Even with all the focus on JP Morgan’s loss bomb in the past few days, some critical elements of the story have not gotten the scrutiny they deserve. By way of background, Amar Bhide, who is currently a professor at Tufts, has run a prop trading operation (admittedly some time ago) and has written extensively both on the financial services industry and entrepreneurship.
Bhide takes issue with Dimon’s description of the funds that the Chief Investment Office (part of the bank’s treasury function) as “deposits” but rather as market funds. He also contends that no one can be running a major risk-taking trading operation along with a huge, sprawling international bank. A major trading operation requires that senior management be on top of position risks, and the organizational and operational demands of running a super big bank make that impossible. Finally, he argues that the risks JPM and other banks are taking are much greater than is commonly recognized, and JP Morgan’s profit level in the face of unfavorable conditions for financial firm is proof of unduly high risk levels.
55 comments
Comments are closed.
I think this is the wrong discussion point. The real issue is whether these are activities that we the tax payer ought to subsidize and insure. There was a great deal of wisdom in Glass Stegall by distinguishing between commercial , investment banking and merchant banking activities. If there is a second discussion point it should be regarding having four large organizations exercise an effective oligopoly in banking and whether this large a concentration is a good thing.
WOW! Very well said. The lesson learned that brought about Glass-Stegall must apparently be relearned. And having only four banks, that not only control everything but also believe they are TBTF, certainly cannot be in our best interest as a nation.
TBTF banks are a threat to our national security. The principals should be rendered to Syria or sent to Gitmo for indefinite detainment.
I agree, there should not be a “too big to fail” anything in the U.S. Break up the big banks, replace the “firewall” and while we’re at it start enforcing the laws against monopolies. That’s one of the prime ways we can “create jobs”.
The proper concern of the state is that bank depositors should be protected from a bank going insolvent. Following the GFC, the Australian Government guaranteed deposits up to $1m.
But I fall well short of advocating using tax payer funds to mitigate bad investment strategies of privately owned banks.
So, agree should be no entity or sector that is too big to fail, but we should protect small deposit holders from losing their money.
If anyone still has their money in these criminal institutions, they deserve to lose it.
I totally agree: http://abigailcfield.com/?p=1230
In response to Conscience of a Conservative, I think that at the end of the video, the professor agreed with your point that the tax payer should not subsidize and insure speculation. I may have misunderstood, but I heard him to say that “hot money” is investing with these banks because they know the U.S. Government will back stop losses, and that the profits are scarier than the losses because next time the losses could be much higher.
Bingo — that was exactly my understanding of what Prof Bhide was saying.
Poorly understood trades/positions by the management of TBTF entities – and yet backstopped by us — the taxpayers. Prof Bhide’s statement about what scares him — the “profits” of $19 Billion — is the really worrisome part of where JPM has gone.
Yves said it much better — while I paused to do my laundry. I just wish that Dimon, et al, would take as much care as I do with my laundry.
IMHO your point about G-S is similar to a thought I have—that it’s not so much that the big banks are TBTF, but rather too complex to fail.
To echo Dwight, that is clearly what Bhide said. He said the hot money was going to these banks because they were TBTF (hence taxpayer backstopped), that they were engaged in massively levered risktaking, and also involved in derivaties, which he separately regards as inappropriate for a taxpayer guaranteed entity (his discussion at the top that these activities should be conducted instead by hedge funds).
Uhh, Conscience, how could your points not have formed her presentation ?
Sometimes we consider what has gone before to form the moment ?
Seriously.
Amar Bhide is expressing a concern which no rules and regulations can control; no taxpayer can bail. If all this “hot international money” is going straight through investment banks like you know what, and JPM makes enough good trades to have a profit of 19bn, it destabilizes the rest of the hot money traders – who themselves are using the same money which has been levered, in layers of trading and derivatives, maybe 200:1. Any profit is as dangerous as any loss. This is a new kind of liquidity trap – you are trapped on a treadmill running faster and faster. And obviously getting nowhere. But just think, when the treadmill stops and all the investment bankers and money market funds fall off, what happens to the rest of us. Do we plug along as usual? We can’t put up a firewall that tall. Investment banks will take everything down someday.
