|May the source be with you, but remember the KISS principle ;-)|
|Contents||Bulletin||Scripting in shell and Perl||Network troubleshooting||History||Humor|
|News||Recommended Links||Corruption of Treasury||Corruption of SEC||Corruption of FED||Banking Bonuses as Money Laundering|
|Commodities manipulation||High frequency trading||Insider Trading||CDS -- weapons of mass financial destruction||Control Fraud||Naked short selling|
|Senate Hearing on Goldman||The Secret to Goldman’s Success||AIG collapse||Abacus Deal||Settlement with SEC||Principal-agent problem|
|Goldman CDS saga||Buffet Saga||Commodities manipulation||Aleynikov||"These F#@king Guys" (GS humor)||Lobbying and the Financial Crisis|
The Baseline Scenario
Posted on November 27, 2013 by James Kwak | 6 CommentsWhich is to say, a basket case. Along with Citigroup, and Bank of America.
We all know that JPMorgan Chase is too big to fail. We all know that this means that it enjoys the benefit of a likely bailout from the federal government and the Federal Reserve should it ever collapse in a financial crisis. So why does that make it a poorly run company? It's possible for a behemoth to be well run; think of Intel in the 1990s, for example.
One reason, of course, is that it's too big to manage. Even if bribing Chinese officials by hiring their children wasn't part of the master strategy, not being able to stop it from happening is a sign that things aren't really under control. (And for "bribing Chinese officials," you can insert any number of other things, like "betting on the relative values of various CDS indexes," or "manipulating LIBOR.")
Mark Roe (blog post; paper) points out another reason. For decades, the supposed cure for bad management has been the so-called market for corporate control. In other words, do a bad job, and someone will take over your company and you'll be out of a job. That someone might be a corporate raider like T. Boone Pickens, or it might be a private equity firm, but in either case bad management is a sign of opportunity.
Not so with too-big-to-fail banks. For one thing, TBTF banks are impossible to acquire in one piece: no other bank could absorb JPMorgan, even if there weren't the rule against a banking conglomerate having more than 10 percent of all U.S. deposits. The other option is to engineer a breakup, which is what all manner of shareholder advocates have been arguing for. But, Roe argues, if being too big to fail is your competitive advantage, that would kill the golden goose. Therefore, the market for control doesn't work properly, and these behemoths continue bumbling along their way-not just threatening the financial, but doing a lousy job at their job of providing credit to the economy.
6 Responses to Why JPMorgan Is JPMorgan
- Patrick R. Sullivan | November 27, 2013 at 5:40 pm |
Right, the bank Tim Geithner turned to in the Spring of 2008 to help him with Bear-Stearns is a 'basket case'. The same bank that the FDIC needed to absorb WaMu.
J..P Morgan is only in trouble because it's being held up for extortion by the Federal Govt. Largely because of the idiocy promoted by the likes of Kwak and Johnson.
- Anonyomouse | November 27, 2013 at 6:40 pm |
The same can be said of the federal gvt. Who would purchase the debt, and what would they use for payment. Now if they were to say, be extorted by a larger economy such as china's, we would not know where the idiocy would lie because it would be ubiquitous on both sides of the fence. First a trade war would erupt, then there would be a deafening silence as each side waited for the other to jump so they could be victorious in their self proclaimed deeds. It's a mess of epic proportions which will not end well.
- Bitcoin 2.0 | November 27, 2013 at 10:13 pm |
@JanetYellen (Fed nominee) Goldman Sachs trying to corner investor market now, with bitcoins, corn rows of GPUs working 24/7. Although, GS-TBTF is behind the curve, as Quark surpasses Litecoin and Bitcoin in the opinion of virtual developers/investors (see below). "The Goldman conspiracy theory: After writing about the markets for more than twenty-five years, I've come up with an informal rule: where there's trouble, there you will find Goldman. This isn't a criticism or an indictment; it's merely an empirical observation. The bank is so big and so aggressive that it gets involved in virtually everything, so when the C.S.I. squads turn up to examine the body, they usually find some Goldman D.N.A."
It was reported earlier today that "Bitcoin surpassed $1,000 on the Mt. Gox online exchange, fueled by speculators snapping up the virtual currency as it gains wider acceptance."
Would the creator of the bitcoin actually reveal him/her/themselves since one of the underlying concepts of its creation, is its property of "anonymity." The speculation and efforts to out the person(s) is ongoing. However, "Satoshi Nakamoto" is currently speculated to be "Shinichi Mochizuki" A recent and supposed posting from his pseudonym: the linked panel discussion includes names of Wells Fargo, Mr. Bernanke, ECB, Target (retail outlet), and Bitcoin as a complementary currency: http://www.youtube.com/watch?v=KXxqh8FX0iI
- JC | November 28, 2013 at 1:27 pm |
You do realize that Intel in the 90s lazily squandered its technological lead to AMD and took years to pull its act together and resume actual competition, right?
- Alexandra Lomakin | November 28, 2013 at 7:54 pm |
Saying that the market for corporate governance is a possible solution for smaller companies, assumes that companies with high returns are always well managed. That is not true if the playing field is rigged. For one, successful cheaters make good money. And then some well managed but smaller companies can be bullied around
- Charles Zigmund | November 29, 2013 at 1:54 am |
Recent journalistic exposes of the Pentagon's permanent inability to be audited and the out-of-control US intelligence system both show that needed basic controls cannot be applied to vast systems. The large banks are just another example. There is little doubt that human government and business entities at the largest levels are incapable of being managed. This creates an opportunity for computers. Once computers demonstrate the ability to take over and solve this problem, humans will lose all meaningful control over their largest organizations.
California Sues JPMorgan Chase Over Credit Card Cases
By JESSICA SILVER-GREENBERG
Kamala Harris, the California attorney general, is accusing JPMorgan Chase of credit card collection abuses.Richard Vogel/Associated PressKamala Harris, the California attorney general, is accusing JPMorgan Chase of credit card collection abuses.
California's top law enforcement official accused JPMorgan Chase on Thursday of flooding the state's courts with questionable lawsuits to collect a glut of overdue credit card debt.
On Thursday, the California attorney general, Kamala D. Harris, sued the bank, the nation's largest, in California Superior Court over claims that the lender "committed debt collection abuses against tens of thousands of California consumers," according to court records.
JPMorgan Chase, Ms. Harris says, deluged the courts with dubious lawsuits to collect soured credit card debt. For roughly three years, from January 2008 to April 2011, Chase filed thousands of lawsuits each month, the lawsuit says. On a single day, for example, JPMorgan filed 469 lawsuits, court records show.
As the bank plowed through the lawsuits, Ms. Harris says, JPMorgan took shortcuts like relying on court documents that were not reviewed for accuracy. "To maintain this breakneck pace" JPMorgan used "unlawful practices," according to the lawsuit filed on Thursday.
The accusations outlined in the lawsuit echo problems, including questionable documents used in lawsuits and incomplete records, that plagued the foreclosure process and prompted a multibillion-dollar settlement with big banks. One hallmark of the foreclosure crisis, robosigning, in which banks worked through mountains of legal documents without reviewing them for accuracy, is at the center of Ms. Harris's lawsuit against JPMorgan.
