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It turns out that I have a connection to the whole JPMorgan Chase Fail Whale trades. The guy who led the hedge fund pushback against the London Whale, the one who took the other side of the bet, the one who made the profit off of JPM’s massive loss, is a guy named Boaz Weinstein. He’s a friend of a friend from college.
It was last November, and Mr. Weinstein, a wunderkind of the New York hedge fund world, had spied something strange across the Atlantic. In an obscure corner of the financial markets, prices seemed out of whack. It didn’t make sense.
Mr. Weinstein pounced.
As the financial world now knows, what was out of whack was JPMorgan Chase & Company. One its traders, Bruno Iksil, the man later nicknamed the London Whale for his outsize trades, was about to blow a multibillion-dollar hole in the mighty House of Morgan.
I don’t really have a problem with Weinstein’s conduct in this case. I’m sure we’d have plenty else to argue about. He’ll probably pay 15% in taxes on this profit next year, rather than the 35% top rate, by using the carried interest loophole. That’s ridiculous. And Weinstein did deal credit derivatives at Deutsche Bank, losing $1.8 billion for the bank during the financial crisis in 2008. But in this case, he saw an opportunity and exploited it, and didn’t use one dime of unsuspecting depositor funds, or any implicit taxpayer guarantee, to do it. He shouldered the risk and came out ahead.
Hey, that’s gambling, and if that’s what this guy wants to do with his money, go ahead. I object to the use of the implicit too big to fail guarantee, the discount window, political influence, inside information, rigged rules and virtually unlimited depositor funds that go along with any trader at a bank who tries to play this game. The idea that a victory will send profits to the bank balance sheet, but a loss will simply get socialized by the government, turns the idea of risk completely on its head. JPMorgan didn’t have a real risk oversight board – they’re claiming to build one now, along with some belated efforts at accountability – because they didn’t need it. Implied protection from the taxpayer was all the risk insurance they required.
It turns out that, unlike Boaz Weinstein, a significant amount of these hedge fund traders don’t do so well for their clients when they aren’t backed by a giant bank. If there’s such a thing as a free market, I suppose that means that the worst traders will fall out, and investors will take their money to those who can bring a return. And if they lose, they lose. The government has no bearing on the deal.
I would be open to banning the financial instruments that really have no social purpose, like naked credit default swaps, where you don’t even have to own the underlying security. And the idea of clearinghouses and exchanges for derivatives is a good one (although by the end of the Dodd-Frank implementation process, they could be rendered useless). But as long as the hedgies are taking their own risks, and the investors understand them, and my tax dollars have nothing to do with the transaction, I say go for it. If that’s your idea of fun over a weekend in Vegas, rock on. Just don’t come running to me and my 310 million friends when it all falls apart.
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Think how rich you might be if you’d just followed this friend of a friend.
Come to think about it, maybe there is merit to a flat tax proposal. I propose that we all pay the same carried interest rate as the hedge fundies. Or maybe, the hedge fundies should pay the same rate we do. Yeah, I like that better.
What fun it must be to be a MOTU. While busily
“earning” obscene amounts of moneyproviding much needed liquidity to capital markets,you can outsource the whining to a friendly “journalist”:
Wall Street Titans Outearned by Media Czars
No, thanks. I make so little money now, a flat 15% would raise my taxes. As it would for many, maybe all, lower income people.
We need a progressive tax system.
I agree DD,even some Vegas casinos ban Weinstein .They are smart enough to know the key is to monitor him more carefully .yet the status quo posture is that we can regulate gam-theory bets .often so big they a second position on the collective behavioral response the initial bet elicits .More generally ,there must be a global constellation of economics for which are accountability is unhinged .
Sorry ,I meant to say ,’not to monitor’
That’s called milking the comprador.
So, where’s the list of how they get your money without taxing you?
Man, they train you guys well.
It sounds like you’ve had your training at Communist Martyrs HS comrade! Boy, have you noticed how far the goal posts been moved to the right these days? They did it a yard at a time and nobody hardly noticed Porgy! Well, Mudhead that just goes to show you that what we really need is more shoes .. shoes for the people! ;)
Not even “hardly nobody noticed”. Too many compradors to stop that train.
I’d have something to say if I thought david might want to participate in his own thread, but since he never does I think I won’t participate either
Perris. I respect your input don’t take me wrong but is not our role as commenters to carry the conversation as DD moves to the next POV.
I assume that applies to all their counterparties as well?
??
David’s a reporter, not a salon-keeper. The guy already busts his ass like nobody I’ve ever seen. Not to mention he’s working on a holiday. Etc.
Anyway, on the topic – a society that celebrates rather than denigrates people of Boaz Weinstein’s ilk is spiritually dead and headed for the dustbin.
It’s not clear that you’re slinging snark. People in my bracket always notice any movement in any direction. We’re the proverbial canaries in the economic coal mine: a little less makes our lives yet more precarious and stretches the month yet further beyond our money, a little more, I can’t remember when such a bounty may have graced my checkbook, makes our lives a little less precarious and pulls back the month a little closer to our money. For us, month and money never actually coincide.
I’m almighty sick of communism for companies and politicians and capitalism for me.
Yes.
Resolution is the only solution
The problem with trying to set apart some portion of the world of finance off from another, and have part of it have a bail-out back-up in exchange for following certain rules, while the rest is Wild West, is that the two will bleed into one another. Given the over-abundance of money we let accumulate at the top, beyond what the people who “earn” it will use to generate demand, there is so much more available than we need to capitalize expansion, that capital does not command much return. The only way to get much return is to go Wild West and chase after the return that can be garnered from the early stages of bubbbles. All sorts of counterparties, including ones that we want to protect, such as pension funds, will go Wild West. We will end up having to bail out the Wild West to protect the widows and orphans who depend on the pension funds.
And it’s no use trying to keep counterparties we want to protect out of the Wild West, and letting only the idle wealth of the idle rich go there, because the hallmark characteristic of Wild West “investments” is their opacity. Nth order derivatives send their tendrils out beneath the surface like some huge crabgrass that we could see encompasses the whole world, except we can’t see the subterranean connections. “Too big to fail” will fail because it has to rely on above ground connections only in deciding where to divide entities whose subterranean connections are the really important connections. The pension funds can’t avoid these entanglements — no one can and still participate in any way in the whole of the financial system.
The only effective regulation would be to react to failure that threatens contagion wherever in the financial world that failure occurs, but to react with resolution alone, bailouts not permitted for anything. On resolution, counterparty money will be protected only insfar as it represents deferred consumption. We let everyone else get stiffed, no matter how much ripple effect failure that causes, and pick up the pieces completely, but only by making whole investors who will spend what we save for them generating demand in the real economy. The rationale is that the protection of demand is the only public good at risk in the default of financial institutions, therefore only demand will be protected, idle money will be allowed to complete the suicide it started when it invested in failure.
The key element in resolution is that all transactions become public knowledge. The surest way to encouraging investors to use reasonable due diligence up front is to make clear up front that their failure to look under all the rocks before they commit money will result in public exposure on the back end if the bet goes bad. This will result in an impatience with complextiy whose sole rationale is opacity. Opacity will become the enemy, the thing to be avoided, not the thing to be sought in “investments”.