Bruno Iskil, the infamous “London Whale,” will leave JPMorgan Chase in the wake of his soured “Fail Whale” trades which lost the bank $2 billion to date. “The timing of the departure is unclear,” according to sources, probably because the trade hasn’t yet been unwound.
Whenever Iskil departs, it won’t end the fact that JPMorgan Chase, as evidenced by the Fail Whale debacle, is running a hedge fund inside their bank, as Sen. Jeff Merkley said in our interview yesterday. We can have these elegant debates about whether the trades represented a bet or a hedge, but if those trades weren’t gambling, then the word “hedge” has lost all meaning. Whether Jamie Dimon got his lobbyists to gut the Volcker rule and make his betting legal is also immaterial.
Why don’t we want hedge funds inside big banks? For a variety of reasons. You give the hedge fund an unfair advantage of a taxpayer subsidy, from depository insurance and access to the Federal Reserves low interest discount window and other benefits of commercial banks. A bank, with all its other functions and hundreds of thousands of employees and trades being made all over the world, cannot possibly stay on top of the markets the way a hedge fund can (it’s a “too big to manage” problem along with “too big to fail”). And if and when the hedge fund melts down from all that risk, you create an intolerably dangerous situation for the bank, leading to potential bailouts with taxpayer dollars.
There’s just no rational reason to allow hedge funds to exist inside of banks. As Paul Volcker said today, “if (banks) want to do proprietary trading, they want to do a lot of other things, it’s very simple: give up their banking license.” At least wall off the risk somewhat. It’s not a perfect solution, but it’s far better than where we’re at now.
That’s especially true because banks like JPMorgan Chase are out soliciting investor money to use in speculation, amping up their risk and raising the probability of an eventual meltdown and bailout. By and large these are separate from the depositor money, but it gives the bank the best of both worlds: they can reap the benefits of being a depository institution, with the insurance and cheap loans that provides, while adding the risk and potential reward of being a hedge fund. To quote Amar Bhide:
What scares me is not the $2 billion that JPMorgan lost. It’s the record $19 billion profits that JP Morgan made. How on earth do they make a $19 billion profit quote unquote “putting customers first” in an economy that’s supposedly slowing down and their customers are flat on their backs?
The answer is by taking enormous risks that can backfire, as we’ve seen with these trades.
Shareholders have begun their counter-attack. They claim that JPMorgan Chase misled them by misrepresenting the risk from these trades, which eventually led to a drop in the share price. And they have filed three shareholder lawsuits on those terms. Assuming most banks on Wall Street engage in this – and thus have the same exposure – it won’t be long before a debacle like this leads to a systemic risk and a big bank failure. That’s why we have to stop these practices before it’s too late.




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Look at this passive language:
Whether Jamie Dimon got his lobbyists to gut the Volcker rule
Who actually gutted the Volker rule? Who got payed off massively? Those poor legislators were just so powerless when faced with all that money. And their leaders in the house and senate were just compelled to offer those amendments without killing them off in dirty back-room deals like they do with anything populist.
it’s very simple: give up their banking license.”
There’s just no rational reason to allow hedge funds to exist inside of banks.
Last time I checked a license was not a right, but a privilege. There is no rational reason to try to convince bankers to “give up” anything, anymore than you would try to talk a serial killer out of what murdering people. Are they in charge of the issuance of those licenses? No one asks a drunk driver “pretty please” to give up their license.
You’d think that after cleaning up after the two cretins who blew up Bear Stearns’ hedge funds (with billions in Uncle Sam’s money of course), leading to the demise of that august institution, the JPM people would have been a bit more careful about policing the cretins who just blew up its prop desk. You know we got similar stories about stanching the contagion at the Bear hedge funds too. Just saying.
We just need to create some Super Safe Community or State Banks, patterned after the boring old timey ones- Just like “Dads Bank”. They serve the community, that hang on to the loans and administer State funds. They don’t engage in Interstate competition or short term speculation and shorts. Insure them well with FDIC, let them draw their money from the Fed same window with the same rates.
This de-facto Reclassifies Wall Street as speculative banks not savings banks. Then remove the FDIC insurance for savers from the Speculative Banks along with any Fed Guarantees.
This the same principle that Golds Gym used to screwed me out of my “lifetime” Gold membership. They just created a super golds gym membership.
It’s really time to stop asking these fuckers on bended knee to be nice.
This is about Moral Hazard. If John Corzine or Jamie Dimon’s assets were on the line, and there were actual criminal punishments for not doing proper oversight, they would be policing the behavior like the Gestapo.
Instead they are treated by the government like un-ruley children whose parents rush in to save their monster progeny after they’ve poked little tommies eyes out with their pop-sickle sticks. They are to the government as the Menenedez twins were to their parents, but we’re the victims.
The “Personal Responsibility” that the Democrats and the third way push is revolting in this light.
When it comes to capitalism we live in a one party state.
Shareholders love Dimon. They approved his $22 million compensation and kept him on as CEO.
Hey shekf that’s my plan! Is it that obvious? Wonder why Bernanke and Geithner haven’t implemented it already.
Very well laid out short and sweet.
Whose gonna implement the plan?
If we can’t eliminate moral hazard and hence disaggregate these multi-purpose monopolies ,then everything is mere cosmetics to lull suckers into a false sense of security .
That is a question for she kisses frogs. Seem a wonderful idea. Regionalize banking will be easier to track. Dump the FED system too. All banks get the same interest rates not just TBTF.
Besides it is above my pay grade.
Hey, it took the banksters some time to become the beneficiaries of moral hazard. Give them credit where it’s due.
Does anyone know what kind of severance packages these bastards walk away with, besides no accountability charges?
U.S. used to have a system like that. Carter started on the road to destroy it.