The move on Thursday comes as JPMorgan navigates a thicket of regulatory woes. The Office of the Comptroller of the Currency, one of the bank's chief regulators, is preparing an enforcement action against the bank over the way it collects its credit card debt, according to several people who were not authorized to discuss the cases publicly.
JPMorgan assembled a "debt collection mill that abuses the California judicial process," according to the lawsuit. Many of the lawsuits filed rely on questionable or incomplete records, Ms. Harris said. "At nearly every stage of the collection process," JPMorgan "cut corners in the name of speed, cost savings and their own convenience," Ms. Harris said.
JPMorgan's debt collection practices are under scrutiny, but flaws are increasingly common in credit card lawsuits filed by rival banks, according to interviews with dozens of state judges, regulators and lawyers who defend consumers.
"A vast number of the lawsuits are flawed and most of them can't prove the individual actually owes the debt," said Noach Dear, a civil court judge in Brooklyn who said he had presided over as many as 150 such cases a day.
JPMorgan Chase declined to comment. The bank, though, has been cooperating with regulators, including the California attorney general's office, to root out problems with its debt collection lawsuits, according to people with knowledge of the matter. Amid concerns that some of the underlying documentation was flawed, JPMorgan stopped filing credit card lawsuits in 2011, these people said. In courts across the country, according to judges, JPMorgan has also been throwing out some lawsuits as well.
According to a blistering 300 page Senate report released yesterday, JPMorgan (JPM) executives misled regulators and were less than forthcoming about key information regarding the bank's financial exposure related to the "London Whale" trading losses.
The findings were released on the eve of a Senate hearing underway today in which several past and present JPMorgan officials will testify regarding the trading losses. CEO Jamie Dimon will not be testifying today, but Senate reserves the right to hold more hearings on the matter.
Nothing happens in Washington or finance without some sort of underlying agenda. The length and depth of the Whale investigation has the Wall Street gossip mill in overdrive. The most popular theory is that the report is both a slap at Mr. Dimon -a staunch critic of government involvement in banking regulations- and the first salvo in the ongoing fight over the Volcker rule.
Fred Cannon, chief equity strategist at KBW agrees. He says there are two underlying but related issues in play during today's testimony: "Are these institutions really able to be examined?" and "are the trade books even manageable to anyone?"
JPM has two choices in terms of how to respond to the report. One is to claim the delays in disclosure were a function of news making its way gradually through a massive organization. The other option is to humbly confess to intentional obfuscation and throw itself a the mercy of the Senate.
The first is a tacit admission that JPM, by most accounts the best run major bank extant, isn't able to control or even be aware of massive risks in its portfolio. Confessing to hiding the potential losses from both investors and investigators isn't something the bank is going to do. That leaves "confessing as little as possible and dismiss the whole thing" as a third option. It's a strategy that shouldn't exist in front of a Senate investigation but has worked quite well in the 6 years since the financial meltdown started.
It would seem the government has Jamie Dimon's team backed into a corner and ready to take its best shot at imposing the Volcker rule as is, necessitating a massive restructuring of JPMorgan and its peers as we know them. Today's testimony is merely the undercard; the main event comes if and when Jamie Dimon himself gets the chance to strike back.
Right, as JP Morgan spends the most ever to buy off Congress and Obama, it's unlikely to get much static about "We're to big to fail, and too big to jail". Liars, cheats and thieves, it will be business as usual for JP Morgan. When you have the same running the country, not much else is...
Waiting for I-yimg-com...
Another wasted day in Congress. If they too big to fail, they are too big to exist. No more bailouts.
4 more Beers!
i like how the SEC says they win when they sue Goldman for 10 million and win. Congrats to the SEC!!! that's the equivalent of suing me for $1.99 and winning. how would I ever get over such a insignificant lose?
Josh Rosner (
@JoshRosner) is co-author of the New York Times Bestseller "Reckless Endangerment" and Managing Director at independent research consultancy Graham Fisher & Co. He advises regulators, policy-makers and institutional investors on banking and financial services (a more complete bio appears at the end of this column).
This is part 4 of 5; Yesterday evening, we published the Introduction. We will be releasing a different part each evening and morning culminating in the release of Rosner's complete report on Friday morning. On that date, the Senate Permanent Subcommittee on Investigations will release their final report on JPM's CIO Group (aka the London Whale).
Prior installments are here: Intro, part 2 and part 3.
March 12, 2013 | The Big Picture
... ... ...
We have intentionally chosen not to detail all of the many private or public actions settled or outstanding (which have driven almost $16 billion in litigation expenses since 2009) or, other than the multistate settlement and foreclosure review settlement, the agreed to or unresolved costs of actions related to mortgage putback demands, including those of institutional investors, insurers, the GSEs, FHA, or the costs of foreclosure-related actions. Moreover, the firms attempts to transfer billions of dollars of Washington Mutual (WaMu) related losses to the FDIC demonstrates their unwillingness to accept the responsibilities for their own management failures.
Even without the inclusion of these items, since 2009, the Company has paid more than $8.5 billion in settlements for the various regulatory and legal problems discussed in this report. These settlement costs, which include a small number of recent settlements of older issues, represent almost 12% of the net income generated between 2009-2012. Banking regulations and laws are intended to protect stakeholders and the public but some portion of these costs may be tax deductible to the company[i] allowing management to transfer to the public the costs of and future risks of these violations.
Even without the inclusion of these items, since 2009, the Company has paid more than $8.5 billion in settlements for the various regulatory and legal problems discussed in this report. These settlement costs, which include a small number of recent settlements of older issues, represent almost 12% of the net income generated between 2009-2012. Banking regulations and laws are intended to protect stakeholders and the public but some portion of these costs may be tax deductible to the company allowing management to transfer to the public the costs of and future risks of these violations.
In addition, JPM's ability to retain its reputation, its political power and support of investors in the face of financials that lack the details necessary for a proper analysis are reminiscent of another too-big-to-fail institution: Fannie Mae.
We are not suggesting that JPM will meet the fate that Fannie did. But there are notable similarities in the actions taken by these institutions. JPM appears to have taken a page out of the Fannie Mae playbook in which the company perfected the art of cozying up to elected officials, dominating trade associations, employing political heavyweights and their former staffers and creating the image of American Flag-waving, apple-pie-eating, good corporate-citizen, all of which supported an "implied government guarantee" and seemingly lowered their cost of funding. Additionally, rather than being driven by the strength of its operations and management, many of the JPM's returns appear to be supported by an implied guarantee it receives as a too-big-to-fail institution.
JPM has a reputation of being the best managed of the biggest banks. In our reviews we could not find another "systemically important" domestic bank that has recently been subject to as many public, non-mortgage related, regulatory actions or consent orders. The firm's pride in a disputable "fortress balance sheet" – which underestimates their off-balance sheet risks appears to have given investors false comfort, after all poor risk management and control failures are almost always the major drivers of capital destruction.
