The fallout from JPMorgan Chase’s “Fail Whale” trade (I’m trying to coin this phrase, so help me out, will you?) continues. But there’s been a thread in one section of the liberal blogosphere that has confounded me. For some reason, writers are trying to position this as a problem for Mitt Romney. Here’s a representative sample:
This is exactly the type of major loss of depositor money that the Obama administration sought to ban with one of the major planks of its 2010 Dodd-Frank Wall Street reform law — the Volcker Rule, named after former Fed chairman Paul Volcker. And that’s bad news for Romney, who wants to repeal the whole law, Volcker Rule and all [...]
The Volcker Rule is still being developed by regulators, won’t be implemented until late July at the earliest. It’s intended to ban banks from gambling with depositor funds in what are known as proprietary trades. Dimon claims that the investment in question wouldn’t have violated the rule had it been in effect — he says the bets JPM made were meant to hedge against potential losses in other investments. But finance experts have cast doubt on that claim, and Dimon himself admitted that the incident will provide ammunition for the Volcker Rule supporters.
It’s true that Romney wants to repeal Dodd-Frank, including the Volcker rule, and it’s true that repealing any limits on proprietary trading would be a stupid move, especially in light of the Fail Whale trade. But this would be a better argument if the Fail Whale didn’t happen on the Obama Administration’s watch. In fact, it did, and Dimon’s insistence that the trade would be Volcker rule-compliant is probably accurate. And we have the federal regulators to blame for that.
As I pointed out in my previous post, Carl Levin and Jeff Merkley, the authors of the Volcker rule that made it into Dodd-Frank, already said that portfolio hedging – what amounts to what was on display here with the Fail Whale – should have been banned by their legislation. But the proposed rule allowed it, creating a giant loophole that effectively guts the Volcker rule. In other words, the executive branch agencies are directly responsible for a trade like this being allowable. So how is this a problem for Romney, then?
As Felix Salmon points out, the complex nature of derivatives trading can always be mitigated by big, dumb rules:
Your sophisticated platform needs to be built on a foundation of dumb rules: simple limits on how big any one position can get, on how much exposure you can have to any one counterparty, or in general on any trade which is based on the hypothesis that your desk is smarter than anybody else on Wall Street.
Those kind of rules won’t prevent all blow-ups, of course, but they’ll help. They would have prevented this one, and they would have put an end to Jon Corzine’s disastrous MF Global trades, as well.
The problem is that traders hate dumb rules, because they cap the amount of money they can make. And traders have enormous power at investment banks these days, because they make the lion’s share of the profits.
The Volcker rule as it’s being implemented is the opposite of a big, dumb rule. It’s a regulatory haze full of loopholes and concessions that render it fairly useless. If you’re going to put the blame for that on any one person, it wouldn’t be Mitt Romney.
The SEC has opened an investigation into the Fail Whale trade. Let me predict the outcome: a fine in the millions of dollars, and a “neither admit nor deny wrongdoing” clause tucked inside. If that. By the way, the investigation has nothing to do with the Volcker rule, but the public disclosures of the losses.
It’s not for no reason that investors around the world would prefer Obama to Romney in the Presidential election.
UPDATE: Levin and Merkley Confirm: We Didn’t Intend Fail Whale Trades To Be Legal





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Why Is “Fail Whale” Trade a Problem for Romney, and Not the Administration That Watered Down the Volcker Rule?
It’s a trick question. The answer is: Because President has said he supports gay marriage.
As for the poll showing that traders support Obama’s re-election, I’m trying to imagine why the London Whale, French-born Bruno Michel Iksil, wouldn’t vote for Obama if given the chance. Can’t think of any.
Fail Whale is a good one, but there are a few people who have been way ahead of you for about twelve hours on that one. I’ve read it in several articles since last night. Plus it’s a well known Twitter term.
There is ONLY one solution to this whole mess and that is a law, not a ‘rule’; it’s surprising (not really) that Brown’s legislation is going nowhere or that someone else isn’t doing what the Brits are, namely having it in law that investment banking and retail banking are separate; oh, pardon me, we had that with Glass/Steagal didn’t we?
