JPMorgan Oops
If you can grasp what happened in the London Office of JPMorgan Chase, then you probably could become the next CEO of the bank as it seems the current CEO Jamie Dimon had no clue. On Thursday last week, Dimon, with his pinky planted in the corner of his mouth, announced that JP Morgan Chase lost 2 billion dollars, though reports state the loss could go as high as $5 billion. Will there be any fallout from this loss? It appears that JPMorgan Chase will be able to absorb this loss, but after Dimon and other Wall Street executives have been campaigning against further banking regulations, have they lost that battle? As Paul Krugman writes:
For the moment Mr. Dimon seems chastened, even admitting that maybe the proponents of stronger regulation have a point. It probably won’t last; I expect Wall Street to be back to its usual arrogance within weeks if not days.
But the truth is that we’ve just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon.
Tags: Economy, Financial Regulation, JPMorgan Chase, Wall Street
Up twinkle Nemski!!! Bout time bro! Good job.
In a world with FDIC insurance, regulators need to police banks aggressively.
Bring back Glass–Steagall
@Liberal Elite: Unfortunately, regulators gutted the important parts of Glass-Steagall well before Clinton and a bi-partisan coalition officially repealed Glass-Steagall.
Glass-Steagall allowed commercial banks (i.e., Banks that take FDIC-insured deposits) to purchase “investment securities” for the banks’ own accounts. But, the bank’s regulator (the Comptroller of the Currency) once closely regulated the definition of the term “investment security.” Long ago, it meant marketable securities that the rating agencies rated investment grade. [Note: Rating agencies rated most mortgage-backed securities, collateralized-mortgage obligations, collateralized-debt obligations as investment grade. That is, Glass-Steagall would not have prevented the last crisis.] Later, regulators recognized loopholes to this rule (and other protections), which sprung from Section 16. Glass-Steagall was toothless by 1998.
Glass-Steagall is not the solution, as it allowed substantial proprietary trading by commercial banks.
@D “Glass-Steagall is not the solution”
Sure it is, if you also clean up the apparently corrupt rating agencies. You’re thinking too small.
http://elizabethwarren.com/wall-street-reform
@Liberal Elite: No need to regulate rating agencies. In fact, over-regulation decreased the number of (major) rating agencies to 3: S&P, Moody’s, and Fitch. In my opinion, society needs MORE rating agencies.
And, society needs buy-side investors to verify ratings. Right now, sell-side players pay rating agencies to rate securities. Thus, rating agencies have an incentive to overrate securities. Buy-side investors should trust, but verify – pay other rating agencies to rate securities for the buy-side investor’s benefit.
Warren suggests a “new” Glass-Steagall, not the original Glass-Steagall. My point is that classic Glass-Steagall was (and would be) pretty useless. Glass-steagall was intended to thwart sell-side abuses (Think Goldman Sachs selling bad investments to “Muppets”) and SOME buy-side speculatiion, not general risk-taking. Commercial banks could still buy “investment-grade” securities. Honestly, I am skeptical of the Volcker Rule (definition of proprietary trading is murky), because of Glass-Steagall’s buy-side failure.
Society cannot quash all the banks’ risk taking, as all lending is risk taking. And, regulators cannot distinguish between investment-grade and so-called speculative securities. Thus, all society can do is (1) empower regulators to crawl inside the banks and TRY to assess the overall risk of the banks’ portfolios or (2) break up the too-big-to-fail commercial banks.
I have tremendous respect for Warren. I used her book on bankruptcy during law school, and I know one of her students pretty well. She knows classic Glass-Steagall is not the answer. Most likely, she wants something more effective. And, I agree with her.
@D “No need to regulate rating agencies.”
It’s not about simple regulation… What you need to do is to change the way rating agencies are funded. Current practice is inherently corrupt. Even if there is no explicit corruption there remains the appearance of corruption.
@Liberal Elite: I agree. Buy-side investors need to pay for ratings, and the established rating agencies need competition.
@D “Buy-side investors need to pay for ratings,”
I was thinking of doing it as a government function. Why can’t the SEC do ratings for any new Glass-Steagall act? Sort of like what the FDA does for new drugs.
BTW: I noticed you added a paragraph in edit above (4:17) on this. It’s not that I have poor reading comprehension.
This is much ado about NOTHING. It is no one’s business what they invest in unless you’re a stock holder, and then you more than likely aren’t a big enough holder to make a shit.
