. Mike in Nola says:

    Does anyone really believe that the alleged hedge in the illustration was anything more than a cover story for a big prop bet?

  3. Mike in Nola says:

    While I do have great respect for Chris Whalen, his statements that seem to be absolving JPM of blame because they have to do that to make money are misguided. Banks should be banks doing real lending to real businesses and people like in the old days, and hedge funds should be hedge funds, doing the things that the modern TBTF do. If you want hundred million dollar bonuses, don’t claim to be a bank and don’t do it on our dime. I thought this was best summed up in a post on Clusterstock:

    http://feedproxy.google.com/~r/clusterstock/~3/7QaQP3ENGIw/everyone-who-wants-tougher-bank-regulation-is-solidifying-their-stance-into-one-solid-point-2012-5

  4. bocon007 says:

    Compared to everyone else who frequents Barry’s blog, I’m an absolute novice with no professional connection to the financial industry whatsoever, so I like to think my comments can provide some insight into what the typical American thinks about all this.

    What I find troubling is step 4: “This strategy 2 and 3 grew so large that it became obvious to other investors who then saw an opportunity to bet against JPMorgan, which they viewed as cornered.”

    Isn’t this competition gone awry? We want banks to be in competition with one another, but don’t we want them to be competing against one another to provide some beneficial service to society? Instead, what appears to be the case is the big banks are playing a grand match of financial chess, where the object of the competition is to outsmart one another in ways that have nothing to do with providing access to capital, fostering innovation, or facilitating the financial needs of businesses and individuals.

    In the suburban community where I live there are two car wash businesses relatively close to one another. What good does it do for my community if these two businesses become entangled in a poker game worth tens of thousands of dollars, where each business tries to beat the other in an endeavor that has nothing to do with washing cars?

  5. Does anyone really believe that the alleged hedge in the illustration was anything more than a cover story for a big prop bet?

    Mike in H-town,

    Why would they?

    and, as, already, been, astutely, noted (Art Cashin) ~”If it were a Hedge, Where’s the side that Gained in Value?”

  6. Greg0658 says:

    Mike its a subliminal ad for Citi Travelers .. easy to miss for then it wouldn’t be subliminal
    http://en.wikipedia.org/wiki/The_Travelers_Companies
    oh & :-)

  7. mathman says:

    Some interesting reading here (too):

    http://libertyblitzkrieg.com/

    (for example, the prologue to this)
    Six Months Left…Can They Do It?

    “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.”

    - John Kenneth Galbraith

    “Today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority.”

    -Bill Clinton at the signing of Gramm-Leach-Bliley Act in 1999 (which ended Glass-Steagall and gave banks full control of the United States of America)

    “Obama delivered heated rhetoric, but his actions signaled different priorities. Had Obama wanted to strike real fear in the hearts of bankers, he might have appointed former special prosecutor Patrick Fitzgerald or some other fire-breather as his attorney general. Instead, he chose Eric Holder, a former Clinton Justice official who, after a career in government, joined the Washington office of Covington & Burling, a top-tier law firm with an elite white-collar defense unit. The move to Covington, and back to Justice, is an example of Washington’s revolving-door ritual, which, for Holder, has been lucrative–he pulled in $2.1 million as a Covington partner in 2008, and $2.5 million (including deferred compensation) when he left the firm in 2009.”

    “Putting a Covington partner–he spent nearly a decade at the firm–in charge of Justice may have sent a signal to the financial community, whose marquee names are Covington clients. Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and Deutsche Bank are among the institutions that pay for Covington’s legal advice, some of it relating to matters before the Department of Justice. But Holder’s was not the only face at Justice familiar to Covington clients. Lanny Breuer, who had co-chaired the white-collar defense unit at Covington with Holder, was chosen to head the criminal division at Obama’s Justice. Two other Covington lawyers followed Holder into top positions, and Holder’s principal deputy, James Cole, was recruited from Bryan Cave LLP, another white-shoe firm with A-list finance clients.”

    - Peter J. Boyer in his excellent recent article “Why Can’t Obama Bring Wall Street to Justice?”

