By Abigail Caplovitz Field, a freelance writer and attorney. Cross posted from Reality Check
Jamie Dimon, John Stumpf, and to a lesser extent, Vikram Pandit and Bryan Moynihan, are running massive hedge funds. They’re placing enormous, incredibly risky bets. “Hot money” investors are giving them the cash to gamble because they all understand that you and me will make good on any losses, since we’ve started guarantying the banks-turned-hedge-funds as “Too big to fail.”
The money flowing to these gamblers-in-chief is growing by double digit percentages, and includes so much borrowed money the “leverage” may be six times what Lehman Brothers was doing when it flamed out. As long as this situation continues, a new financial crisis is inevitable, and the risks of it grow faster every day. There’s only one solution: cut these gamblers off from public support. The market will do the rest.
We cut them off by reinstating Glass-Steagall, a depression era law that kept the bankers in check for decades, until their Clinton-era lobbying prowess repealed it. Senate Candidate Elizabeth Warren has a petition going to do just that. Please sign it.
“Deposits”, the Word that’s Hiding the Hedge Funds
The information on the bailed out bankers’ hedge funds I just summarized comes from this incredibly important Bloomberg interview of Amar Bhide. (H/T to Yves Smith at Naked Capitalism.) Bhide is a professor at Tufts University who knows a lot about the financial services industry, as the excerpts I discuss below make clear. In a little more than four minutes, Bhide detailed how and why JPM “is a systemically important, structurally defective bank. As are all the other megabanks.”
Crucially, Bhide debunks the bailed-out-banker PR spin that his Bloomberg TV interviewers parrot, and he schools them in other ways too. If enough people are clued in to what is really going on, we will break up the banks and restore Glass-Steagall. But there’s no chance of that so long as major media embraces the bankers’ key word for their hedge fund money: “deposits”.
Hedge Fund Money is the “Surplus Deposits”
The media keep talking about the money JPMorgan lost as “surplus deposits” or “excess deposits“. You know what deposits are, right? It’s your money at the bank, and mine. And the business’s down the street; even big businesses. It’s the cash we all give the banks for safe keeping.
But that’s not what Ina Drew was “investing.” She playing hedge fund, speculating with hot international money.
Here’s Bhide’s first attempt to get Media Guy and Media Gal (his Bloomberg interviewers) to understand:
There’s this amazing narrative I keep hearing. The investment office exists to quote unquote “invest surplus deposits.” It isn’t the case that the surplus deposits walk in through the door. JP Morgan goes out and solicits these deposits in hot markets in order to invest them, in order to speculate with them.
Later in the interview, Bhide twice has to revisit the point because the interviewers have bought into the imagery of the bankers’ word “deposits.”
But let’s explore a little bit what the bank does. We’re taking in deposits, we’re in a deleveraging economy, loan growth is anemic, what do you do with these deposits?…
See his subconscious bias in action? “Taking in deposits.” That’s “what the bank does” all right, the retail bank branch. The Chase that you and I might use. But the hedge fund branch, the “Chief Investment Office”, doesn’t “take in deposits.”
I think you have the chain possibly a little bit off. The deposits aren’t deposits put into the bank by individuals or even commercial deposits. These aren’t IBM’s deposits. These are deposits that JPM proactively goes out and solicits from hot money markets. If it didn’t solicit these deposits it would not have them to invest with.
But Media Guy isn’t ready to listen yet. Watch how he recites some data and then pronounces bank talking points, including the taking in deposits line.
Well, I don’t know, the data suggest a couple of things. On the first hand, on a one-year basis JPM’s deposits on hand has grown by 13%. Wells Fargo’s have increased 11%. Citigroup 5%, Bank of America 2%. All of these banks are fighting for the same deposits. Either JPMorgan is doing something uniquely well, or, people think it’s a safer bank and Wells Fargo is a safer bank to put their money with. That’s a choice.