The Big Picture
The disclosure by once future Treasury Secretary and current JP Morgan CEO Jamie Dimon of a sudden and previously undisclosed $2 billion dollar derivative loss should be a wake up call. It unwittingly reveals much about the present state of finance:
- The inherent tension between traders using leveraged risk with Other People's Money in the pursuit of enormous bonuses is still weighed heavily towards excess risk taking;
- There is no bank in the United States that has demonstrated the ability to manage proprietary trading risks - if they use derivatives and/or leverage;
- It took less than 3 years after the financial crisis peaked for traders to engage in the same sorts of highly leveraged reckless speculative bets that helped crash the economy last time. Imagine the sorts of risks these mis-incentivized desks will be doing when the memories of the crisis fade 10 years after.
- Trades that are so enormous as to be "credit index distorting" are not hedges, but pure speculation. Within banks, apparently the word "Hedging" loosely translates as "speculation." Actual hedging of existing positions appears to be nonexistent.
- VaR remains a mostly useless concept as applied by banks today. It is a false model of reality whose deviations have devastating consequences. (Call it physics envy)
- At these size trades, the asymmetrical preference for bonuses over risk management is such that even clawbacks won't work;
- Jamie Dimon, formerly praised as the Capo di tutti capi of bank CEOs, apparently has been more lucky than brilliant. This quarter, his luck ran out.
- Derivatives, because of their enormous built in leverage, are inherently dangerous. They are still financial weapons of mass destruction;
- Too big to fail banks remain a threat to the stability of the global economy.
While this was "only" a $2 billion loss it easily could have been much greater. That banks such as JPM are still putting on trades that distort indices is quite bluntly, astonishing.
The solution to this risk is very very simple: The USA should reinstate Glass Steagall, and repeal the Commodity Futures Modernization Act.
Until that occurs, the risk of catastrophic failure remains present in the financial system.
This wasn't a wake-up call.
This was the snooze alarm ringing again for the umpteenth time since 2008.
Despite repeated blatant evidence that these people will gamble our country away like drunks in Las Vegas, the rent-to-own politicans and regulators contineu to believe that people who wear well-tailored suits can't be incompetent or fraudulent despite history showing that these are the people who do the most damage.
Instead we continue to throw people in jail with long sentences for a third possession of a dime bag of marijuana while we bankroll and guarantee bankers' gambling habits without any investigation of potential fraud. Please note that it is unlikely that Dimon and JPM committed fraud here unlike many of the other bankers, just incompetence which presumably justifies another large bonus.
Right on BR!
Still way too many Hair Triggers at the ready.
To quote Warren Buffet once again from 2005:
'There are more people [like hedge-fund managers] that go to bed at night with a hair trigger than ever before, it's an electronic herd, they can give vent to decisions that move billions and billions of dollars with the click of a key. We will have some exogenous event - we will have that. There will be some kind of stampede by that herd ? 'When you have far greater sums than ever before, in one asset class after another, that are held by people who operate on a hair-trigger mechanism, then they lend themselves to more explosive outcomes. People with very short time horizons, with huge sums of money – they can all try to head for the exits at the same time. The only way you can leave your seat in burning financial markets is to find someone else to take your seat, and that is not always easy …'
For those who wonder about financial reform…abandon all hope until people get REALLY, DANGEROUSLY mad. Because it is a cesspool of corruption, capture and ideological mendacity of the lowest order imaginable.
Strongly suggest replacing pitchforks with this!
For the past 30 years I've managed to eke out a living selling fertilizer (not the organic variety that Jamie Dimon was peddling yesterday,) so I've never needed to be a financial genius, but a "hedge" by definition cannot lose money. It is a defensive measure used to protect a gain, or to insure in an outcome. It may limit upside if the event you were defending against doesn't happen, but it never, ever loses money.
When the financial press allows the CEO to use the word "hedge" to explain a $2 billion loss other than in a sentence like, "Our failure to hedge resulted in a $2billion loss," our financial press does us a disservice.
What does it take for a degenerate gambling addict to admit they are a degenerate gambling addict?
"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions … Derivatives have permitted the unbundling of financial risks." - Alan Greenspan, May 2005
"There's no question about it, … Wall Street got drunk, that's one of the reasons I asked you to turn off the TV cameras. It got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments." - George W Bush, July 2008
The Bush quote was revealing in that after Bear Stearns and before Lehman his administration already pinpointed precise blame for the financial industry collapsing on itself. Yet Bush signaled an intention to do nothing, choosing blind adherence to ideological dogmatic belief that U.S. style capitalism is inherently self preserving, self regulating and self correcting. It wasn't until later that all the eventual Big Lie culprits (100-year storm, corrupt GSE's, predatory mortgage originators, overborrowing home buyers, intimidated property appraisers, lax underwriting, sloppy rating agencies, lazy government regulators, sophisticated investors recklessly chasing yield and failing to conduct due diligence, Barney Frank, etc.) were being tossed out en masse to provide TBTF with smoke screen cover.
TBTF is an out-of-control degenerate gambler addicted to greed that, unmonitored and unsupervised, cannot resist a compulsion to play Russian roulette nonstop until it shoots itself in the head. At the beginning, middle and end of the day government's primary function is to protect its citizens. Notwithstanding initial, possibly well intended government motivations, the bailouts and Citizens United are enablers feeding TBTF's addictions with the radioactive fallout posing too great a threat to society at large. The mother of all socialist safety nets assembled almost overnight and since ongoing to support TBTF is too expensive, is not succeeding and must be withdrawn. TBTF needs to be laced into a straightjacket and locked in a padded cell until it is trained to walk again without falling down. Upon release, it should be kept on a short leash. If gradually permitted to roam, it should be implanted with two-way tracking devices that will paralyze it when dangerous activity is detected.
I think the next financial crisis is less than two years away, and it will strike the global real economy as badly as the banking crisis with the collapse of Lehman Brothers.Janet Tavakoli Jamie Dimon's SNAFU JPMorgan's Other Derivatives' LossesPosted by Jesse at 5:23 PM
By Janet Tavakoli
In an August 2010 commentary about JPMorgan's losses in coal trades I wrote: "The commodities division isn't the only area in which JPMorgan is vulnerable. Credit derivatives, interest rate derivatives, and currency trading are vulnerable to leveraged hidden bets. Ambitious managers strive to pump speculative earnings from zero to hero."
At issue is corporate governance at JPMorgan and the ability of its CEO, Jamie Dimon, to manage its risk. It's reasonable to ask whether any CEO can manage the risks of a bank this size, but the questions surrounding Jamie Dimon's management are more targeted than that. The problem Jamie Dimon has is that JPMorgan lost control in multiple areas. Each time a new problem becomes public, it is revealed that management controls weren't adequate in the first place.
JPMorgan's Derivatives Blow Up Again
Jamie Dimon's problem as Chairman and CEO--his dual role raises further questions about JPMorgan's corporate governance---is that just two years ago derivatives trades were out of control in his commodities division. JPMorgan's short coal position was over sized relative to the global coal market. JPMorgan put this position on while the U.S. is at war. It was not a customer trade; the purpose was to make money for JPMorgan. Although coal isn't a strategic commodity, one should question why the bank was so reckless.