  8. Herman Frank says:

    I’m used to asking simple questions to get (complicated/ob-fuse/non-sensible-) answers: “so you took insurance against your possible troubles brewing (2)? But then you took a position contrary to your insurance (3)?” Why didn’t you terminate the nr. 2 in the first place to minimize risk? But HO(!), then you increased BOTH?!
    And then “the market smelled a self-centered, short-sighted maniac writing blank checks to maintain HIS IDEA of how it should turn out??!” Hmmmm, seems like a repeat of something which combined sub-prime malfeasance, CDO’s, leverage and absence of knowledge by anyone the trader.
    “I want the smelling salt and a return of the Glass-Steagall Act!”
    Can’t these folks in Washington EVER understand that I don’t want them to give in to the bank-lobby, that I don’t want to spend more tax-dollars on “financial institutions TBTF”, and that I’m totally, absolutely, completely fed up reading about “banks risking their own money”? As long as a bank has shareholders they shouldn’t be allowed to wager billions. That’s for a “partnership”, where good old boys like Mr. Dimon put their condo in Colorado, their mansion on Martha’s Vineyard and their penthouse in NYC at risk. “Be my guest! Enjoy the system!” But don’t socialize your losses!

  9. machinehead says:

    From Corvair’s Rise and Fall:

    [Nader's] language could be impenetrable in places. He described how the Corvair’s “rear wheel is mounted on a control arm which hinges and pivots on an axis at the inboard end of the arm near the center of the vehicle.” But mostly Nader was clear and compelling. He explained how GM had belatedly improved the stability of the 1964 Corvettes by adding a stabilizer bar under the car’s front end to improve the front-rear weight imbalance – an admission, in Nader’s view, of the car’s inherent design flaw.

    Well, here’s one car book I’m not gonna buy. How can an author who writes an entire book about automobiles find a basic description of an independent rear suspension ‘impenetrable’? Then he makes the ludicrous claim that a stabilizer bar — a piece of round steel bar weighing all of 15 pounds — serves to ‘improve the front-rear weight balance.’ Utter nonsense — a stabilizer bar reduces body roll during cornering.

    Presumably the reference in the last sentence should be to ’1964 Corvairs,’ not ‘Corvettes.’ It’s the Corvair which Nader criticized for an inherent design flaw. So much for copy editing!

    This book excerpt is by an award-winning journo who apparently has reported on the auto industry for decades, yet doesn’t know a nut from a cotter pin. Similar examples are all too common in financial journalism.

  10. Jim67545 says:

    Read the Rolling Stone article. Interesting but not surprising. I suspect the same s__t is occuring in Agricultural, Defense, etc. legislation.

    The author left out what seems to be one honored tactic: when the legislation is first published for public comment, overwhelm the regulator with comments and questions that, to be resolved, require delay and ballooning the sheer size of the bill. In this case to 2,000+ pages. Then 1. ridicule the bill as another example of rediculous and overreaching legislation (after all it’s 2,000+ pages), 2. ridicule legislators for not knowing everything in its 2,000+ pages, or not even reading it and 3. have a plentitude of issues to bring delays, craft loopholes or attacks as described in the article. The huge complexity of the legislation (a result of this tactic) makes #3 much easier.

    And so many Americans, working for powerful corporations and their interest groups, diligently work to weaken our democracy. Aint it grand? I wonder if someone working for a lobbying group is proud or ashamed of this kind of success? Is remuneration the final decider? Is joining in the company’s group-think? Interesting.

    ~~~

    BR: Excellent point — think about the loo holes, giveaways, tax credits and boondoggles lobbyists have won for Ag/Def paid for by tax dollars.

  11. biscuits says:

    The Epicurean Dealmaker points out that what JP Morgan was doing was within the proper scope of Volker Rule permitted hedging activities. With the lack of transparency and complexity of the “hedges” there is no regulatory body that will be able to determine what exposure could be systemic. How are regulators supposed to determine what is a hedge and what is a proprietary trade in derivatives? The only difference, apparently, is intent. And how easy is it just to say you “never intended” for things to take a bad turn. Wasn’t that Corzine’s excuse? This makes it clear to me that Volker rule will not reduce systemic risk.

    We need to reinstate Glass Steagall and let the cowboys blow themselves up on their own dime. The Too Big to Regulates need to be broken up. Anything positive that they add to our economy is far outweighed by the negatives.