Yeah big @7 ,if we had the power to implement the plan ,then you must conclude this magical power has given us a non-viiolent means to rid ourselves of these bankster parasites .They own the municipal bonds that leverage control over the states while also funding state elections .
Here’s Drew’s severance package
Link.
Iskil’s will prolly be reported when he actually leaves.
Per Abigail Caplovitz Field in a Naked Capitalism post earlier today, it’s not gambling at all. That is, unless you’re so rude as to point out the fact that we taxpayers are on the hook for the losses.
As I typed in 11.
Hey eCahn .you might be right ,but one way or another they’ve been enjoying moral hazard for nearly a half-century .I can’t speak to its formative period ,but I know that Wriston said fuck the Fed’s permission circa 1970 when peddling a new derivative and never looked back as he later cooked up the syndicated-lender scheme for moral- hazard socialism circa 1980 .
Yes, I’m sure you can trace back the roots of moral hazard quite a way. Stigler wrote about regulatory capture in the 1960s, and for an economist to figure it out, it had to have been going on for decades already.
However, not to the extent banksters get away with it today, wholesale without even needing to hide it by pretending to be respectful to congressional committees as Blankfein so blatantly showed. It’s the completeness & the boldness of TBTF and their purchase of pols that I meant to refer to, as having taken awhile to develop.
Last i saw the guillotine is still the same fit.
here’s the real problem: the mob[s] owns the banks. this is especially true of jpmorgan chase. the spawn of texas commerce bank, a mexican cartel/cia drug laundry, and first chicago, a mob bank.
that is dimon’s real constituency. and since we have no investigative journalism in the usa, no one recognizes this.
so, the gangsters roll merrily along. unrestrained. because the congress of the usa is for sale to even the lowest of bidders. and the president is the creation of the chicago mob[aka jamie dimon].
shareholders voting to retain the current board is an interesting argument. what i think you would find is that the majority of the shareholders, institutions, never overturn the boat. and the oddlotters, in the main, never contest the board/mgt. because even if they tried, the delaware courts would refute them. furthermore, such an effort would require an alliance between the oddlotters and the instutional owners. that will never happen.
there will never be an alliance between the perfuned princes and the booboisie.
the only things that have kept jpmorgan chase alive has been all the free funds from the fed. and the drug money laundering. without those infusions of virtually illegitimate funds, jpmorgan chase is insolvent.
which takes me to all the other bets that jamie has on. silver for instance. jpmorgan chase, jamie and blyth masters, have a short position in silver that exceeds all the silver ever mined. it is a monstrous naked short that would never be allowed except for the fact that clinton, bush, obombya are all in thrall to the cia/gangsters – who have positions in this bit of leger de man financing.
it is the same thing with the other bets that jpmorgan chase has on. they are often disguised for the booboisie as derivatives, or hedges. but they aren’t. they are straight up bets. just as this iskill bet was.
there will be no ending of these crimes until there is a global financial cataclysm that exceeds the 1029 crash.
or until the populace rises up before that catastrophe.
that of course is why obombya and the congress imposed the ndaa. and all the other perversions of the constitution. they know what will be happening when the real shit finally hits the fan. within the next 12-18 months if they can continue to manipulate the public relations. if they cannot, it will occur before the election.
The failed Whale scandal is the latest Canary singing loudly in the Coalmine of World finance. In a few mos. it will be forgotten till the next Canary and the next and when the mine collapses again like 2008 everyone will claim they never heard any of them sing. Except for all of us. Its called denial and delusion and these days they are what substitutes for reality in DC and Wall st.
BIG BANKS/CORPORATIONS CONTROL THIS COUNTRY WITH THEIR $$$$$$$$$$$$$
DEMS/REPUGS ARE ONE PARTY AND THEY ARE RUINING OUR COUNTRY WITH THEIR GREED/CORRUPTION.
IT’S ALL ABOUT THE MONEY.
WE BAIL THEM OUT AND ALLOW THE CEO’S TO KEEP THEIR JOBS AND THEIR BONUS MONEY. WE SHOULD HAVE TAKEN TO THE STREETS IN 2008. NOW THEY WANT US TO CUT SOCIAL SECURITY/MEDICARE, ETC TO PAY FOR THE BAILOUT $$$$$$.
Two points:
On the losses: The people suing JPMorganChase must be willing to also give up any profits from the methods JPMC used that incurred some losses. The hypocrisy of taking the profits while decrying the losses isn’t ethical. But, of course, the rich and anyone in America fighting for money doesn’t worry about cognitive dissonance, ethics or anything. They’ll bite the hand that’s feeding them (JPMC) and not even blink.
On banking: What is a bank’s risk hedge and what is a hedge fund inside a bank? I think when a traditional bank asks for collateral they were hedging losses. Modern banking can’t be so different. But, if there are far larger profits to be made gambling, then that’s what they will want to do and they will be pushed to do by their competitors and greedy shareholders. I saw Jamie Dimon’s interview with David Gregory and he said banks lend money and that’s risky, so they need to hedge the risk. Isn’t that what collateral is for? What kind of lending are they doing which requires market gambling/hedging? I trust Dimon knows what he’s doing and he’s very very good at it. But, making markets and hedging are not traditional banking. We need to separate the two and ensure sufficient money goes to traditional banking, so our economy can be properly funded.
Maybe the big reason the economy has remained flat is insufficient lending because banks just aren’t ‘sexy’ profit makers. That’s an indication the risk-taking ‘investment’ world has gotten out of control. The markets should always be an abstraction of the real world economy and a tool to assist the real world economy. Now that’s turned upside down and it needs righted.
I can’t imagine Mitt Romney and the Congressional Republicans doing anything to fix it, so we had better elect Pres. Obama and more Congressional Democrats.