After trading hours on Thursday of this week, Jamie Dimon held a conference call about $2 billion in mark-to-market losses in credit derivatives (so far) generated by the Chief Investment Office, the bank's "investment" book. He admitted:
"In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored."
But lets get back to commodities. For several years, legendary investor Jim Rogers has expressed his concern to me about JPMorgan's balance sheet, credit card division, and his belief that Blythe Masters, the head of JPMorgan's commodities area, knows so little about commodities. Jim Rogers is an expert in commodities and is the creator or the Rogers International Commodities Index. He also sells out-of-the-money calls on JPMorgan stock. So far, that strategy has worked out well for him. (Rogers gave me permission to publicly reflect his views and his trades.) Moreover, JPMorgan is still grappling with potential legal liabilities related to the mortgage crisis.
Is Jim Rogers justified in his harsh view of JPMorgan's commodities division? After he expressed his concerns, JPMorgan's coal trade made the news, and it appeared to me that Jim Rogers is on to something.
For those of you who missed it the first time, my August 9, 2010 commentary is reproduced below in its entirety. Dawn Kopecki at Bloomberg/BusinessWeek broke the story wherein Blythe Masters' quotes first appeared...
Read the rest here
"It is impossible to calculate the moral mischief, if I may so express it, that mental lying has produced in society. When a man has so far corrupted and prostituted the chastity of his mind as to subscribe his professional belief to things he does not believe, he has prepared himself for the commission of every other crime."Using political influence with the Fed and the Treasury, JP Morgan overrode concerns at the SEC and CFTC to create a broad loophole in the Volcker Rule which was designed to allow them to continue risky and highly leveraged 'prop trading' in their CIO unit under the phony rationale of 'portfolio hedging.' This is the backstory on the antics of the 'London Whale' and quite likely their rationale of 'hedging' to justify enormous and manipulative positions in other markets.
Throughout the lead up to the financial crisis, banking lobbyists used their friends at the Fed and the Treasury to suppress the warnings of regulators and undermine reforms to protect the public interest.
One of the most infamous instances was the bullying of Brooksley Born and the silencing of her warning as chairman of the CFTC by Alan Greenspan, Robert Rubin, and Larry Summers. PBS Frontline: The Warning.
This crony capitalism is one of the reasons why the financial system collapsed, and why the markets are still so dangerously unstable, despite the determined efforts to disguise it with liquidity and lax regulation. The responsibility for this goes back to the Clinton and Bush Administrations at least.
Obama was elected with a mandate to reform, but instead packed his Administration with Wall Street figures. He has one of the worst records for pursuing financial frauds in the last twenty years.
It is time to stop apologizing for and tolerating the soft corruption that has characterized the Obama Administration's policy on the financial sector since day one. The price of giving him a pass on this failure to do his job and making excuses for him is too high. The excuse that Romney will be worse is not acceptable.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.
JPMorgan Sought Loophole on Risky Trading
By Edward Wyatt
May 12, 2012
WASHINGTON - Soon after lawmakers finished work on the nation's new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.
Several visits over months by the bank's well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.
Even after the official draft of the Volcker Rule regulations was released last October, JPMorgan and other banks continued their full-court press to avoid limits.
In early February, a group of JPMorgan executives met with Federal Reserve officials and warned that anything but a loose interpretation of the trading ban would hurt the bank's hedging activities, according to a person with knowledge of the meeting. In the past, the bank argued that it needed to hedge risk stemming from its large retail banking business, but it has also said that it supported portions of the Volcker Rule.
In the February meeting was Ina Drew, the head of JPMorgan's chief investment office, the unit that suffered the $2 billion loss...
JPMorgan wasn't the only large institution making a special plea, but it stood out because of Mr. Dimon's prominence as a skilled Washington operator and because of his bank's nearly unblemished record during the financial crisis.
"JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging," said a former Treasury official who was present during the Dodd-Frank debates.
Those efforts produced "a big enough loophole that a Mack truck could drive right through it," Senator Carl Levin, the Michigan Democrat who co-wrote the legislation that led to the Volcker Rule, said Friday after the disclosure of the JPMorgan loss.
The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment - so when one goes up, the other goes down.
Portfolio hedging "is a license to do pretty much anything," Mr. Levin said. He and Senator Jeff Merkley, an Oregon Democrat who worked on the law with Mr. Levin, sent a letter to regulators in February, making clear that hedging on that scale was not their intention.
"There is no statutory basis to support the proposed portfolio hedging language," they wrote, "nor is there anything in the legislative history to suggest that it should be allowed."
While the banks lobbied furiously, they were in some ways pushing on an open door. Officials at the Treasury Department and the Federal Reserve, the main overseer of the banks, as well as the Comptroller of the Currency, also wanted a loose set of restrictions, according to people who took part in the drafting of the Volcker Rule who spoke on the condition of anonymity because no regulatory agencies would officially talk about the rule on Friday.
The Fed and the Treasury's views prevailed in the face of opposition from both the Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulate markets and companies' reporting of their financial positions. Both commissions and the Federal Deposit Insurance Corporation, which insures bank deposits, pushed for tighter restrictions, the people said...
Read the rest here.
Posted by Jesse at 12:11 PM
Email ThisBlogThis!Share to TwitterShare to FacebookCategory: Alan Greenspan, blame for financial crisis, Brooksley Born, financial reform, JPM
How Are the Mighty Fallen"The enormous loss was just the latest evidence that what banks call 'hedges' are often risky bets."
Senator Carl Levin
"From top to bottom of the ladder, greed is aroused without knowing where to find a comfortable foothold. Nothing can calm it, since its goal is far beyond all it can attain. Reality seems valueless by comparison with the dreams of fevered imaginations; reality is therefore abandoned."
After the bell JPM announced that it is taking a $2 Billion loss in its London derivatives book. The news drove down US bank stocks and the SP futures dropped a quick 12 points.
A Treasury official, speaking off the record, noted, "We may be dancing on the edge of a crevasse, but we're still better than Europe. Neener neener."
Isn't this transformation of the CIO office at JPMorgan part of Jamie Dimon's strategy to skirt curbs on proprietary trading and take very large positions in OTC derivatives in order to greatly increase bank profits?
I thought we were told that these massive bets were in the CIO section because they were 'hedges against risk' for JPM's corporate portfolio exposure. You know, the same way that Blythe Masters has assured the public that their massive bets in commodities are all merely hedges?
See JPM 'London Whale' Trader Bruno Iksil Driving Derivatives Market With 'Massive Positions and Excess Capital'
Smells like the Corzine strategy at MF Global to me. And it was even being run out of London, the locus of financial frauds. What a coincidence!
Wait until their commodity derivatives book blows up. When Blythe Masters famously said that 'the rest of the market is scared shitless of us' perhaps it was true, but not for the reasons that she had imagined.