    Mathematical models are not perfect. The fudge factors, the assumptions, the unnecessary complexity all add to the subterfuge that the Too Bigs use to define their “hedging” activities as a method of containing risk when they are in fact creating systemic risk. ED says the concept is just too deep for the journalists, leave it to the congress critters, you know, those guys who are OWNED by the banksters. Thank goodness they saw the need for exceptions in the Volker Rule, otherwise we would have been sent back to the STONE AGE! Gotta leave some wiggle room for the status quo, or we could face Armagedon.

    The use of models also helps the Too Bigs sell their derivative products to unsophisticated institutional investors who need to limit risk while maximizing returns. In this way, the risk becomes so embedded in our financial system that any move away from status quo brings the threat of systemic risk being unleashed on our economy. While hedging using the futures exchanges limits the risk somewhat (other than broker dealers playing fast and loose with customer funds), unregulated derivatives in particular allow systemic risk. Financial innovation has become just another name for gaming the system, and there is no way for regulators to keep up with each new derivative twist that the best & brightest design.

    Old fashioned banking, where local banks made local loans, served our economy very well. The masters of the financial universe need to go to a happier place, maybe China? I’m sure those guys will be great sports when the SHTF.

    I would like to see a new “small is beautiful” meme become the norm and an see an end to systemic risk being used as a gun to our collective heads as the insolvent banks continue to loot our economic wealth with fed ZIRP, & QE, not to mention TARP if those oh so knowledgeable Congressional rule makers deem it necessary. The “small is beautiful” meme should also be part of our regulatory structure, and should include threshholds where regulation becomes more stringent to help smaller entities be more competitive. The use of propaganda to get the little guys to fight the battle while the big ones hitch a ride is becoming more obvious.

  12. ZedLoch says:

    The HP post reminded me of this:

    Sayonara Sony: How Industrial, MBA-Style Leadership Killed a Once Great Company

    http://www.forbes.com/sites/adamhartung/2012/04/20/sayonara-sony-how-industrial-mba-style-leadership-killed-once-great-company/

    Long story short: Racing to the bottom in the consumer electronics pricewar is not a recipe for success.

    And I still think Sony puts out some of the best products out there!

  13. SOP says:

    “Re-instate Glass-Steagall”… “Repeal the Commodity Futures Modernization Act” …

    Over Phil Gramm’s and Bill Clinton’s dead bodies!

    Damn peasants, quit your whimpering… the Recession Is “Mental,” America Is “Nation Of Whiners” …

  14. PeterR says:

    John Mauldin’s newsletter out today is sobering re: the ECB printing more Euro’s:

    “This is a Ponzi scheme that makes Madoff look like a small-time street hustler.”
    http://www.ritholtz.com/blog/2012/05/waving-the-white-flag/

    Sobering indeed.

    Then listen to Lakshman Achuthan talk about the likely recession coming:
    http://www.ritholtz.com/blog/2012/05/why-u-s-economy-is-heading-back-into-recession/

    Then consider the fact that JPM just lost 2 billion in trading, and the worse may be yet to come:
    http://www.marketwatch.com/story/jp-morgans-losses-reveal-market-chaos-2012-05-10

    Have a good weekend. Enjoy Mother’s Day because the day of reckoning may be getting closer!

  15. DSS10 says:

    Financial Times p. 12, “How JPMorgan loss hit war on Volcker: Investment bank’s travails play into the hands of regulators and advocates of tighter control,” by Tom Braithwaite and Tracy Alloway in New York and Shahien Nasiripour in Washington: “For most of the year, Wall Street seemed to be winning the war on the Volcker … In early 2010, [Paul] Volcker persuaded President Obama that banks that enjoyed government support should not be allowed to make risky bets with their own money. … Deluged by comment letters, and struggling to separate proprietary trading from legitimate market making, government officials delayed the rule.

    From Mike Allen’s Politico Playbook email 5/12

  16. Mike in Nola says:

    @bocon007: don’t worry about professional training. Very few of us here are more than self trained, serious amateurs in finance. And it shows :)

    @Greg: you’re right. Didn’t notice that.

  17. SOP says:

    Re. “The Brain – it makes you think … doesn’t it?”

