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'Tempest in a teapot'

May 15, 2012 - Harry Eagar
That's what Jamie Dimon called press reports that his bank was making stupid bets in its London office. He has since apologized.

As a retired business reporter, I get great pleasure from the fact that a $75,000-a-year business reporter understands JP MorganChase's business better than its $15 million-a-year CEO.

But as a retiree dependent, in part, on a pension invested in American business, I am less pleased by this confirmation that, on average, American business managers are incompetents.

It's like this: James Clerk Maxwell understood electricity and magnetism, which led to electric light bulbs. You don't have to be as competent as Maxwell to turn on a light.

Generally speaking, American managers are capable of turning a light on and off, but that's as far as their competence goes. Certainly this is true for Dimon. The stupidity of his bank's derivative policy was explained to him in words a 2nd-grader could understand. For about $1.50 (or even free, depending upon whether he got his warning first from the Wall Street Journal or Bloomberg, which were both on the story at the same time). He still didn't get it.

In the Financial Times, John Gapper makes a couple of good points:

"JPMorgan would clearly be barred under the Volcker rule from placing Mr Iksil within its investment bank and giving him anything like the same amount of capital to play with as a proprietary trader. Indeed, if its chief investment office were a hedge fund, it would easily be the biggest in the world – six times the size of Bridgewater Associates.

"Furthermore, Mr Dimon is on weak ground in claiming the portfolio was being invested merely as a hedge for its balance-sheet risk. As he said on Thursday: 'It actually did quite well. It was there to deliver a positive result in a credit-stressed environment. And we feel we can do that and make some net income.' In other words, it was seen inside the bank mostly as a hedge, but partly as a profitmaking trade.

You have to be really stupid to think that a hedging office can also be a profit center. Hedges are by definition zero-sum games. Believing that a hedging office can also be a profit center is like a newspaper managing editor imagining that he can have his delivery boys collect news while they are delivering papers, thus saving the troublesome expense of paying for reporters.

And he says:

"As the debacle at JPMorgan once again demonstrates, any bank with a highly leveraged balance sheet (in other words, all of them) is one big 'risky bet'. That is the nature of the financial beast, whether or not it employs a whale."

This is true if banks are allowed to simultaneously try to be what RtO has long distinguished as both "risk banks" and "safe banks." It is not, however, as Gapper may imagine, a fundamental requirement of banking. The United States used to (and Canada still does) require that banks choose to be one or the other.

It was mandated in the Glass-Steagall Act, one of the many wonderful benefits we inherited from the New Deal. Big banks didn't fail when Glass-Steagall was in effect. (Well, one did, over 60 years; compared with about a dozen just in 2008 following repeal.)

There's a problem with just re-enacting G-S. The globalization of money flows -- all money today is "hot money" -- means that safe banks would have a much harder time attracting capital than they used to. But that's the topic for another RtO post.

 
 

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