Skip to comments.JPMorgan’s Follies, for All to See
Posted on 03/17/2013 2:27:38 PM PDT by neverdem
Thats the takeaway for both investors and taxpayers in the 307-page Senate report detailing last years $6.2 billion trading fiasco at JPMorgan Chase. The financial system, thanks to dissembling traders and bumbling regulators, is at greater risk than you know.
After bailing out the nations banking system in 2008, taxpayers and investors have been assured that such a crisis will not happen again. The Dodd-Frank legislation was supposed to make our system safe from the kinds of reckless banking activities...
But the true value in this Senate investigation is its spotlight on the ability of bank executives to hide hundreds of millions of dollars in losses and yet survive internal valuation reviews. This shows how imprecise, undisciplined, and open to manipulation the current process is for valuing credit derivatives, the report said.
JPMorgan, dont forget, is the largest derivatives dealer in the world. Trillions of dollars in such instruments sit on its and other big banks balance sheets. The ease with which the bank hid losses and fiddled with valuations should be a major concern to investors.
As for taxpayers, the Senate report clearly indicates that JPMorgan Chase is too big to regulate. The report found that the bank failed to provide crucial portfolio data to its regulators at the Office of the Comptroller of the Currency and that those regulators did not investigate questionable trading at the bank. The overseers accepted the banks assurances that nothing was amiss.
We already know that banks of JPMorgans size are also too big to be allowed to fail and too big to prosecute. Such banks are too big to regulate and apparently too big to manage. So how much more evidence do we need that banks like JPMorgan are simply too big a risk for taxpayers to bear?
(Excerpt) Read more at nytimes.com ...
But regulation is a “bad” thing. Next.
So you support more regulation?? How is more regulation going to help us??
Pulled everything out JP Morgan Chase in Oct 2012. I hope this damn bank folds. the worse bank in the USA. money and other assets are in local/regional credit union.
What happened to antitrust laws????
They went the way of the Dodo bird, once business and government got into bed together.
Thanks neverdem. Sidebar:
Elizabeth Warren: St. Patrick drove snakes out of Ireland...to Wall Street
New England Cable News | March 17, 2013
Posted on 03/17/2013 8:01:28 PM PDT by ConservativeStatement
Well, for starters, the government could do the following:
1. Banks may not trade in bespoke investments off an open market.
2. In the debt market, “credit default swaps” may not be sold without evidence that the seller is able to make good on the contract. Furthermore, CDS are not able to be bought by someone who don’t hold a debt instrument the CDS is supposed to insure.
3. Banks could be required to hold 15% Tier-1 capital.
4. Banks can’t operate in insurance products, and insurance companies can’t operate in banking markets. This would prevent a repeat of AIG.
5. Investment banks can no longer be publicly traded. They have to be partnerships, the way they used to me. This puts all the partners’ capital at risk when they want to do goofy and high-risk trades.
6. Eliminate CDO’s, CMO’s, CDO^2’eds and other synthetic bond products.
7. Eliminate the pay-for-rating bond rating system. All bond ratings should be rolled into a fee paid by bond buyers, thereby making the ratings agencies much more interested in preventing defaults.
8. Restore mark-to-market accounting for banks. Ignore those who claim that bank positions are “too complicated” to “mark to market.” If they’re too complicated or too illiquid to mark to market, then either eliminate the product, make the market more visible and liquid or eliminate both. When an investor or regulator picks up the financial statements of a bank, the accounting therein should not be based on mathematical fairy tales, and that’s what the current “mark to model” accounting is.
9. If banks become so large as to threaten the national economy with their reckless behavior, then they’re too large to be allowed to exist, period. The Congress needs to recognize that our national economic sovereignty takes precedence over the profits of multi-national banks.
10. Borrowing from the Fed’s discount window becomes public after 30 days. No exceptions.
11. Banks originating loans or bonds must keep at least 10% of all new issues. This way, if the crap they’re peddling will go bust, it hits them as well.
Those are just a few ideas off the top of my head. NB that nowhere in there did I talk about limiting profits, limiting salaries or anything else of the sort.
I agree with all the points you make.
How is that small Government?
Your comments remind me of General Smedley Butler:
War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses.
I believe in adequate defense at the coastline and nothing else. If a nation comes over here to fight, then we’ll fight. The trouble with America is that when the dollar only earns 6 percent over here, then it gets restless and goes overseas to get 100 percent. Then the flag follows the dollar and the soldiers follow the flag.
I wouldn’t go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights. War for any other reason is simply a racket.
There isn’t a trick in the racketeering bag that the military gang is blind to. It has its “finger men” to point out enemies, its “muscle men” to destroy enemies, its “brain men” to plan war preparations, and a “Big Boss” Super-Nationalistic-Capitalism.
It may seem odd for me, a military man to adopt such a comparison. Truthfulness compels me to. I spent thirty- three years and four months in active military service as a member of this country’s most agile military force, the Marine Corps. I served in all commissioned ranks from Second Lieutenant to Major-General. And during that period, I spent most of my time being a high class muscle- man for Big Business, for Wall Street and for the Bankers. In short, I was a racketeer, a gangster for capitalism.
I suspected I was just part of a racket at the time. Now I am sure of it. Like all the members of the military profession, I never had a thought of my own until I left the service. My mental faculties remained in suspended animation while I obeyed the orders of higher-ups. This is typical with everyone in the military service.