If this exec branch allows the Volcker rule shredding to continue and become writ in the legislations, allowing the macro hedging instead of just the micro hedging of a particular position, as designed, they will not have a leg to stand on when they get called out for having this happen on their watch.
Clearly the banks are counting on the allowance of macro hedging. I don’t know if they have been given assurances, but JPM has gone as far as to move their proprietary trading activities into this nook department, their CIO. It sounds to me like they are pretty confident that they are going to be able to continue this while staying technically within the confines of the shredded Volcker rule.
And there is all that campaign money to be had. They’ll probably make some nuanced decision that claims to take care of situations like the Fail Whale trade, but really won’t. Or maybe they could use it as an excuse to delay the finalization of the Volcker rule regulations until after the election? That would be sweet for both the banks and Obama.
Because nobody is supposed to criticize the Great and Wondrous Leader, that’s why.
Besides, Jamie Dimon is the real villain. He wasn’t supposed to let this happen (or be revealed) until after the election. (Watch for plenty more Fail Whales late this year and early next.)
Because it’s a lot bigger problem for David Cameron. We might be able to chase his butt outta #10 with it.
Because we’re now operating on the same principle the Republicans were in 2008. Remember how every bit of news, no matter what, it was ALWAYS “good news for John McCain!”
Well, now it’s the blue team wearing the blinders and every bit of news, no matter what, is GOOD NEWS FOR THE GREAT AND WONDERFUL O! And, ergo, it must be bad news for Romney.
The “blue team” is so much like the “red team” it often disgusts me.
Gosh! I sure hope this doesn’t effect Jamie’s bonus . But I have confidence that the board of directors will see what an irreplacable ASSet he is and reward him handsomely. {snark}
Fail Whale argues I think that we need more than the Volcker rule if anything sure it happened on Obama’s watch but its not a problem for Obama unless it leads to another bank bailout, which I admit is possible.
But since Mitt and the GOP are against any more bank regulation Obama can argue like he always does that he is limited by what he can get passed into law.
If we get another banking crisis then yes it hurts Obama but it hurts Mitt and the GOP more.
Reverse Darwinism always rewards failure as a way to cover up mistakes by the in group leadership. Bush’s heck of a job Brownie comment comes to mind and his early praise of the Generals in the Afghan and Iraq wars.
We have a leadership to weak to admit making mistakes Great Leaders do take big risks the CEO cult is right about that but they also admit, learn from and change direction quick after making mistakes.
Our system is led by such insecure freaks they can’t ever admit making mistakes.
How is this for a rule no trade if it goes bad can be big enough take down more than 5% of a banks reserve cash. This way if the market goes down and a bunch of trades go bad at once hopefully the bank will not see everything fail.
Stock is down just over 10% including after hours trading today.
It’s not Romney’s fault.
Hedging your bets betting both sides of a trade is insane during a market crash where everyone has lower values of their assets when the housing market collapsed the stock market also collapsed and nobody has cash how do you expect to get paid by hedging your losses when the people you hedge your bets with are also seeing losses in their trades and their assets being marked down.
How about we rid the country of ‘investment’ banks?
10% that is news the financial stocks have been making imaginary money the Credit Default Stock Market has more money in it than is on the entire planet
http://my.firedoglake.com/thingscomeundone/2011/07/26/another-lecture-on-imaginary-markets/
A 5% loss in the Credit Default Swap Market will cause another banking crisis nobody could hope to pay. I reported on this awhile ago. Scary nice to be right.
seconded!
Kudlow I am sure is making that argument right now and all the business press id following but no cable here so I can’t check.
Whats the big deal? Firm makes a bad trade with firm capital. Losses of 2% on their trading book. Seems to be much ado about nothing.
If you default on your house and the bank still owns the loan the banks need margin set aside to cover it for Credit Default Swaps the banks have no government requirement to set aside cash to cover it the banks to cover bad trades use their cash thats supposed to be used to cover bad loans and profits to cover these loans.
Using cash set aside to cover bad loans to cover bad trades should be illegal.
This comment demonstrates a clear lack of understanding of what an investment bank does.