I hope this doesn't hurt all the 'civilized people' who have their money tucked away in bank shares. The disclosure earlier today from Chris Whalen about Wells Fargo's accounting practices might have made Charlie Munger soil his wee undies. Well at least he is confident that the US will once again provide bailouts at the expense of 'handouts' to the poor and middle class.
Someone has to step in and protect capitalism from the capitalists. They'll never learn on their own.Barron's
JP Morgan Reveals Large Trading Loss; Shares Hammered
By Avi Salzman
May 10, 2012, 5:29 P.M. ET
JPMorgan Chase (JPM) fell 6.5% after-hours after saying it incurred "significant mark-to-market losses in its synthetic credit portfolio."
CEO Jamie Dimon apologized on a conference call at 5 p.m. for "egregious mistakes" and an "unbelievably ineffective" trading strategy meant to hedge trading positions.
He said the company's Corporate division was likely to post an $800 million after-tax loss, higher than its previous expectations for a plus or minus $200 million. JPM's chief investment office lost $2 billion on its synthetic credit positions while recording a $1 billion gain, mostly by selling credit exposures. (which will blow up at some later date in the manner of financial pyramid schemes - Jesse)
"[I]n hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored," he said, according to an initial transcript. "The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.
"The strategy was badly executed, badly monitored," he said, without going into detail about the specific trading strategy.
The company's 10-Q , released just before the conference call, says:
"Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO's synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO's AFS securities portfolio."
Analysts on the conference call were clearly perplexed by the sudden change. JP Morgan was considered to have among the cleanest balance sheets of the major banks. Dimon also noted that the loss could give fuel to critics who say that banks are still too lightly regulated.
Other major banks were also falling on the news...
What do you mean the vault is 'empty?'
JPMorgan loses $2bn in 'egregious' error
By Tom Braithwaite in New York
JPMorgan Chase announced a surprise $2bn trading loss on credit derivatives trading, which chief executive Jamie Dimon blamed on "errors, sloppiness and bad judgement" and warned "could get worse".
The shock disclosure, made after the market closed in a regulatory filing, sent shares in the bank down by about 6 per cent and prompted renewed calls for tougher regulation.
JPMorgan said the mark-to-market losses came in the bank's chief investment office, a unit set up to invest excess deposits, which has drawn controversy after hedge funds alleged it was taking big proprietary bets.
Proprietary trading is set to be banned in the US by the forthcoming "Volcker rule" and the losses revealed on Thursday are likely to stiffen regulators' resolve to enforce that ban broadly.
Carl Levin, a Democratic senator who has pushed for a strict interpretation of the rule, said "the enormous loss" was "just the latest evidence that what banks call 'hedges' are often risky bets". He called for "tough, effective standards... to protect taxpayers from having to cover such high-risk bets".
"It plays in to the hands of a bunch of pundits out there," Mr Dimon said on a hastily convened conference call. "This trading may not violate the Volcker rule but it violates the Dimon principle."
...Turbulent credit markets exacerbated flaws in the trading strategy, JPMorgan said. Since the company does not want to conduct a fire sale of its positions, it is stuck with the exposure for some time.
"There is going to be a lot of volatility here and it could easily get worse this quarter – or better, but could easily get worse – and the next quarter we also think we have a lot of volatility," Mr Dimon said.
JPMorgan also restated its "value at risk", a measure of maximum possible daily losses, of the CIO in the first quarter from $67m to $129m.
Read the rest here.
Submitted by Tyler Durden on 04/13/2012 09:23 -0400
- Ben Bernanke
- Capital Markets
- Collateralized Debt Obligations
- Collateralized Loan Obligations
- Credit Crisis
- Deutsche Bank
- Dresdner Kleinwort
- Prop Trading
- Risk Management
For the fiction, we go to JPM's conference call transcript where we had the following disclosures.
- "I did want to talk about the topics in the news around CIO and just take a step back and remind our investors about that activity and performance. We have more liabilities, $1.1 trillion of deposits than we have loans, approximately $720 billion. And we take that differential and we invest it, and that portfolio today is approximately $360 billion. We invest those dollars in high grade, low-risk securities. We have got about $175 billion worth of mortgage securities, we have got government agency securities, high-grade credit and covered bonds, securitized products, municipals, marketable CDs. The vast majority of those are government or government-backed and very high grade in nature. We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch."
- "We hedge basis risk, we hedge convexity risk, foreign exchange risk is managed through CIO, and MSR risk. We also do it to generate NII, which we do with that portfolio. The result of all of that is we also need to manage the stress loss associated with that portfolio, and so we have put on positions to manage for a significant stress event in Credit. We have had that position on for many years and the activities that have been reported in the paper are basically part of managing that stress loss position, which we moderate and change over time depending upon our views as to what the risks are for stress loss from credit. And I would add that all those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting. All of those positions are put on pursuant to the risk management at the firm-wide level. They are done to keep the Company effectively balanced from a risk standpoint.... " Of course, when you own the regulators, it is not much of an issue... And would it be the same regulators who we have now confirmed don't understand the first thing about markets?
- "All of those decisions are made on a very long-term basis." Indeed - and the Norway sovereign wealth fund bought Greek bonds investing in "eternity." Only problem is eternity came far faster than expected."
- "The last comment that I would make is that based on, we believe, the spirit of the legislation as well as our reading of the legislation and consistent with this long-term investment philosophy we have in CIO we believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker."
For the facts, we go to Bloomberg again, which was the first to break the Bruno Iksil story, and which exposes without shadow of a doubt why the Chief Investment Office is nothing but the world's largest prop desk. But hey, just as Goldman named it frontrunning service the "Asmymetric Service Initiative" thereby magically not making it a frontrunning service, naming the world's largest prop desk the "Chief Investment Office" makes it no longer be the world's largest prop desk.
Here are the highlights. First on the CIO group:
- Achilles Macris, hired in 2006 as the CIO's top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said.
- Some of Macris's bets are now so large that JPMorgan probably can't unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms.
- The CIO's growing size and market power have made it an increasingly important customer to Wall Street's trading desks and a market influence watched by hedge funds and other investors, the former employees said. Iksil's positions in credit-derivatives have become so large that some market participants dubbed him "Voldemort," after the villain of the Harry Potter series who's so powerful he can't be called by name.
- "What Bernanke is to the Treasury market, Iksil is to the derivatives market," Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles, where she helps oversee $32 billion, said in a telephone interview.
- Macris's team amassed a portfolio of as much as $200 billion, booking a profit of $5 billion in 2010 alone -- equal to more than a quarter of JPMorgan's net income that year, one former senior executive said.
And far more importantly on the background of the guy behind it all. It kinda, sorta sounds like he is a... gasp.... prop trading kinda guy
- It's Macris, not Iksil, who was behind the strategy that led to an unprecedented build-up of credit risk in JPMorgan's chief investment office, three former employees of the bank said. While they expressed doubt Iksil can unwind his positions without causing a dislocation in the markets he trades, they also said JPMorgan probably can afford to hold the assets until they mature and so won't be forced to sell them.
