These numbers do not include Wall Street whose most recent boom/bust cycle vaporized $4.2 trillion dollars in residential estate value. Then there's your 401K...
|May 11, 2012|
|Ezra Klein's Wonkbook|
Of the big banks, JPMorgan Chase arguably came through the crisis best. And its CEO, Jamie Dimon, has been using the credibility built up during that period to fight the Volcker rule. “Paul Volcker by his own admission has said he doesn’t understand capital markets,” Dimon told Fox Business earlier this year. “He has proven that to me.”
And then, last night, JPMorgan Chase announced it had lost $2 billion on some very big, very dumb hedges. For proponents of stricter financial regulation, Dimon's giant loss is a huge gift. The final version of the Volcker rule is scheduled to be released in the coming months. Dimon swears that these trades would have been compliant with the previous drafts of the Volcker rule. That will give regulators a strong incentive to make sure future trades like these aren't.
Dimon, for his part, doesn't see the relevance. “Just because we’re stupid doesn’t mean everybody else was,” he said on a Thursday conference call. “There were huge moves in the marketplace but we made these positions more complex and they were badly monitored.” (Alan here... "Just because we're stupid doesn't mean everybody else was." In the midst of betting frenzy, don't bet the farm on limited stupidity. In contemporary American capitalism, stupidity - at least from the vantage of The Common Good - is limitless...)
But the point of the Volcker rule -- and of financial regulation more generally -- isn't to punish banks for being evil. It's to protect the rest of us from banks being stupid. And if the most prudent of the big banks can't keep itself from being this stupid this soon after the financial crisis, then it's pretty clear we're going to need very strong rules to keep them from being stupid in the years to come, when the lessons of the financial crisis have faded more completely.
As Reuters' Felix Salmon writes, "JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate."
Top story1) A massive bet gone wrong cost JP Morgan Chase at least $2 billion. "A massive trading bet boomeranged on J.P. Morgan Chase & Co., leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the 'King of Wall Street.' The losses stemmed from wagers gone wrong in the bank's Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed 'the London whale' had roiled a sector of the debt markets. The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade." Dan Fitzpatrick, Gregory Zuckerman, and Liz Rappaport in The Wall Street Journal.
The loss is putting the spotlight on the Volcker Rule. "JPMorgan Chase’s $2 billion trading loss, which was disclosed on Thursday, could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business...The centerpiece of the new regulations, the so-called Volcker Rule, forbids banks from making bets with their own money, and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view, banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name, in this case for the purposes of hedging and market-making. The missteps by JPMorgan could highlight that murky line between proprietary trading and hedging. The bank unit responsible for losses takes positions to hedge activities in other parts of the bank." Nelson Schwartz in The New York Times.
The "new nature" of investment banking is hidden in plain sight.
Wall Street is a predator and the overwhelming probability is that you are being fleeced.
Few human traits are as widespread as homo sapiens' tendency to "overlook the obvious," a trait fostered by our inclination to "be penny wise and pound foolish."
What, exactly, are we overlooking?
Wall Street no longer invests in actual production -- at least not as its primary function.
Instead, Wall Street places bets on "numbers."
In mathematical - and gambling - parlance, Wall Street "runs numbers."
Derivatives, credit default swaps and other forms of hedging are "confections" cut whole cloth from "numbers" masquerading as productive business activity.
Money, Power and Wall Street (PBS Frontline):
Inside Job: http://vimeo.com/23086688
If derivatives and credit default swaps were proposed in the 1950s, "The Greatest Generation" would have identified this financial excrement as the equivalent of Las Vegas slot machines.
It bears repetition:
Wall Street is not, primarily, about production of goods and services, it is about numbers; numbers that create a vortex of apparent "business activity" but whose primary purpose is to engender centripetal force that sucks money from gullible investors who reside outside "The Vortex."
In turn, Wall Street "market makers" -- inhabiting the "still center" of the storm they've deliberately created -- pocket the gullible money ventured by any outsider foolish enough to enter the vortex.
Maybe not at first...
But sooner or later the gullible outsiders get blown away.
Wall Street thrives on creating "the boom" that eventually goes bust.
The Scam is all pyrotechnics - a few pretty lights in the boundlessness of night.
As the resident croupier of American economics, Wall Street pitches lightning-fast gambling profits gleaned by placing complicated mathematical bets whose odds are skewed toward "the house."
At least in the beginning...
Then, as bets get bigger -- and the "debt to pay-out ratio" ever more lopsided in the direction of debt -- all betting is geared toward handing "the bag" to one terminal sucker (or group of suckers) before the boom -- composed of ever more meaningless numbers -- busts.
In the 2008-2009 bust, The American Taxpayer was designated as "terminal sucker."
Willa Cather said “ There are only two or three human stories, and they go on repeating themselves as fiercely as if they had never happened before. ”
One of these stories is the deliberate creation of bogus boom, followed by devastating bust.
Which is to say: Wall Street sequesters wealth (The Boom) while citizens surrender wealth (The Bust).
"A New Dark Age?" by Noam Chomsky