Gamble with other peoples money without any reserve to cover the bets if they lose? :)
No, KrisA and many others of us here understand very clearly what investment banks do. However, we don’t like them doing it under the current model where they have the benefits of commercial banks, access to the Fed discount window, and government (taxpayer) bailouts when they screw the pooch, as they regularly do.
dimon is the junkie, summers, geithner, holder and obama are the ‘villians’
http://www.huffingtonpost.com/peter-s-goodman/jamie-dimon-derivatives-f_b_1509631.html
How did JPM’s recent trading error affect you?
Yes we did, and reinstating that would go a long way to fixing our financial problems, but it’s just too hard to accomplish. Thanks to Bill Clinton and his partners in crime, including his economic team and the Gramms.
What’s your response here, David, where it’s documented that it was allowed in Levin/Merkley’s rule:
http://economicsofcontempt.blogspot.com/2012/04/volcker-rule-and-portfolio-hedging-yet.html
That’s from April.
Troll alert, in.re. floundering father.
Why is it a big deal hmm those are only losses right now I don’t know what the trade was but if losses on whatever they traded get bigger then their losses get bigger. Lets say they bet on oil prices going up oil prices are down now so they have a loss if oil prices go down more then they face a bigger loss assuming the contract was not due already.
Chances are if they speculate they have other contracts due later it would be very stupid to have all contacts on CDS due at the same time but ok I won’t put it past them if that happened then the loss is the final number.
But if they were smart and had several contracts due over several months, years all on higher oil prices or any other stock, commodity etc then if prices on that asset keep dropping then their losses continue.
We are worried because CDS are not reported.
If it were reported I would report what they lost money on and why. As an investor I don’t like to invest on things I don’t know where the money will be invested.
BeachPopulist I am sure does not want his future SS and Medicare cut more just to bailout the banks again.
We have to disprove the trolls who make claims without facts or we leave people with the impression that we don’t have counter arguments with facts. Hate and Spam trolls I leave to Mods. Thanks for the warning but I was showing trolls the facts back when Christy was here:)
Its a crime I feel to let ignorance continue.
I understand, but most of them spew their preconceived notions to disrupt an otherwise meaningful dialogue and then disappear. I no longer have the appetite to indulge them.
Why not blame Willard.
He recently gave new meaning to getting a haircut.
I agree it is tiring to deal with ignorant trolls who think they know something.
Was JPM requesting a bailout for their trading loss? Not that I am aware of. In fact I don’t seem to remember them needing a bailout in 2008-2009. I understand it has been in vogue to demonize banks or wall street or whatever but this appears to be an issue between JPM and its shareholders and has no bearing on anyone’s medicare or social security benefits.
Not reported? Their trading positions are reported every quarter. Check out a 10-Q its all in there.
Dayan’s coverage of this falls depressingly short of anything I’d believe was coming from a Democrat, let alone a Progressive. Read Peter Goodman & Simon Johnson today at Huff.Post, and MANY others across the internet to get interesting arguments from leftys who refuse to softserve Obama’s catastrophic failures.
All the banks took money from the FED even when they said they supposedly didn’t need any.
If they had revealed their true balance sheets one could see why. If they didn’t need any money, why did they stop lending?
Perhaps you’d like to explain how they managed to accidentally MF Global then? Or does demanding another company absolve you of guilt while you attempt to pillage the accounts of legally protected customers make you a responsible bank?
Not to mention JPM wouldn’t exist without the largess of the Fed, so I’m not sure why you’d come out and suggest they “don’t” need help at this point. If they can’t get that investment grade credit position unwound while everyone piles on top of them they are going to be hurting. Not to mention they somehow seemed to have known Fitch was going to downgrade them this afternoon an hour after markets closed. This weekend will be fun for them.
Who said they stopped lending? I had no problem getting a mortgage during late 2008. Maybe they stopped lending to those with poor credit or those unlikely to repay but that just seems like strong business practice and risk management.
I don;t understand what you are trying to say about MF Global and my guess is you don’t either.
As far as JPM needing the fed to remain in existence, I would be interested to see what kind of analysis you have done on that. My guess is that is a talking point pulled from someone else on here rather than a statement made from sound analysis.
It’s internet slang, I accidentally a (blank), go back to youtube where you came from if that’s hard to understand. Also personal attacks are cool, but I suppose I just called you a troll, so whoops.