They used their money, there were other investors on the other side of the trade…..in simple terms its called capitalism. Its a self regulating system. They lost less than 1% of their net worth. But they are evil private sector wall street guys….
@Liberal Elite: Two reasons: (1) regulatory capture and (2) gaming the system.
(1) The SEC will need models for rating investments. Where will they get the models? Probably, the banks. After all, where are the (supposed) experts? The banks. In fact, the agencies’ models for most exotic securities were once the banks’ models. Why use those models? The agencies lacked the expertise to make their own models AND the sell-side was paying their bills.
(2) Banks will structure securities such that the SEC’s models give the securities good (i.e., investment grade) ratings. This is why the banks created collateralized-mortgage obligations (CMOs) and collateralized-debt obligations (CDOs). They looked great in the models, not so great in reality.
And don’t feel like the buy-side is the little guy. The buy-side includes mutual funds, hedge funds, private equity, the banks’ proprietary trading units, and other institutional money managers.
More competition in the market for ratings will spur innovation in modeling. (Of course, the rating agencies’ dearth of talent does not bode well for them.)Right now, the ratings of S&P, Fitch, and Moody’s are meaningless. The cost of a credit-default swap on a corporation’s bond is a better estimate of the corporation’s creditworthiness than the ratings of S&P, Fitch, and Moody’s. (Similarly, the spread between a 10-year nominal treasury and a 10-year inflation-protected treasury is a better estimate of inflation expected over the next 10 years than government statistics.)
Also, if rating agencies service the buy-side, then they will have loyalty to the buyers (in addition to the sellers). The rating agencies lose their incentive to pull punches.
@Rockland: Not true. Through FDIC insurance, the government subsidizes the commercial banks’ costs of capital (specifically, borrowing). This is especially true with too-big-to-fail commercial banks, like JP Morgan, Citigroup, Bank of America, and Wells Fargo.
@D “Two reasons: (1) regulatory capture and (2) gaming the system.”
Nice discussion, but not buying it. One could make the same claims about the FDA (no drug design experts on staff,…), but yet the FDA does a pretty good job. If the FDA can do it, so can the SEC.
“They looked great in the models, not so great in reality.”
How does the Upton Sinclair saying go? “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
There are people who can understand investments and the holes in the models. We just need to hire those people.
@R “It is no one’s business what they invest in…”
But YOU are the one who backs them if they lose. YOU are on the hook for ALL of their loses that would be passed on to small investors.
How about this? “Hey Dad, me and my buddies want to go gambling. We expect to have all sorts of fun and make lots of money, but if I lose, can you cover my rent check?”
p.s. your viewpoint is most silly.
@Liberal Elite: The FDA does an okay job. But, the FDA is not known for either its efficacy or efficiency.
Government intervention should be the exception, not the rule. There needs to be a justification for nationalization.
And, there’s no reason to prefer the government over the private sector in the market for ratings. Specifically, there is no collective action problem. Further, the U.S. government has long regulated the market for ratings. In fact, the government whittled the market down to 3 competitors. The government caused the lack of competition! Also, in contrast to your idea, Europe is increasing competition, not creating a new agency for rating securities [Note: Europe considered both alternatives].
The SEC can rate securities. But, I would not expect great things. The SEC cannot afford the millions (and even billions) of dollars that modelers earn.
@D “But, the FDA is not known for either its efficacy or efficiency.”
But there’s a reason that nearly all the thalidomide babies were born in Europe. The agency is both efficient (costs are low compared to other agencies of similar size and function — big pharma picks up the tab), and efficacious (they’ve made very few serious mistakes compared to their international counterparts).
@D “The SEC cannot afford the millions (and even billions) of dollars that modelers earn.”
You don’t need to hire the modelers, you just need to hire people who can review the modelers work… someone who can separate quality work from BS. This is what the FDA does.
Liberal Elite – So using your logic…..DC owes us Trillions because of their faulty investments and financing their investments using decades of yet to be collected TAXES… LOL
Shouldn’t you be occupying something?
@R “So using your logic…..DC owes us Trillions”
Duh.. Yea. That’s why they call it the ‘National Debt’.
@R “Shouldn’t you be occupying something?”
Shouldn’t you be learning something?
@Liberal Elite: But is a government solution more effective or more efficient than a private-sector solution? That’s the appropriate comparison.
The government already failed in regulating ratings once. That does not give me confidence. Moreover, the world trend is competition, not nationalization.