“$19 Billion in profit”
You keep using that word, profit; I do not think it
means what you think it means. Welcome to Potterville.
I’ll tell you one thing “profit” means. It means Jamie Dimon is taking home around $23 million a year.
Have these people ever even heard of what happened to Marie Antoinette?
No. They are too arrogant to let it enter their consciousness.
Another posting that really says nothing, the quote is presumably attributed to the Tufts professor. Risk taking happens when a nation state no longer has the world’s most powerful military – Dimon’s a great patriot, the appearance of a thoughtful magician pulling billions forth from his ass in the spirit of free enterprise.
Consider watching the video clip.
Incomprehensible logic there friend. Perhaps Amar’s comment about leverage at 200 to 1 is beyond your grasp. Allow me to fill in the blanks. If JPM is making 19 bil in a sluggish economy, they must have a rather large pile to invest. A large fraction of that money is “hot money”, meaning money from various locations around the globe, often the result of loans. So, just for grins, let’s assume that the 19 bil is the interest income from loans – what would be the principal amount? At a rate of return of 4%, almost $500 billion would have to be at risk – and if you take salaries and operating expenses into account, you would be well over $1 trillion at risk. That doesn’t spook you? Even a little?
It is a damned good thing that JPM owns the casino because its gambling habits are startling to anyone with eyes to see.
Concur.
“Yes, darn good. You don’t know how good, you can’t handle the truth. These are heady issues.” Oh f$%k you.
@debt relief,
I think they missed that you were being sarcastic in your first comment. I got both the sarcasm and the “incomprehensible” logic, i.e., that what JPM and other TBTF banks are doing is a symptom, not the cause, of an underlying disease that nobody is talking about. And I think that’s fair, although I’d argue that what the TBTF banks are doing is a separate disease ushered in by what can best be analogized to AIDS for empires.
Then again, I may be reading too much into what you said.
Dear Tao Jonesing;
“AIDS for Empires!” Good analogy. The symptoms are more like Alzheimers for Empires though. Either way, they describe a rot at the top.
Thanks for starting my day with a laugh.
Tao,
Your comment reminds me how, when a number of years ago there was a discussion of having a National Condom Day, I wondered how large a national condom might be and thought it a “brilliant” idea – we could put it on Florida and then continue to screw Latin America, without giving them any financial AIDS!
The main thing to worry about is are those massive Bankster profits actually being paid for by the Real Economy and as such draining out demand from this sector.
Quite.
JPMC would argue it is the bone marrow of the economy.
Even bone marrow, when cancerous, has to be rooted out
and replaced, lest it kill the host.
This is the exact reason our Country’s economy is in the toilet right now.. Big Banks taking risk endangering our economy. We saved them once ..now its time for regulations and jail sentences…. This fumble by JP Moirgan is egg on Republican’s face on protestng wall street regulation at a time when the American people will not stand for such news out of wall street because while our President fights to restore this country’s economy and set regulations to ensure this foolishness from happenning ..House Republicans are fighting Frank/ Dodd tooth and nail….
Yes, Finance is a huge problem, BUT
Let us not forget that we have allowed multinational US corps to abuse their status by exporting all the jobs and pollution to other countries and making gobs of money ofr the global inherited rich owners that like the global labor & capital competition.
Are we all enjoying this Shock Doctrine event?
Dear Sir;
Pray don’t heap all the blame just on the Republican Party. I, once a stalwart Democrat, have been convinced by evidence posted here and on allied blogs that the coruption is equal opportunity and pervasive. Mercutio said it best, “A pox on both your houses (of Congress, or Parliament, or Diet, or…)”
Let me tell you the problem with Chase. It’s the perverse and toxic corporate culture. Where obscene demands on ever increasing profits and growth cause their employees to move ever away from what a bank is suppose to do. To engage in risk, even if that risk is against the fiduciary responsibility that a bank has to its own customers. Maybe this trade wasn’t “technically” with client’s money….but that doesn’t mean it is not happening. And if Dimon, who is famously known as a bean counter – control freak, an obsessive report fanatic…if he doesn’t know what is going on right under his nose… what does that indicate? Either this bank IS really to big to manage…or Jamie is not as good as his PR machine leads us to believe.