See how his words still evoke you and me? Notice too the “fortress balance sheet” meme in “safer bank”. Media Gal piles on that one: “Or they think Jamie Dimon’s is the risk manager.”
Bhide tries again:
Again, the word deposits is so misleading. This is hot international money. Hot international money going wherever it sees too big to fail institutions, so they’re ‘depositing’ this money, more or less, with the US Government.
To recap: Jamie Dimon and his bailed out counterparts are soliciting money, money that is looking for a hedge fund to gamble with. Dimon’s sales pitch has two parts: 1) I won’t lose your money, because I’m the greatest risk manager ever was (very Barnum of him) and 2) I can’t lose your money, because I can stick my hand into Uncle Sam’s pocket if I really need to, as deep into his pocket as I want.
The Bankers Are Going All In With Our Money
The hundreds of billions in play right now are real money. But the numbers are system threatening when you consider the “leverage.” Just like we shouldn’t call the solicited hot international money “deposits”, we should say “cash advance to gamble with” instead of “leverage.” Because that’s what “leverage” is in the hot money, hedge fund context.
Leverage upon leverage. The ‘deposits’ are leveraged 10 to 1. And the investor gets quote unquote “invested” by the investment office for possibly another 10 to 1. Possibly 20 to 1. So the activities of the investment office are a levered fund, probably levered 200 to 1. Levered on the backs of guarantees by you and me. And this is an enormous threat to the public good.
Let’s be clear why: enormous bets can lose and that’s bad enough when we taxpayers stand behind them. But hugely levered bets not can not only lose, they increase the losses by an order of magnitude or two, and can bring a daisy chain of other institutions into play–the money was borrowed from somebody, right? And don’t kid yourself about how big the risks are that these funds are taking. As Bhide says:
What scares me is not the $2 billion that JPMorgan lost. It’s the record $19 billion profits that JP Morgan made. How on earth do they make a $19 billion profit quote unquote “putting customers first” in an economy that’s supposedly slowing down and their customers are flat on their backs?
By placing really big, highly leveraged, very risky bets. That’s how.
The Mythology of Risk Management
Bhide makes one other extremely important point: the idea that these bailed out bankers are managing their hedge funds’ risks is complete b.s.; it’s fundamentally an impossibility.
Here’s his first try to get Media Guy and Gal to understand:
[Dimon’s] managing an organization of over 200,000 people scattered all over the world. In dozens and dozens of businesses. This is not a …Berkshire Hathaway who is on top of the specific trades that he’s doing. How could he possibly know?
Media Gal: “It’s his job to know.”
Bhide: “Well it’s a job that no human being can do.”
But the obviousness of what Bhide’s saying doesn’t sink in, so later on he tries again.
Media Gal: “Do you think the risk managers understand the type of products these traders are trafficking in?”
Well it’s one thing to understand the type of product generically, it’s another to know every single trade. The people running these very large organizations who are taking these very large audacious risks ought to be on top of every single trade. I know successful hedge fund managers, they make a fortune, it’s a well made fortune.
So you’re saying if the CEO…cannot have enough visibility into these individual positions and understand the risks they present there’s no way that his or her institution should even be dabbling in this stuff.
Bhide: “Absolutely. I mean I have nothing against these individual instruments per se…”
Media Gal: “So you’re saying the derivatives products, it’s not them. It’s the way they’re being managed?”
Bhide: “I’m saying they don’t belong in JPMorgan, they do not belong in a large commercial bank, period.”
Media Gal: “Then where do they belong?”
Bhide: “In a specialized hedge fund!”
So there it is. Jamie Dimon and his peers are running massive hedge funds that are getting more massive (remember, Dimon’s grew by 13% last year alone), taking enormous, highly leveraged risks they cannot manage, secure in the knowledge that the American taxpayer is guaranteeing their bets.
We are accelerating toward our next, and larger, financial crisis. Time to bring back Glass-Steagall. Sign the petition, please. And watch the Bloomberg interview of Amar Bhide. And pass them both on.