Making sense of the banking industry…the sequel


Today in the New York Times, I came across this article about JP Morgan and their disclosure of $2 billion in trading losses.  Jamie Dimon is quoted in a conference call saying:

“These were egregious mistakes.  They were self-inflicted and this is not how we want to run a business.”

The losses occurred in one of JP Morgan’s investment groups.   The same group is expected to lose another $800 million this quarter.  From the article:

The trading group has been a focus in recent weeks as questions surfaced about big bets the JPMorgan unit was reportedly making in credit default swaps.

and also from Dimon…

“Every bank has a major portfolio. In those portfolios you make investments that you think are wise to offset your exposures,” Mr. Dimon said in the April call. “At the end of the day, that is our job — is to invest that portfolio wisely, intelligently over a long period of time to earn income and to offset other exposures that we have.”

I completely understand that you need to offset exposure, but please note his words…”wisely” and “intelligently”.    Something tells me that these investments…these credit default swaps were not a wise investment.  If you want the layman’s version of a credit default swap you can look at this article.  The definition from investopedia states it well:

A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default.

Yes, a buyer of a CDS might be speculating on a loan default.  This very issue is explained well in the documentary Inside Job…here is a clip explaining them and the problems arising with this unregulated facet of the banking industry.
Wall Street and big business would like to keep this kind of information out of the hands of the public.  They talk it up with big words and try to point out how insanely complex the whole thing is, when truly, it is a smokescreen.  The banking industry needs more regulation, not less.  We still haven’t recovered from the 2008 financial meltdown.
Oh, and one more note about Jamie Dimon the CEO of JP Morgan….he was awarded $23 million dollars in pay and bonuses last year.
JPMorgan Awards CEO Jamie Dimon $23 Million Pay Package for 2011 Jamie Dimon
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3 responses to “Making sense of the banking industry…the sequel”

  1. Tea Party Slayer says :

    The investment banking side can take risks. Just don’t do it on the backs of of main street’s checking and saving’s accounts. The investment banking model is supposed to be more risk tolerant. We just need to separate the commercial side. But the American public never seems to learn from the past. Glass-Steagall was put in place when banks mixed the two and helped bring on the 30s Depression. Then we had some stability until Gramm and the crew repealed it in 99. Then we had the 2008 collapse, and we’re still debating this. T

    The American people should look in the mirror. They keep getting duped by claims of socialism and federal government boogeymen. The middle of the country and the south empowers these manic Republicans, who are in Wall Street’s corner. I’m looking at a Wisconsin poll right now. Walker is up 50 to 45!!! I read another article that said there are no undecided voters there, and the state is completely polarized. What does that say for reasonable government regulation if Walker is empowered by voters in a state like Wisconsin?

    • thejumbledmind says :

      Yes, Wisconsin is particularly frightening right now. Walker signifies what movement conservatism is all about. They influence the masses by fear alone when people should truly be afraid of the movement conservatives!

      I agree with the risk tolerance…I would just like to see it a bit more regulated.

      • Tea Party Slayer says :

        You’re right. Simply limiting affiliations between securities firms and commercials banking is not enough to stop the shenanigans. More regulation would be nice. But it’s complicated, and there are critics on both sides, as always. Some folks say Glass-Steagal would’ve done nothing to prevent the 2008 meltdown; others say Gramm’s bill repealing Glass-Steagal was an important factor. Of course, the banking indsutry argues splitting the two hurts their global competitiveness.

        Great Depression, S&L Crisis, market dive of 2000, and 2008 financial crisis all involve similar types of excesive risk taking. I’m trying to keep this simple. I think we need to do three basic things –

        1) First, we take away some of the damage that can be done to the public when invevitably there are shenanigans. We do this by rolling back the Bush tax cuts to the wealthy and focus America on fundamentally sound growth again. And by separating commerical banking from investment banking.

        2) Second, in the simple bill we tie a broad interpretation of “excessive risk taking” directly to the banks’ boards, executives, and chief compliance officers. I think a broad definition of excessive risk taking and strong, central regulators ready to pounce is simple, and will do more to create incentive for better corporate governance and market discipline. If the banks don’t comply with the spirit of the bill, we go after the supervory authorities criminally and financially. I haven’t followed where we are with the Volcker Rule, but again I’d try to be as broad as possible in deifining risk taking so strong regulators have more avenues of attack.

        3) Finally, I’d eliminate the relationship of risk taking to bail-out guarantees. The bill would clearly prohibit public dollars from bailing out these financial institutions, again fostering more prudence in invesmtment decisions.

        I think Volcker said himself that this could be done in a 4 page bill. I agree with that as long as it gives broad authority to go after these guys.

        As an olive branch, I’d drop all talk for going after anyone for the 2008 crisis, which wouldn’t be popular. But I’m more concerned about how do we limit damage and get back to sound fundamentals moving forward.

        But again, this is my simple view. I’ve been too lazy to delve into all the intricacies of the actitivities like credit default swaps, etc. Nor have I followed in detail about where we are with the Volcker Rule.

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