A government isn’t a corporation. You’ve grown so used to serving your corporate lords, you’ve confused a government of the people by the people for the people with your bossman.
@socialistic ben: Society must evaluate the government’s performance. To what should society compare the government’s performance? – The performance of a market solution (regulated or unregulated). Otherwise, government is unaccountable. Or, do you assume that government is always right?
It has nothing to do with corporations. It’s about measuring performance.
“The government already failed in regulating ratings once.”
Hilarious. You have to love the wingnut logic at work here. Turn the government into a useless mass of dysfunction, then say – look at how useless government is. The only cure for it is increased uselessness. That should work.
@Jason330: The government did fail:
http://online.wsj.com/article/SB123976320479019717.html
This is beyond dispute. The only argument is whether the government can do a better job moving forward. If you want to address that, I’ll read what you write.
@D “The government did fail:”
Sure it did. And sometimes a football referee makes a bad call. What’s your solution? Get rid of the referee? No. We need better rules and better referees. Failure to do so will result in investors leaving the market in droves. In fact, it’s already happening for these very reasons:
“End of the Affair”
http://www.nytimes.com/2012/05/15/opinion/end-of-the-affair.html
Even a conservative should see the pending danger in backing away from much needed reforms.
@LE – Exactly. It failed because it was too weak. Consequently, we need stronger regulations, not weaker ones.
In addition, it is the proper role of government to look out for the common good and protect the public interest. That is not the job of the private sector.
@Liberal Elite: Ratings are not important to most retail investors. I tried to impress this before. Ratings are important to buy-side investors – institutions. Specifically, ratings are important to institutions that lack internal risk management. In effect, the institutions outsource risk management to the rating agencies.
The only retail investors that need ratings are high-net worth individuals.
Other individual investors cannot buy non-government bonds, except at high cost, because the market is illiquid and opaque. Some individual investors buy individual government bonds and create a bond ladder.
Now the NY Times article. These are separate concerns from the rating agencies. And, the markets are not retail investor friendly. The SEC should act (aggressively). But, honestly, 99% of retail investors should only buy index funds and diversify their holdings. And they should never, ever buy a product that they do not understand (I’m looking at the equity-indexed annuity in particular).
Foremost, the government needs to clarify the difference between salespeople and fiduciaries. The former calls you a muppet; the latter has your best interests in mind (or else). Retail investors do not understand the difference.
In all, the rating agencies are outsourced risk managers. They serve institutions, not individuals. That being said, there are some stupid institutions out there. You should watch PBS Frontline’s four-part series on the crisis.
@Valentine: The government regulated until only 3 rating agencies survived. This is not an example of under-regulation. It’s an example of poorly-designed regulation. In all other markets, the government promotes competition – think FTC blocking AT&T’s purchase of T-Mobile and Microsoft’s purchase of Yahoo. In the market for ratings, the government reduced competition.
In general, I am skeptical of all power. Today, the Democrats want to increase federal power or commandeer the States. Tomorrow, the Republicans use that precedent to ban same-sex intimacy.
@D “They serve institutions, not individuals.”
But there’s no reason that they cannot also serve the people (aka the government). If the people are backing investments with guarantees, then they should be… and in a big way. That’s the real issue here.
And big buyers should be smart enough to take care of themselves. Small investors have every right to play, and every right to expect a fair playing field. That an unfair field is seen by many is a serious problem.
@D “The government regulated until only 3 rating agencies survived. This is not an example of under-regulation. It’s an example of poorly-designed regulation.”
What it really is, is an example of regulation designed by Wall Street lobbyists.
Stupid and corrupt in => stupid and corrupt out
@Davy — You can deluge people with a lot of details but that won’t convince anyone when it comes to philosophical beliefs about the proper role of government or the just relationship between democracy and the economy, etc. That is what you are up against, imo.
@Liberal Elite: “What it really is, is an example of regulation designed by Wall Street lobbyists.”
That’s called regulatory capture, which I mentioned earlier.
Honestly, I would never trade individual stocks or bonds (except buying government bonds through Treasury Direct), even if there is a level playing field. It’s a fool’s errand:
http://www.bogleheads.org/
Even with a level playing field, an amateur will not steal Alpha from a professional.
@Valentine: Perhaps. But, this argument should be easy. The Europeans rejected a centralized credit rating agency.
The big problem is market abuse, like bidding and withdrawing a bid within a single second. Stuff like that.