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writing for godot

Finally, Jamie Dimon and I Agree on Something

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Written by Martin Andelman   
Friday, 11 May 2012 12:28
JPMorgan Chase's CEO, Jamie Dimon, says he doesn’t want to make excuses, but his bank’s $2 billion losses in the last 45 days were due to errors, sloppiness, terrible execution, bad judgment and strategy, and the mark-to-market environment.

Want to know something? Those are exactly the same things that I would have guessed caused the loss of $2 billion in 45 days. I have no trouble imagining that those things could contribute to some fairly significant losses.

Dimon also told analysts that in hindsight he should have paid more attention to "trading losses and… newspapers"?

Okay, that shocked me. I mean, $2 billion is a lot of money to lose in 45 days when it could have been prevented just by noticing the losses and paying attention to newspapers.

I think I'm going to go ahead and send Mr. Dimon a one-year subscription to the New York Times. I know he has the money to buy his own subscription... or the entire newspaper for that matter, but he must be terribly busy because he lost $2 billion in 45 days for want to newspapers so it seems the least I can do.

And I sure am glad he didn't want to make any excuses. I hate CEOs that lose billions and then come out making all sorts of excuses, don't you?

According to CNN/Money…

“The group that suffered the losses is part of the bank's so-called corporate unit, and had been making trades designed to hedge against risk.”

Wait a minute… they were trying to hedge AGAINST RISK? And they LOST $2 BILLION? Now, that must be frustrating… I hate it when that happens. Like, when I’m eating really carefully and I stick a fork right through my cheek. Don’t you hate that?

CNN/Money also had the following to say…

“Last month, rumors swirled around a JPMorgan employee based in London who had, according to the Wall Street Journal, been taking large positions in credit default swaps. The employee was said to work in the bank's Chief Investment Office.”

So, according to the WSJ on April 6, 2012, the guy had been “dubbed the London whale,” and was a “French-born J.P. Morgan Chase & Co. employee named Bruno Michel Iksil.”

“Mr. Iksil has taken large positions for the bank in insurance-like products called credit-default swaps (“CDS”). Lately, partly in reaction to market movements possibly resulting from Mr. Iksil's trades, some hedge funds and others have made heavy opposing bets…”

Oh, good Lord. We’re still doing this sort of thing, huh? Some guy at JPMorgan Chase in London was gambling with credit default swaps, no one was watching, and next thing you know the bank was down $2 billion?

And this came as a surprise to Jamie? I guess there's no system in place at JPMorgan Chase that might of caught the losses at $1 billion, is that right? Well, now there's an idea for a new product that I would think would sell like hot cakes.

Someone should make a “$1 Billion Lost Alarm.” You know, after you've lost a billion... the bell rings.

What happened here?

So, as I understand it, JPMorgan was betting on changes in corporate index prices. CDS trading in corporate exposure is just speculating in the hopes of exploiting small movements in indices while employing a ton of leverage, which means you can win big, or you can lose big, and either way you go, it can happen fast.

It appears that JPMorgan’s bet was in the $100 billion range, and don't you just love the leverage there. They went long, meaning they sold protection, on an index that's supposedly tracking the CLO (collateralized loan obligations) market.

The problem was that the prices of the index's underlying components were not matching up with the pricing of the index on which JPMorgan had bet. At the end of the day, it was a very small movement in price that caused the losses, but that movement happened at the same time that the difference between the index and the underlying assets increased.

The idea that CDS index trading can be used to "hedge" anything is the sort of thing that's true... until it's not anymore. It's all pure speculation. But one thing should be clear to EVERYONE... NONE of this has anything to do with commercial banking.

Jamie Dimon claims that it was an attempt to manage "tail risk." His tail, maybe.


And we don’t need the Volker Rule? The rule that would prevent banks from placing outrageous bets with their own money, and place limits on the amount of capital they can invest in risky things like hedge funds and swaps, to name but two. The rule that’s part of Dodd-Frank’s financial reforms… the ones that are being fought tooth and nail by the financial services industry lobbyists and bank CEO, including Dimon.

According to the Washington Post on May 2nd…

“The warning from Daniel Tarullo, a Federal Reserve governor, comes as banks are putting up stiff resistance to new oversight and financial regulations — including at a private meeting Wednesday between Tarullo and the heads of Goldman Sachs, JPMorgan Chase and other Wall Street firms, according to the Fed.”

“Among the major new regulations that has been delayed is the Volcker Rule, which would seek to prevent banks from taking excessive risks by curtailing their ability to speculate with their own money — rather than on behalf of clients.”

Well, I can certainly understand why no one would want to rush into the Volker Rule, especially with JPMorgan Chase losing $2 billion in 45 days… actually fewer than 45 days.

I guess it’s really none of our business though, right? I mean, it’s not OUR bank. If JPMorgan Chase wants to take on the kind if risk involved in buying credit default swaps and the like, it’s on them. It’s not like we’re on the hook if they bankrupt themselves… right?

Please say I’m right…

Mandelman out.


 

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