MFG is actually comically easy to understand, but the situation is locked up because the CFTC’s Gensler managed to block discovery, then recluse himself, the various committees aren’t able to understand counter party risk or segregated accounts. But Corzine influence peddled to get the chance to play for real money as a primary dealer, and blew it, so we’re left with the smoking ruins of segregated customer funds. By the way that’s not actually happened before, and JPM has admitted to receiving the money, then letting it “vaporize” as the Wall Street Journal put it.
I’d be interested to see you counter anything I said in the original comment without complaining to authority. I actually don’t really listen to people on here much about the current financial system, its not the best forum for it sadly. If you think the firms on the street can survive without ZIRP then enjoy whatever cognitive dissonance agent you are on, or go read up on practically anything that’s happened in the last 4 years. It’s a fun time, I assure you.
Why are you even talking about MF Global? and who was making personal attacks.
You asking me to make an “I don’t beat my wife” argument. I asked you to demonstrate what work you have done or what you have read that indicates that JPM could not survive as a firm without Fed support. You haven’t done that. We aren’t talking about any other Wall Street banks. Only JPM.
Oh my, the person making person attacks was you, originally commenting on how I clearly know nothing, nothing (Sgt. Schultz voice) about JPM, or how to counter your statements on not “bashing the banking system” (or whatever you’d rather put there). MF Global is actually rather important, considering the largest bank in the US still hasn’t been honest about what happened to money that was stolen from customers, and ended up being posted as a margin call at JPM. But you’re right, nobody cares, its not something anyone should care about.
What work I have done? If you’d like to start with the fallacies you’d been committing endlessly over they past… Day you’ve been on here? Sure, let’s not beat any wives! Without the current system of easing coupled with ZIRP there would be no financial system at the moment. If you’d like to only discuss JPM, then the MFG problem is rather important, or the CEO’s lies over how exposed he was to the IG9 tranche. I’m lumping JPM in with the rest of the 5 banks, because if you’re smart enough to attempt to pin the burden of proof on parsing my incompetent language, we might as well just dance in circles and eat bon-bons or whatever you really enjoy. Also, how are you still having fun on here after all this time?
Back to your point though, if you look at Q4 JPM earnings, you’ll see a comically bad quarter that’s saved because they didn’t GAAP account for their possible litigation penalties due to pending foreclosure fraud accusations and didn’t factor in losses from MFG. Seriously, go look, (if you somehow haven’t).
The same JPM that posted net income of $5.4 billion in the first quarter of this year? Which cough cough included %2.5 billion in litigation reserves. Top line up 6% from a year ago? Increasing their dividend and instituting a new repurchase program worth $12 billion for 2012.
Yep, sounds like things are really on life support over there. Thank got for the fed.
Q1 results got the tax breaks and adjustments factored in, nice try. 2.5 billion doesn’t actually cover nearly enough if there wasn’t a deal on foreclosures pushed through by the admin, perhaps they weren’t too worried? Are you reading directly off their last earnings release? Or did you go off somewhere else for the interim. Repurchasing programs are cute, just shows you how badly they need to bleed cash out of their bank due to… ZIRP. But, wait, they don’t want rates to tighten? Not to mention after they finish cleaning up Iksil’s mess I’m sure their profits and bottom line will be so perfect.
If you’re making money off these, I really do hope you put some time into spell checking yourself. That last line is embarrassing.
Ohh no spelling/grammer police…..
Yes, adjustments for over allocating loan loss reserves in the past from the credit card and real estate portfolios. Hardly the boogeyman you want it to be and if anything suggests the conservative nature in which these reserves are approached. Company clearly doesn’t “need” the fed to survive. Nice try though.
Didn’t you hear the sirens when I pulled up?
This is getting comical, you’re gonna argue still that their “conservative nature” meme is something we should all trust? Over-allocation is great! Until you go back and look at the MFG instance where that’s how they found the wiggle room to hide the losses that MFG carried though the summer until they eventually went bust. Nice try, it’s just good obfuscation from the accounting department, and there’s a lot more than just loan loss reserves going on in that Q1 statement. I’ve not seen a shred of proof that JPM could give up its primary dealer status and remain functional, or are you somehow going to argue that it doesn’t actually need ZIRP and a lender of last resort to function? If you asked them to, as some have today, the obvious response is “everyone else on the street has it” right? This can only end well, and your shilling just adds to the popcorn value.