- In 2011, corporate revenue of $3.3 billion included $1.6 billion of securities gains and produced $411 million of net income, the bank said in an annual filing on Feb. 29. By comparison, JPMorgan's investment bank reported $26.3 billion in revenue and $6.8 billion of net income in 2011.
- Since 2007, the value of securities held in JPMorgan's chief investment office and treasury has more than tripled to surpass $350 billion from $76.5 billion, according to company filings.
- Profit, not risk management, guided the purchases, according to the former employees. One of the employees, who previously held a senior executive position at the bank, said Dimon even ordered some of the trades himself.
- Dimon pushed the unit to seek bigger profits by buying higher-yielding assets, including structured credit, equities and derivatives, and ramping up speculation, according to two former employees.
- In London, Macris expanded his team, adding expertise in credit and fixed-income trading. A Greek citizen, Macris previously was co-head of capital markets at Dresdner Kleinwort Wasserstein before joining JPMorgan in 2006. In that role he helped oversee a unit that made proprietary trades, or bets with Dresdner's own money, according to two people who worked with him at the time.
- Before joining Dresdner, Macris oversaw currency trading at Bankers Trust, now part of Deutsche Bank AG. Macris was an idea- generating machine who was blunt and didn't suffer fools, said Duncan Hennes, who worked with him at Bankers Trust.
- At JPMorgan, Macris hired Evan Kalimtgis, a former head of credit portfolio strategy at Dresdner, to help with risk management, according to one former employee.
- In 2007 Javier Martin-Artajo, who had been Dresdner's head of credit-derivatives trading, joined JPMorgan in London. George Polychronopoulos, who worked at hedge fund Endeavour Capital LLP, also joined the London office in 2009.
- Martin-Artajo, Polychronopoulos and Kalimtgis didn't return calls and e-mails seeking comment.
- While Macris had a mandate to make money from the beginning, he didn't start putting on big bets until after the credit crisis in 2008. Two of the former executives said the following year he bought AAA-rated pieces of collateralized debt obligations. As competitors dumped securities and prices slumped, Macris's group at JPMorgan emerged as the biggest buyer in some markets, said one former executive at the bank who was familiar with the trades at the times.
- In one example, a New York-based CIO trader named Jonathan Horowitz bought about $1.1 billion of AAA-rated portions of collateralized loan obligations for about 80 cents on the dollar in November and December 2008, people familiar with the matter said at the time. Horowitz declined to comment.
Finally, the most damning evidence that JPM's World's Biggest Prop DeskTM, elsewhere known as the CIO, has to be dismantled lest it suffer the fate of all other massive prop desks, which promptly blew up in the days after the Lehman failure, is the following:
- One public sign that the chief investment office does more than hedge: Its trading risk is on par with that of JPMorgan's investment bank.
- JPMorgan's annual report for 2011 shows that the CIO stood to lose as much as $57 million on most days of the year. That compares with $58 million for the investment bank, which includes Wall Street's biggest stock- and bond-trading units.
- Another sign: The relationship between the CIO and the investment bank's sales and trading desks is strained, two former employees said. Employees in the CIO get a smaller share of their trading profits than those in the investment bank, giving Dimon a cost-management incentive to direct more trading through the CIO, one former executive said.
Hence: JPMs "Chief Investment Office" = World's largest prop trading desk. But hey, just repeat "Assymetric Service Initative" ... "Assymetric Service Initative" ... "Assymetric Service Initative" three times ... and it becomes truth.
November 28, 2009
Filed under: Bailouts Intensify Monopoly, Bailouts Only Reopened the casino, Regulation Can't Work, disaster capitalism - Russ @ 4:12 am
So I recently read Gillian Tett's Fool's Gold, her account of the "Morgan Mafia" at JP Morgan who "innovated" the credit default swap and the mass marketization thereof.
The book is well-written and does a good job of explaining all the financial gizmos and machinations which destroyed our economy once and for all.
But in the end Tett does not successfully defend her explicit or implicit theses which are as follows.
Her overt claim is that derivatives and securitization are inherently good and useful, constructive and value-creating, and that it was only their abuse by bad apples which caused everything to go wrong.
This is on display in her very section titles: Innovation, Perversion, Disaster.
More specifically, she claims that the folks at JPMorgan (to whom she had access and who willingly cooperated with her in giving interviews, from Dimon on down to the most obscure cadres; so to a large extent this is JPM's version of events) did their best to be responsible, accountable, prudent actors, while the bad apples were at most of the other banks.
Her implicit claim is that financialization of the economy and the extreme growth and concentration of the finance sector are also good things. (I take it for granted, after all that has happened, that anything written on the subject which isn't attacking the sector as such has an obligation to defend its existence.)
But the evidence of the very history she and JPM lay out contradicts all of this.
Tett opens her story with a bunch of drunken frat droogs partying in Boca, reveling in vandalism and mugging one another. This kind of behavior continues throughout the story, unfortunately on more socially destructive levels.
It was at this Boca conference in 1994 that the Morgan Mafia, as the swaps team called themselves, zeroed in on the idea of credit default swaps. This was an extension of existing interest rate swaps, and wasn't a completely new idea, but the JPM crew really made it work. As will be the pattern throughout the tale, they weren't doing this in response to any social or even "market" need, but proactively thought it up toward the goals of greater rents and attacking regulation.
They spent the next few years mucking around (by their standards) with the idea, doing a few big deals. But the real goal was to standardize this method of selling risk. They eventually bundled $10 billion worth of JPM risk on existing corporate loans, securitized it, induced Moody's to give these securities a AAA rating, and in December 1997 marketed it through an SPV shell company (in order to evade taxes). The model was now complete.
When the dotcom bubble crashed, followed by the Enron and Worldcom troubles, nobody took these as evidence that financialization needed to be reined in. On the contrary, CDS were touted as having successfully spread out the risk. Meanwhile, the Fed had embarked upon its easy money policy. So for CDS the lesson and the incentive were clear: They were now to be used to help blow up the mortgage bubble.
Ironically, after having "innovated" the CDS instrument, JPM itself never fully committed to mortgage securities. They could never figure out how correlated mortgage defaults might be, and therefore what the real level of risk was. So they only did two big CDS-MBS deals and then backed off. Similarly, in 2005 Dimon wanted to prioritize mortgage securitization. They spent much of the year setting up an "assembly line" structure to compile, bundle, slice, and sell these securities. But no sooner was the mechanism in place than in early 2006 the mortgage market showed signs of stalling. As defaults started racking up in San Francisco, Las Vegas, Miami and elsewhere, JPM held back once again.
In the end this conservatism served JPM well. When the crash finally came, it was one of the few banks whose balance sheet wasn't loaded down with toxic paper, and the only one the government could readily turn to as the "private" face of the corporatist bailouts. Tett attributes this to a longstanding corporate culture which allegedly valued teamwork, loyalty, long-term relationships over the Darwinist "eat what you kill" ethos at other banks. Back in 1933 under Congressional grilling JP Morgan Jr. had assured the world that the bank's mission was to engage in "first class business…in a first class way". This became a mantra at the bank.