Read Cindy Adams column (yes, I am an equal opportunity newsie) in the NY Post today, where she describes how Chase employees (who didn’t seem very experienced in her words) tried again and again, very agressively, to push her into a bigger relationship with that bank then she ever wanted.
One of the reasons (amongst many) I personally made the choice to leave JPMC: When all the senior executives held a sales rally where they “insisted”, to the point where they required that we “hand over” documents to our ‘leaders’, private personal information on our clients (like bank accounts, social security numbers, date of birth, income), without OUR client’s permission….solely so that this “information” could be “shared” with other employees of the bank in an effort to get more business. Let me reiterate…WITHOUT the client’s permission.
It’s one thing to “share” information in a company, with other employees, if you think there is a compatible business opportunity. It’s quite another thing to actually give “paper” with private client information to someone else, without that client’s explicit approval. Especially in a company as big as JPMC.
Is this a bank where anyone would want to put their trust in?
Glass Steagall made it difficult to compete on global scale.
mario,
Glass Steagall is the problem.
Here is how the bankers’ game works:
http://aquinums-razor.blogspot.com/2011/11/here-is-how-bankers-game-works.html
mansoor h. khan
Why should US taxpayer supported banks compete globally? Foreign banks here tend to provide commodity products at crappy margins or engage in trading. The universal banking model is a poor one in terms of both ability to manage (diseconomies of scope) and returns (Eurobank margins have never been all that hot).
Eh. Glass-Steagall worked fine in the U.S. and it wasn’t so much about U.S. banks competing globally, but specifically about the Anglo-American context and their competing with the City of London and the conditions created by Margaret Thatcher’s Big Bang in 1986.
Once Thatcher put through the Big Bang — and with the UK’s failing industrial and economic position in the 1970s and early 1980s, anyone in her position might have been tempted to play that card — it became a race to the bottom. The big U.S. banks could continually tell the Washington pols that if they didn’t get the regulatory deals they were getting in London they’d move more of their operations there.
It’s not an accident that when the most blatant financial industry transgressions come to light — i.e., AIG, MF Global — it’s usually turns out to have been run through somebody’s London office. Believe me, the Reagan administration were almost non-ideological centrists next to the Thatcher administration: for better and for worse. Mad Maggie was/is your Hegelian world-historical individual.
And for those who may not know —
http://en.wikipedia.org/wiki/Big_Bang_(financial_markets)
http://www.guardian.co.uk/business/2011/oct/09/big-bang-1986-city-deregulation-boom-bust
‘Big Bang’s shockwaves left us with today’s big bust’
‘Back in 1986, as the City broker L Messel was being acquired by a fast-expanding investment bank called Lehman Brothers, a young, ambitious financier was parachuted into London from Wall Street and put in charge of European expansion. That man was Dick Fuld, who later achieved notoriety as the captain of the investment bank as it went down with all hands….
‘…that radical Thatcherite reshaping of the City, a period in which the Americans arrived to snap up ancient City institutions for huge premiums, leading to the clubby atmosphere of the Square Mile being replaced with the rapacious, bonus-grabbing culture of the investment bank.
‘”Nobody could quite believe how much the Americans wanted to pay,” recalls Adam Pollock …then a banker at Lazard….’
Thanks for this background. Did Dick Fuld actually think Frankfurt was behind the Iron Curtain. In the 1980s? So banking to Fuld was a form of capitalist warfare. Pyrrhic warfare. It shines a new light on the Crash of 2008. I’m wondering if the crash was controlled demolition because Shrub and Paulson, et.al. knew it had been a fatal mistake to untether finance and let it float off into space like that. It was an insane thing to do. And they let Lehman fall. They put the brakes full on. Still wondering why Greenspan told everyone the business cycle had been tamed when other people were looking at the accelerated entropy of it and knew they had to do something drastic. Just thinkin. And then of course blamed the whole thing on homeowners.