Don’t let the facts get in the way of your story right….When it doesn’t work out the way you thought just blame “accounting tricks and gimmicks” Nice try but its an up hill battle when you are actually talking to someone that knows something about bank accounting and as well as the investment banking business. Go practice your BS somewhere else.
Ohh. The bank doesn’t need ZIRP. JP Morgan existed before 2008, and before 0% interest rates.
Go shill somewhere else.
Oh you know something about it eh? And you know what ZIRP is? Excellent, and yes, JPM did exist before 2008, didn’t have Chase at the end until 2004 though, and a long and storied history before then!
Uphill is actually one word, ironically. I seem to have forgotten that “over-account loan loss reserves”, and net operating losses are totally legitimate, make sense, and can be understood by anyone! So calling them gimmicks is entirely dishonest, or something. You only provided data on the health of the company that is clearly being manipulated, considering how much they are pulling damage control on their IG credit position and subsequent disaster, I don’t even feel bad implying that there is a problem.
JPM, (what I think you meant by “the bank”) does need zero interest rate policy, without that, they wouldn’t be able to operate the level of churn required to keep the system running. They wouldn’t be able to meet liabilities, and aren’t actually able to make much profit off of banking, thanks to treasuries not producing real yield, so it might make sense for them to push for higher rates. Or would it?
I believe you were the one who originally got upset over someone implying JPM was a “bad bank” and that people needed to stop with “BASELESS ACCUSATIONS!!1!”. I’ve actually been trying to listen to your eloquent and impassioned defense of the primary dealer known as J.P. Morgan Chase, and I’ve been greatly disappointed. But since you’re so knowledgeable I guess I should take your word for it. (I know nothing, nothing!) The fact that you’re even here, in this backwater (sorry FDL), says volumes.
I think you have me confused with someone else. I don’t believe I ever told anyone they were making “baseless accusations.”
Your excuse for strengthening results is “clearly being manipulated.” So clearly that it was apparently missed by the 50+ regulators as well as the firm’s external auditors. But somehow you have been able to figure out that manipulation yet refuse to disclose exactly what and how it is being manipulated.
Aren’t able to make much profit off banking? Traditional banking? Fine lets ignore the “mot much” $2.3B the firm made in retail and commercial banking during the first quarter. There is still $1.1B from the credit card business, $1.7B from the investment bank, and $400 million in asset management. Seems like they can do just fine without commercial/retail banking.
Your tired schtick may work in your community college cafeteria or in the comments section of of Matt Taibbi article but it clearly don’t hold water. To borrow some of your “internet slang” you’ve been pwned.
Exactly right, in my opinion. Businesses do what businesses do. They pursue profit. It’s the government’s responsibility to ensure that a business’ means they use to pursue profit does not come at the expense of citizens.
Hit the reply button if you want a quicker response. I don’t have too much confused, but sure, “strengthening results” from 2 quarters of various decreases in loan performance, offset by NOL and over allocation are great! I’d happily invest/bank with them. Not.
Do you happen to know if their credit card business income you quoted includes service charges for SNAP? Or does that go somewhere else?
They’ve lost 2 billion at least from your numbers, which I’m going to assume you got from someone reasonable, like their 10-Q and.. are you quoting profits? or net results.
Tired shtick eh? Perhaps I don’t have a community college to cry over my soup at, or keep up with internet slang. You refuse to engage on anything other than comic dismissal, which is fun, but makes it hard to really discuss MFG, or JPM. Apparently implying the fed is supporting the banking industry is a sore spot for you, so thanks for all the data you’ve been quoting. Care to add anything on the downgrades of JPM that came out tonight? Those profits you were talking about are about to be needed if they get knocked down to many more notches. But hey, it’s a conservative and well respected bank. Bashing it isn’t nice or something.
Why oh why are we talking about Dodd frank toothless bill when we need to push to re instate Glass-Stegall. The investment banks should not have customer money to begin with. Period.
This worked very well for a very long time when paired with limits on the amount of leverage the banks can use.
Actual regulations that work please.
Actually, BP does not want his current Social Security and Medicare cut more just to bailout the banks again. Or for any other reason.
But thanks for the good thoughts.