By 2008 this branding, after the neglect of some years, came back to the fore. When Chase Manhattan bought JPM in 2000, although they placed Morgan's name first in the new combined name "JPMorgan Chase" for this branding purpose, they studiedly dropped the pretentious periods from "J.P. Morgan", something the JPMers had always taken pride in, just to show who was boss.
Now the periods were back with a vengeance. With the whole system on the verge of collapse, the J.P. Morgan brand name was of great value. But any social value connotation of this was a scam. JPM was in disaster capitalist mode, with Dimon scanning the horizon for M&A opportunities among the wounded. First Bear and later WaMu were the two big feasts JPM enjoyed using public backstops to again mitigate their risk.
As the whole story shows, JPM's conservatism was never out of any social responsibility or even a real desire to be "first class", but only out of self-interest. Nothing in the book can elide the fact that even at relatively conservative JPM most of this "innovation" was not in response to any market request but was gratuitously dreamt up and aggressively marketed to buyers who had originally wanted no such thing. Tett quotes Peter Hancock, the early head of the derivatives team: "The idea that we gave the most emphasis to was using derivatives to manage the risk attached to the loan book of banks".
She goes on:
Players…had different motives for wanting to place bets on future asset prices. Some investors liked derivatives because they wanted to control risk, like the wheat farmers who preferred to lock in a profitable price. Others wanted to use them to make high-risk bets in the hope of making windfall profits. The crucial point about derivatives was that they could do two things: help investors reduce risk or create a good deal more risk. Everything depended on how they were used and on the motives and skills of those who traded in them……
It was only many years later that the team realized the full implications of their ideas, known as credit derivatives. As with all derivatives, these tools were to offer a way of controlling risk, but they could also amplify it. It all depended on how they were used. The first of these results was what attracted Hancock and his team to the pursuit. It would be the second feature which would come to dominate business a decade later, eventually leading to a worldwide financial catastrophe.
But this is belied by every action of this team. On the contrary, from day one team members were focused on politically leveraging risk insurance toward deregulatory lobbying, in order to further amplify risk and rents. The real motives were never anything more than unproductive rent-seeking and regulation-bashing. As for better managing risk, on the evidence of this book no one ever valued any opportunity to build resiliency into the system, to create slack. On the contrary, every space that risk management opened immediately had further risk crammed into it. Nobody seems to have noticed the fallacy here, that is assuming, as Tett seems to, that anyone ever actually cared about "better" risk management, as opposed to generating the fraudulent simulacrum of it to extract further rents and attack regulation.
Hancock's real mindset came through more clearly when he decried the "curse of the innovation cycle", meaning that he lamented that all real financial innovation had long since been completed. He hated what human beings call the proper functioning of an economic sector as it matures, provides its necessary services more efficiently, because then profits go down to their natural mature level. Hancock and his fellow mafioso were out to "innovate" new scams in order to prevent sector maturation and efficiency from prevailing. Similarly Mark Brickell, another Morgan cadre, aptly compared what they were doing to the Manhattan Project. Then there's the charming Tim Frost, a hard core corporatist ideologue who liked decorating his work space with portraits of "shabby unemployed British miners". These were a comic centerpiece for his jokes about what happens when returns are bad.
In Brickell's case the intent to wage total war on society was overt, as his incessant Hayekian market fundamentalist proselytization demonstrates. His real passion was deregulation.
Brickell took the free-market faith to the extreme. His intellectual heroes, in addition to Hayek, were economists Eugene F. Fama and Merton H. Miller, who developed the Efficient Markets Hypothesis at Chicago University in the 1960s and 1970s, which asserted that market prices were always "right". They were the only true guide to what anything should be worth. "I am a great believer in the self-healing power of markets", Brickell often said, with an intense, evangelical glint in his blue eyes. "Markets can correct excess far better than any government. Market discipline is the best discipline there is."
Peter Hancock shared that view, though he rarely expressed it so forcefully in public. So did most other swaps traders.
The International Swaps and derivatives Association (ISDA), the "industry" lobbying group, under Brickell's personal leadership spread the gospel of voluntary "market discipline", "the self-healing power of markets", "rules designed by the industry itself and upheld by voluntary, mutual accord". "Bankers and their lawyers were better-informed, and they had strong incentives to comply." The libertarian bullshit was piled high. The quants added the mystique of math, "Value at Risk" (VaR) to the mix.
Between the Chicago ideology, the mathematical assurance that risk had been tamed, and of course the bribes, Brickell and his horde accomplished their goals. They first staved off new regulation in the aftermath of the Orange County bankruptcy in 1994, then launched their real lobbying offensive. The dream was to not only get risk off the books so that it didn't eat up the reserve requirements, but to convince regulators to lower the requirements themselves. They convinced the Fed and the CFTC in 1996. (They actually had a harder time convincing JPM's own management to loosen internal restrictions.)
Led by the Morgan cadres, the deregulatory offensive reached its crescendo at the turn of the millennium with the repeal of Glass-Steagal and, with the CFMA in 2000, the explicit declaration that swaps were not securities and beyond CFTC purview. This happened in an atmosphere of absolute fanaticism over technology, "innovation", and most of all "growth". The very fact that none of it had any real-world basis played up the religious aspect of it all.
What was the role in all this of derivatives in general and the Morgan mafia in particular? Tett's own evidence demonstrates that:
1. The JPM cadres themselves took the lead in using these innovations as the pretext for deregulation.
2. Any "innovation" was quickly put to "abusive" uses.
3. That everyone "abused" securities, and that the clear goal of deregulation was to open up space for these abuses, seems to indicate that these uses weren't really abuses, but rather that the banks entered the deregulated vacuum using CDS and everything else exactly as intended. It seems that, rather than being the only "responsible" player, JPM was unusually conservative.
More to the point, they got lucky. In particular, the mortgage problems arose in early 2006 just when JPM was about to take the plunge. If this had been delayed for another year, or if JPM's strategy had been implemented one year earlier, they'd have been caught out just like the others.
So the evidence proves that their intentions were always malevolent, and also doesn't strongly support the proposition that they "knew" what they were doing much better than everyone else.
This is reinforced by JPM's behavior since the crash. By then the original JPM team was dispersed throughout the sector, but the diaspora rejoined for a collective bout of whining, finger-pointing, CYA and ideological reaffirmation, even cultivating martyr fantasies. The basic line is the same: We're innocent, derivatives are good, it was just bad apples who abused them. Most still sing the ideological gospel (though Greenspan's partial recantation has given a few pause).
As for JPM itself, it has used the strength it gained from the bailout to go hunting. It's now the world's biggest bank in terms of market capitalization. It has used its prime position to follow Goldman Sachs into a more overt corporatist partnership with government. (If Dimon really is gearing up to become Treasury Secretary as some reports say, this would be the public consummation of that process.)
The real voice of JPM, most truly in synch with JPM's actions and the actions of the sector as a whole, remains the fascist Mark Brickell. As the crisis descended he never flinched from triumphalism, self-congratulation, and continued ideological assault.