The London market consisted of jobbers, brokers, and merchant banks. None of them were as well placed as the US investment banks. None of the London players had meaningful operations in Japan then, fer Chrissakes. The US investment banks had moved into London and were already starting to clean the clocks of the locals.
Sure. But what have the then-limited capabilities of the native London players or the abilities of the US banks to “clean their clocks” got to do with anything? The point was that the (non)regulatory regime created by Thatcher’s Big Bang enabled US banks to threaten that they’d move larger portions of their own international operations there.
With the rise of state capitalism the things could change rather quickly.
“Why should US taxpayer supported banks compete globally?”
Exactly. Because does that “global economy” really help my “personal economy”…in a meaningful way? A really meaningful way? I don’t see it.
Time to shut the casino down. This is ludricus behavior while the ongoing bailout continues and people are going bankrupt because of it. Make the crooks pay the American people back the Gagillions they owe US. Their shareholders are getting paid large, the banksters are getting richer while WE THE PEOPLE are going broke. This is just wrong in every way.
yves…you are always dyno-mite!
question: who was on the other side of those bets? and what have they done with our deposits they won from chase?
question: why should diamond jamie dimon get away with his crimes and the woman gets thrown under the bus?
question: are we all sick of obama yet? or is it just me (and you)?
bring back the guillotine!!
Damn did he stick the landing or what? How exactly do you make 19 billion in this economy with a selling ANYTHING of substance.
It is called cranking the handle….think about it……..allllllllll those transactions, allllll over the world…..just give me a penny a piece.
Hearing the increase over the years almost drowns out the drone of the US Treasury printing presses since late 2008.
Quantum trading.
Skippy… Can’t bloodly wait….
Mind boggling! A quantum leap… A massive creation which comes about due to a very intense desire. Possibilities are limitless… LMAO
Completly hypothetically virtual.
Skippy… cough…. on line only.
JPM had their annual shareholder vote yesterday. Per a blip on an MSNBC morning newscast today, Jamie gets to stay another year and got his salary and bonus approved. Of course, how many proxies had been mailed back, voting the Board’s recommendations, before the London Whale story broke? Nonetheless, the vote was quite interesting. 40% voted “Nay”. How often does that happen?
At least they are profitable.
Unlike, let’s say: Solyndra
Keep making Money JPM
How do they make $19 Billion dollars in profit? I’ll tell you: JPMorgan is now claiming that none of the WaMu loans were securitized and they are claiming they have ownership of these loans because of their aquisition through the FDIC. So, they have effectively pulled a governmental agency into their fraud and coverup.
That’s how. You steal homes and you steal foreclosure fees you place on them. Fuckers.
What does never securitized mean? They were just a bunch of WAMU bank loans inhouse? Then JPM has legal standing. But if they were never securitized because they were fraudulently securitized, then JPM if fudging the facts and has no legal standing because it would have been legally impossible for JPM to acquire them, with or without the FDIC.
Rather than more unenforcible regulations, it seems that truly allowing capitalism to function is the best answer to control excessive and unproductive speculation. Investors, speculators, or corporations that utilize investing leverage should be subject to clawbacks through unlimited liability clauses. This is the way that Lloyds of London was once organized.
The reality that one could be finacially wiped out by taking on large risk, would most likely curtail much of the highly-leveraged speculation. Banks that want to be backstopped by the taxpayers need to once again be organized as separate corporate entites and return to traditional banking practices.
I think “highly-leveraged” here might be a euphemism. Those derivative trades, leveraged 200:1, might not have any underlying collateral at all. There’s no there there. This might, in fact, explain why the banks wanted to get into the mortgage business, to acquire some kind of collateral. And why our slimey Congress passed the 2005 bankruptcy laws.
What scares me is I suspect $2b is the tip of a big, ugly iceberg. This evening HuffPo already reporting another $1b “oops.”