Friday, May 11, 2012

JP Morgan: The Whale Wagging the Dog

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

JP Morgan Chase revealed yesterday that one of its traders, Bruno Iksil (known as the London whale), was responsible for a $2 billion loss in the last six weeks. Apparently, little has changed since 2008, when the irresponsible activities of the big banks and trading houses almost brought down the world financial system.

Iksil's trading was hardly secret. His positions were well-known among traders and Bloomberg published an article about their high-risk nature on April 5th. Jamie Dimon, the CEO of JPMorgan Chase (JPM), dismissed the report as overblown. Amazingly, the massive losses took place in a portfolio that was supposed to hedge against risks. Because of this, the company claims that these trades would not have violated the Volcker Rule — designed to curtail risky trading by banks and prevent just such occurrences. The Volcker Rule is not scheduled to be enforced by the Federal Reserve until 2014 as is. Jamie Dimon has been one of its major critics.

Jamie Dimon does as he pleases as is. He jumped the gun on the Fed's stress test announcements in March by announcing JPMorgan Chase had passed. The Fed was then forced to release the rest of the information early. Communication's problems were cited for the foul-up. Apparently, Dimon didn't read the memo about the announcement schedule. He sits on the board of the New York Fed (for a list of directors, see: All of the Fed's regional boards have three representatives from the banks they "regulate".

JP Morgan was quick to point out that no laws were broken by the activities that led to the $2 billion trading loss ($2 billion so far that is). The public should be very worried about this. When banks are considered "too big to fail" and expect bailouts when they screw up, the public is the one that pays. The liquidity that JP Morgan Chase and all the other big banks are trading with comes directly from the Fed, supported by its zero interest rate policies (free money) and quantitative easing (fake money). Even though the trading loss indicates serious problems in the financial system, the U.S. stock market was up minutes after it opened. And why not?  It knows the Federal Reserve will make up the losses one way or the other and if that's not enough, it expects more government bailout money for the banks. 

The Fed followed the same strategy in 2008 and still a major collapse took place. Central banks do not have unlimited resources and when the rot builds up too much in the system, everything falls apart. The public today is also not likely to put up with another massive bank bailout. In 1998, it took only one overleveraged hedge fund — Long-Term Capital — to almost bring down the financial system. Today, there are potentially any number of banks and hedge funds that represent major risks.  JP Morgan's trading losses indicate little has been done since 2008 to prevent the next market meltdown. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

1 comment:


JP morgan is one of those banks that should have been allowed to fail.