In April 2008, basking in the glow of JPM's public-enabled fire sale purchase of Bear Stearns, Brickell raved at the ISDA's annual conference:
As Brickell stood at the podium in the ballroom of the Vienna Hilton, history weighed on him. ISDA had gathered in the same city two decades earlier, and Brickell considered that symbolically appropriate. Vienna was the home of the great free-market economist Freidrich von Hayek, Brickell's hero. "[Twenty years ago] we set out to design a business guided by market discipline because we believed it should be an even better guide to good behavior than regulatory proscription", he observed. "The credit crunch gives good evidence that market discipline has guided the derivatives business better than regulation has steered housing finance."
Brickell remained as opposed as ever to the idea that governments should intervene. "Hayek believed that markets would create a rhythm of their own, that they are self-healing. That is something we should all remember and honor today", he told the audience. "When governments arrive to help, there is always a price to be paid that often takes the form of greater regulation".
Every word of this is an Orwellian window into the black larcenous nihilism of gutter evil. The destruction of the real economy, of millions of jobs, is indeed the "discipline" and the "healing", most of all the "good behavior", they want to impose upon us all. JPM and the stronger elements of the sector were entering full disaster capitalist mode.
Tett's book makes clear, in matching words to actions, that not only was there never any good, constructive intention on the part of these operatives, but almost none of them even learned a lesson from or feel remorse over the crisis and all the destruction it has wrought.
On the contrary, most of them are geared up for further battle. They fully intend to keep committing the same crimes. I think this book could provide some useful evidence for a future Nuremburg-style tribunal. It's an important history of how this gangster network conspired against the wealth and social stability and security of the people.
One of the few cadres who retained some skepticism during the process was Andrew Feldstein.
Back in the days when the JPMorgan team had concocted its derivatives dream, Feldstein had believed deeply in the intellectual arguments behind financial innovation. He was utterly convinced that if tools such as derivatives were implemented in a rational, efficient manner, they would vastly improve the financial system and economy. It was the dream that drove them all.
But after living through the mess of the Chase-JPMorgan merger, Feldstein became cynical. He still believed derivatives had the theoretical potential to make markets function better, but in practice, dysfunctional management and warped incentives for traders and the ratings agencies were badly distorting the CDO market. He understood the ways in which the banks were playing around to garner good ratings and make end runs around the regulatory system, and the situation troubled him. But it also presented a trading opportunity.
So – he was an ideological believer, and he still "believed", yet in doublethink, as he saw how it didn't work in the real world. But so what; it was also a "trading opportunity".
That can sum up every ideologue of all times.Comments (8)
8 Comments "
Another chock a block filled analysis of epic financial shenanigans. Well done.
It's been a while since I looked at "the numbers", but it seemed to me that Morgan Chase had and has massive amounts of exposure in derivatives. And whatever the truth of the matter, the story that I have heard was that- I think it was Bear- was, in essence, sacrificed to help cover up JPMs derivative exposure. Suffice it to say that the truth behind the downfall of Lehman and Bear is almost certainly full of underhanded maneuvers on the part of officialdom on behalf of some of Wall Street's most powerful banking and investment entities.
Comment by Edwardo - November 29, 2009 @ 8:44 pmReply
I know the fear with Bear was that if it was allowed to go bankrupt that would trigger a fire sale of securities held as collateral by Bear's counterparties.
Everyone would then have to mark everything to market under adverse circumstances. It sounded (to them) like the apocalypse.
According to the Tett book the same thing came up the previous summer when the Bear hedge funds collapsed and Merrill was threatening to sell "$400 million" notional worth of CDO collateral.
I guess to this day the nightmare scenario is that the market would ever be allowed to actually discover the real prices for this junk by having a lot of it being sold at once.
That's the sticking point to this day – all the banks, probably JPM as well, are simply pretending they're not insolvent.
As long as everybody adheres to mutually assured destruction where it comes to trying to sell the toxic crap, and as long as the Fed gravy train keeps flowing, they can keep up the pretense.
Comment by Russ - November 30, 2009 @ 4:56 amReply
The irony is that these firms have set into motion the death of the goose that laid the golden egg. In their desperate attempt to wring yet more juice from the
orange they have managed to do almost unfathomable damage.
As far as The Fed gravy train, I spend a considerable amount of time pondering what the path of the monetary PTB will be, and what the rest of the world will do in response, or proactively. It seems to me that our "authorities" are hoping to devalue the dollar over a long enough period of time and at a great enough rate to allow extend and pretend to somehow "work."
However, paradoxically, with each passing day that the dollar becomes less and less ensconced as the world's reserve currency, the local PTB loose their ability to manage the dollar's death in an orderly fashion. In short, by my reckoning, the odds of the PTB pulling off an orderly morphine drip dollar death decrease markedly over time.
Comment by Edwardo - November 30, 2009 @ 12:06 pmReply
Yeah, I don't see how they can possibly bring it in for any kind of soft landing. Especially since they have no choice but to keep running up new debt, since what else can America do? It doesn't produce anything. It's just drawing down the old principal, leveraging its fast-eroding military muscle, and living off the dollar's reserve currency status.
America's just a bigger Dubai which can still print its own money. But there's no such thing as a perpetual motion machine. Now that no new force will be added (or has been for a long time), the mechanism must wind down.
Not to mention all the unnecessary friction America added on its own, like its obnoxious aggression (which this idiot's about to expand, even though according to the prelims even he has no idea why he's doing it) which has only encouraged the world to start fervently looking for alternatives to the dollar.
Comment by Russ - November 30, 2009 @ 3:09 pmReply
Good review. I agree that Tett's book was long on JPM propaganda and short on analysis. What she missed was the impact of leverage on the mortgage securitizations. She doesn't see that $1.4 trillion in questionable mortgages are supporting $140 trillion in CDO's. Not one person in ten million understands this. Do you?
Comment by jake chase - December 2, 2009 @ 7:19 pmReply
I understand that apparently no one has any real idea at all what the level of securitization is. I've heard numbers as high as a quadrillion.
All anyone seems to know is that nobody wants to find out what would happen if you had to start selling this stuff in any kind of bulk in the real market.
It looks to me like all policy is meant first of all to prevent such a sale.
Comment by Russ - December 3, 2009 @ 6:55 amReply
The problem isn't the debt. The problem is the leveraged bets structured around the debts. The strategy of extend and pretend is based upon a hope that inflation will validate the underlying debts, but it is hard to create inflation in a consumer economy where the consumers are no longer positioned to accumulate more debt. This suggests that we will be moving soon to a war economy. Expect another draft, possibly an assault on Iran. People would be diverted with flag waving. National security will justify an end to criticism and privacy, financial sacrifice by anyone who has managed to protect himself up until now. You might want to reconsider your own literary efforts. I have heard Vancouver is an attractive city.Reply
All of it will have to be defaulted, one way or another, almost certainly through hyperinflation, now that exponential growth is no longer possible.
(I don't see how they'll be able to do it with "normal" inflation – to get that going or to maintain it for long. The free market wants very badly to deflate.)
I've heard nice things about Vancouver too.