JPMorgan Trading Loss Suggests Little Has Changed Since The Financial Crisis :
PARE CHE OBAMA NON E’ PREOCCUPATO SOLO PER LA GRECIA E LA CRISI EUROPEA!
Posted: 05/11/2012 5:02 pm Updated: 05/11/2012 5:34 pm
If you thought Wall Street had learned its lesson four years after the global financial crisis, JPMorgan Chase’s $2 billion trading debacle suggests you should think again, investment bankers and industry experts say.
To some, it suggests that the need for financial reform is still just as urgent as it was the day the crisis broke out.
JPMorgan revealed on Thursday that it had lost about $2 billion (with possibly more losses to come) from risky bets on opaque derivatives at a London trading desk.
The pressure on the bank intensified on Friday, with reports that the Securities and Exchange Commission had opened an investigation of its trades and Fitch Ratings downgrading the bank’s long-term credit rating to A+ from AA-.
JPMorgan’s big losing trade shows that at least some big banks are engaged in the same sort of behavior that rocked the financial system in 2008, if on a smaller scale.
“This is a smaller version of the same betting that went on in 2006,” said Will Rhode, a principal and director of fixed income at The Tabb Group, a financial-markets research and advisory firm.
“Ultimately, this is about banks being dissatisfied with the single-digit returns on equity that are associated with their conventional lending businesses, and trying to find other ways to make money,” said Daniel Alpert, founding managing partner at investment bank Westwood Capital, “with risk, once again, taking a backseat to potential reward.”
The episode has provided ammunition to those calling for new regulations, particularly the part of the Dodd-Frank financial reform act known as the Volcker Rule, or a ban on proprietary trading by federally insured banks. The rule is currently scheduled to take effect in July, though Federal Reserve Chairman Ben Bernanke has suggested regulators will probably miss the deadline. Part of the delay is due to a barrage of pressure from lobbyists, who have helped to complicate and water down the rule.
“This latest debacle at JPMorgan demonstrates that the banks cannot police themselves, and should not be trusted to do so,” said law professor Frank Partnoy, director of the Center on Corporate and Securities Law at the University of San Diego. “At minimum, they should be required to disclose details about their derivatives, so their shareholders can understand what risks they are taking.”
By Friday afternoon, lawmakers were starting to make a similar argument.
“If the regulators do what [the Volcker rule] says … this activity would not be permitted,” Sen. Carl Levin (D-Mich.), one of the authors of the Volcker rule, told CNBC. “The purpose of Dodd-Frank was essentially to bring back a cop on the beat on Wall Street.”
Tabb Group’s Rhode went further.
“This makes the Volcker rule a foregone conclusion,” he said. “The entire financial community is holding their heads in their hands saying this JPMorgan event could not have happened at a worse time.”
The fact that the trading losses happened at JPMorgan, whose CEO, Jamie Dimon, has been an outspoken critic of financial reform, likely strengthens the argument of those pushing for more regulation.
“There’s something delicious about this happening to JPMorgan,” Rep. John Sarbanes (D-Md.) told The Huffington Post on Friday.
JPMorgan’s troubles should help Dodd-Frank’s cause, said Sarbanes, the son of former Sen. Paul Sarbanes (D-Md.), who co-sponsored the Sarbanes-Oxley financial regulation law that passed in 2002.
However, “people forget quickly,” he cautioned. “The finance industry has a lot of sway.”
What is difficult to tell is exactly how widespread the practices are that got JPMorgan into trouble — partly because without financial reforms, the riskier corners of Wall Street are still just as murky as they were before the crisis.
“We never hear about these things if they profit from it,” said William D. Cohan, a former managing director at JPMorgan who now writes frequently about the banks. “They never call a five o’clock press conference saying we made $4 billion on a London Whale trade.
“We’ll never know who else is doing it, and this is one of the big problems,” he added. “It’s an opaque black box.”
The JPMorgan incident also highlights one other problematic trend still lingering from the crisis: Too-big-to-fail banks engaging in risky behavior that could possibly lead to government bailouts.
“We have to decide whether we want these banks to be large public utilities — very safe, not generating humongous returns,” said Alpert of Westwood Capital, “or do we want these institutions to engage in speculation and put our system at risk?”
Emily Peck contributed reporting to this story.
JPMorgan Whale Fail And Nine Other Big Bank Disasters
JP Morgan crisis: Obama backs tougher Wall Street regulation
Barack Obama prepares to leave New York on Monday, where he had praised JP Morgan CEO Jamie Dimon on The View. Photograph: Mandel Ngan/AFP/Getty Images
President Obama has said JP Morgan Chase’s $2bn (£1.2bn) trading loss demonstrates the need for tighter financial services regulation, amid reports that Ina Drew, the bank’s departing chief investment officer, is walking away with a $32m payout.
Obama said the losses at JP Morgan were so big that the US government might have had to step in if the trading blunders had happened at a smaller institution, where they could have prompted a bank run.
News of the losses wiped more than $19bn off JP Morgan’s market value in just two days, renewing concerns about whether Wall Street’s giants really are “too big to fail”.
“This is the best, or one of the best managed, banks. You could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in. That’s exactly why Wall Street reform’s so important,” Obama said in an interview for ABC’s The View that will be broadcast on US TV later on Tuesday. “Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2bn and counting, precisely because they were making bets in these derivative markets.
“Keep in mind if we get all the rules that we proposed and were passed by Congress implemented into law, it should prevent this kind of stuff from happening. But this, again, is going to be part of what the election is about. We’ve got real differences here, because Governor Romney, members – some of the Republican members of Congress and the financial industry have been arguing that this is unnecessary, that this is impeding capital formation.”
Obama comments come after Ina Drew, a 30-year veteran of JP Morgan and one of Wall Street’s most senior female bankers, quit as the bank fought to contain the massive losses at its London operation. According to reports overnight, Drew holds a share award worth more than $16m. In addition, Drew also holds unexercised options valued at $3.44m, retirement benefits worth around $2.63m and a $9.87m deferred compensation pot.
Dimon, JP Morgan’s chairman and chief executive, said on Sunday there was “no excuse” for the disastrous series of bets it made under the guidance of Drew. Later on Tuesday Dimon will face angry shareholders who want him to step down as chairman.
A White House spokesman said the losses reinforced the importance of Wall Street reform and lambasted Republican presidential candidate Mitt Romney for demanding the repeal of the 2010 Dodd-Frank financial reform legislation.
Barney Frank, co-author of the act, said the fiasco showed how important it is. “It shows how wrong he is in arguing that the legislation is not needed,” he told the Guardian. “This isn’t a stupid mistake at some poorly run company. It’s not some outlier like Countrywide [the fallen sub-prime mortgage giant]. Dimon is a very able guy. But even in a well-run institution things like this can happen.”
Drew was one of the bank’s highest-paid staff, earning more than $31m in the past two years. Among her responsibilities as chief investment officer (CIO), she oversaw the bank’s London offices and the strategy that led to trader Bruno Iksil becoming known as the London Whale for the huge positions he was taking.
Obama’s interview was recorded on Monday as the president raised cash for his reelection campaign at the New York apartment of Tony James, head of private equity firm Blackstone Group.
At the fundraising event, which 60 donors had paid $35,800 each to attend, Obama warned that Congress would not provide another bailout if banks faced another credit crisis, according to a Bloomberg source at the swanky gathering.
http://www.guardian.co.uk/business/2012/may/15/jp-morgan-obama-backs-wall-st-reform