Last week JP Morgan Chase acknowledged a trading loss of at least $2 billion, fueling calls by some observers for more regulation of financial institutions. Chris Whalen, a Senior Managing Director at Tangent Capital Partner, tells Bloomberg Law’s Lee Pacchia that it was actually too much regulation that led to the loss. Jeff Madrick, a Senior Fellow at the Roosevelt Institute, maintains instead that regulators need to clamp down on financial institutions if the dangers of such losses are to be minimized.
Bloomberg Law, May 17 2012
Category: Legal, Really, really bad calls, Video
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.
Chris is being somewhat obtuse. Any profit a bank makes is a hedge against losses. JP Morgan has a derivatives book one or two hundred times world GDP. They are not market makers… they are the market. Under Sarbannes-Oxley Dimon is criminally liable for not disclosing his losses earlier. No, Chris is way obtuse.
Love you, Chris, but you need to meet a friend of mine named Glass-Steagall.
Speculative activity = banking? FAIL.
Not sure if it’s your intent, but you’re starting to sound a bit like a cross between Jeff Macke and Chris Farley. Not a good combo, IMHO.
What causes a run on a bank? Certainly, it is oot one or even a small number of depositors pulling out their money. It is a large percentage of an institution’s depositors panicing and withdrawing. It’s sort of a chain reaction. Remember the demonstrations of a chain reaction with ping pong balls and mouse traps?
What causes a bank to fail? Primarily it is lack of profitability and insufficient equity (capital.) Traditionally regulators have looked at this in terms of operating profit (as with any business) and actual and potential loses in their assets (loans and investments.) Bad loans = losses = (if too large) failure.
What causes a financial system to fail? Is it the failure of a single institution (think WAMU, Long Term Capital Management, Enron, etc.?) No. What caused the financial system to (almost) fail was when an important class of asset, mortgages and MBS and loans to the underlying industry, became a problem for many institutions at the same time. A chain reaction. So, regulators might look at a portfolio of mortgage related loans and predict a 10% loss over the next 12 months, and do so at each individual bank. But, if the entire asset class sours and everyone is trying to reduce their exposure at the same time (think dumping Greek bonds), then the loss would be much greater and the impact more severe.
So, it is this wider risk that must be addressed, not whether JPM is engaged in directional trading. The question that needs to be asked is are many larger institutions engaging in this activity and what systemic risk does this activity represent in aggregate. Maybe each deal is a one-of. Maybe a problem would trigger a chain reaction.
Lastly, seemingly not considered by the regulators is societal risk. If a lending institution gets burned by a particular type of loan, let’s say restaurant loans, it is common for them to basically blacklist any future restaurant loan request. This is the reaction that almost always happens. So, from a societal standpoint, is the risk greater if the banks screw up and withdraw from the mortgage market or lending to restaurants? We have seen the result of losses in housing in terms of stricter lending rules, disappearance of warehouse lines and developer financing, declining home prices, underwater loans, ruined credit, weak GDP, etc. I would argue that such systemically important markets need particular attention and protection.
heres some actual useful information from my friend on Alphaville blogging today
i repeat an email from a big guy last night
QUOTE The trade is a bilateral OTC swap with multiple hedge funds, including a JPM fund. It’s off-balance sheet, so no collateral call – no transparency…..for now.UNQUOTE
i believe him
tho maybe not his probable source and esp about collateral
he is not talking about the obvious questions i asked–yet
1. dealing with their own investment fund for part is certainly a curiosity
not necessarily crooked but consider the possibilities?
2. these are all private entities, less counterpart visibility
3 says its OTC—- but those guys could possibly their own offsets in the CDS market with the volumes seen and described by lisa
4 this at least makes the collateral scenario less likely
everyone should factor in the separate tracy alloway/ Boaz weinstein story elsewhere here
that tends to confirm a net short vol position–betting on less risk like a banker–just not making any loans
NEWS FLASH
more just now from my friend
i will include my questions to him
ME Sooo. Let’s say the item in question is a CDX write or twoway as rumored. While off balance sheet initially. Could it not be rolled into a synthetic “asset” and either marked like a real bond portfolio or called investment and not marked. OBS does not preclude collateral call, depends. I could send my speculation or Qs. But maybe instead you just tell me all you know big guy?
ME OK silent one. Must ask one Q. Why deal with their own fund? Are the two marks of that deal the same? Per our view they often not?
BIG GUY Marks are different as JPM fund operates to profit from the trade and independent from the CIO
Got that????!! this is the same ridiculous self dealing at different prices within the same company
that Goldman publically attacked and called for reform of.
till the rest of wall st beat them up so badly they stopped talking accounting reform
jamie is a scumbag of the Merrill lynch class and has totally prostituted the good Morgan risk culture.
i actually am shocked.
and i am also shocked at Chris
while i know he had these tendancies i am not even going to read him except to get mad
Chris is right, I dont think Jeff go the nuanced point Chris was trying to make.
It seems to be fish-of-the-day to say ‘we need more regulation’, without even asking if the particular ‘market’ should exist at all.