    It depends on where you touch, push or rub ;)

    ——–

    6 Tricks That Let You Control Animals Like The Beast Master

    …there are traits that allow the animal to be completely immobilized with a touch, push or rub. That means any common person can show off these tricks to their friends and tell them that they are the Beast Master.

    http://www.cracked.com/article_19236_6-tricks-that-let-you-control-animals-like-beast-master.html

    ——————–

    Women show off these tricks to their friends and tell them that they are the Beast Master at the local strip joint every night ;)

  18. Jojo says:

    Housing bidding wars are back? Same thing happened in 2000 in the dotcom bubble when the Nasdaq hit 5100…
    ————-
    Redfin.com
    Corporate Blog
    May 11, 2012
    Want My House? First, Take My Poodle (May 2012 Roundup)

    http://blog.redfin.com/

    971 square foot Palo Alto home sells for $1.35 million. Courtesy of Redfin.

    “It’s a nice 971-square-foot home, but I wouldn’t have guessed it was $1.35 million-nice,” said Redfin agent Brad Le. “We offered all-cash at $970K, but with 12 offers, anything can happen and it sold for 42% above asking price.”

  19. cyclohexane says:

    Here is an interesting piece by Professor Rajan:
    http://faculty.chicagobooth.edu/raghuram.rajan/research/papers/FA%20May%202012.pdf
    It has caused quite a stir within the blogosphere with a wide range of responses: Tyler Cowen believes that he “nails it”
    http://marginalrevolution.com/marginalrevolution/2012/05/raghu-rajan-nails-it.html

    while Ezra Klein et al are more critical:

    http://www.washingtonpost.com/blogs/ezra-klein/post/raghuram-rajans-false-choice/2012/05/03/gIQABKW4yT_blog.html

  20. Exclusive: Failing Up With Dick Parsons (Citigroup CEO)
    “The game is rigged, and Dick Parsons’ rancid story gives some insight into how the rigging operates…”
    http://www.thedailybanter.com/2012/05/exclusive-failing-up-with-dick-parsons/

  21. jonas says:

    @bocon007: Great comment. But I think that high stakes poker game is what banks do these days. They justify it as essential to “price discovery.”

    Something along the lines of, if having a little skin in the game, makes your judgment sharp => having all the money in the world on the line must make your judgment god-like…

    Just like a guy playing Russian roulette must always knows which chamber the bullet is in. After all, his life is on the line! Who has more incentive than him?

  22. biscuits says:

    cyclohexane, thought both responses to Rajan’s piece were insipid. I think Rajan misses it when he says we must not lobotomize banking through regulation to make it boring again, saying that finance needs to be “vibrant to make possible the entrepreneurship and innovation that the world sorely needs. Reinstating Glass-Steagall would not put the brakes on venture capitalism, it would simply keep the risk where it belongs, with investors. He says Dodd-Frank must be allowed to do its job but we should be ready to alter regulations if the burden becomes to onerous. He lays most of the blame for the financial crisis on the politically induced expansion of credit saying it is the main reason that “checks and balances on financial risk taking broke down”. No mention of role of derivatives in the piece at all. Is this guy a bankster shill or what?

  23. Mike in Nola says:

    @cyclo and biscuits:

    Wouldn’t give you a dime for anything coming out of the U. of Chicago. They are academics trying to salvage their egos and reputations.

    The University of Chicago was the incubator of the Efficient Market Hypothesis and remains the redoubt for all the neoliberal, freemarket anti-regulation crap that has brought on disaster. They basically supplied the mathematical underpinnings of the VAR stuff that has worked so wonderfully and did their best to discredit Mandelbrot, the mentor of Taleb.

  24. Mike in Nola says:

    This contains a few references to the history behind the U of C and Mandelbrot.

    http://moneymorning.com/2010/10/20/stock-market-genius/

  25. cyclohexane says:

    @ biscuits; “is this guy a bankster shill or what?” Apparently: He seems to be advocating a watered down version of Dodd Frank. Similarly, J.P. Morgan has been pushing back against new regulations such as the Volcker rule. Eerie!

    @ Mike in Nola: thanks for sharing the article. I particularly enjoyed this: “While seven of them went on to win Nobel prizes, Mandelbrot’s job offer from the University of Chicago was rescinded. […]He was actually 75 before he got his first tenured academic position – at Yale in 1999.”