I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefits of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912. I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested.
During those years, I had, as the boys in the back room would say, a swell racket. Looking back on it, I feel that I could have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.
If Congress were serious about their job of regulation to prevent harmful and abusive practices, your proposals are all no-brainers. And not a single one of those regulations impedes legitimate capitalization practices. But then again, we know Congress, both Rats and Pubs, care almost nothing about our country, but instead care most about being re-elected. And being re-elected requires prodigious campaign baksheesh paid by the foxes to the hen-house keepers.
Really, your proposals are nothing but anti-gambling provisions, because the practices your proposed regulations seek to rein in are indeed nothing more than gambling and serve no legitimate financing purposes.
And while we’re at it, we should fix the abusive practices in the stock market, where 70% of all trade positions are held less than a second. After all, almost current stock market practices have no legitimate finance purpose and serve only as a form of gambling. Here’s a few proposed regulations (I’m sure you can come up with some others):
1. All stock positions have to be held for at least one business day.
2. No trade order that has been placed can be cancelled for at least one minute.
3. All futures contracts require physical delivery upon expiration.
4. No futures put contract may be sold unless you own the underlying commodity.
5. Naked put and call options are illegal.
The only way to go back to “small government” in financial regulation would be to go back to a situation where failure was fatal and there was no Federal Reserve. The Fed is what props up banks when they start to fail, starting with the discount window.
If there were no Fed, there would be no “lender of last resort” and a bank that got into a liquidity crunch would be dead.
I’d be cool with that, but it isn’t going to happen. The bankers themselves like having a “bank of last resort” and bankers own the Fed (not the US taxpayer). So the Fed isn’t going away.
If the Fed doesn’t end, then the zombies are left walking the financial landscape, and that means that we need to regulate their behavior.
I’d go after HFT with a either a transaction tax or a technical regulation. Don’t create regulations which mandate that you own shares for a minimum amount of time... because down that road is madness.
To eliminate HFT, all we’d need to do is one or two things:
1. A transaction tax. Say, oh, a penny a trade (sale or buy). HFT immediately ceases to be profitable, so they stop it.
2. Require that all bids put out onto the wire be active for one minute. If you offer to buy a stock, you have to have your bid out there for one solid minute, or until you get a fill. Whammo, HFT tape-painting is over, and without that, HFT’s start running into serious risk and it’s over. This is essentially your #2, and I agree with it vehemently. Just add “or until filled” and it’s good.
As to your other proposals: I’m not sure of your proposals, esp. 3, 4 and 5 where the commodities markets are concerned. If you’re talking about stock or index futures markets... then physical delivery doesn’t make as much sense, so I think you’re talking about commodities: Here’s my explanation:
Your #3: You should allow cash settlement, because it’s necessary. Let’s say you’re a farmer. You’ve sold a contract on corn to deliver in the winter as part of your marketing program. Your corn crop is in the ground and it’s July.
This hits your #4 as well, as the farmer doesn’t have the corn *yet*.
You don’t have the corn yet, but you’re actively “long” corn as you’ve invested in putting seed into the ground.
A hailstorm comes along and wipes out your corn crop. You won’t have the corn to deliver on the contract unless you reach out into the market to buy physical *and then store it* until you can deliver it on that contract. That’s additional expense and hassle. Just settle the contract for cash and be done with it.
To your #4, per the above: Farmers (and others) need to sell contracts as part of their marketing plans. They might not have the commodities in hand at that time, but they’re producers of said commodities and should be able to sell contracts in advance of harvest (or mining, or logging, etc) to capture good prices for their products. This is the very nut of the commodities markets. If producers cannot sell contracts ahead of harvests of the physical commodities, then there is simply no reason for the commodities markets to exist and we should go back to cash marketing.
To your #5: Naked put or call options are very useful instruments for buying or selling the markets. If a consumer of commodity “X” would love to buy a huge quantity of “X” if the price were to drop that low, then all he has to do is sell a put. If the price drops that low, he gets assigned - but if it didn’t, he got paid for waiting.
I hate to break it to you, the Fed is not going away anytime soon.. Sorry banks is already regulated to death.. You can’t be for small Government while calling for more regulation on a business.
So you quote a guy who is ranting and raving against capitalism?? I think you belong at DU.. Comrade..
I knew you could do much better than me with the stock market regs. Your transaction tax works much better than my hold time limit, though such a tax is a significant “camel’s nose under the tent flap” issue, because the financial transaction tax is one of the holy grails of world communism/socialism/progressiveism. An alternative approach could mandate a special per-share fee paid to the market-maker for short-duration transactions, or maybe just a minimum transaction fee, period. Such a fee doesn’t hurt legitimate investors but still makes HFT unprofitable. Not to mention that the market-makers themselves would be onboard for such a proposition.
And you accurately point out the problems with my simplistic futures proposals. Perhaps buyers and producers of physical commodities could be certified somehow before being allowed to trade, that is, they must offer some kind of proof that they do or intend to produce or that they do or intend to consume.
However, I still see no truly useful purpose for naked calls and puts other than for leveraged gambling.
He is against crony capitalism. I do like your approach to conflicting ideas. Purges and elimination of free speech, yes, that’s the ticket to thoughtful debate!
Well then, if the Fed isn’t going away, then the normal corrective processes of the free market won’t correct stupidity in the banking sector.
The correct action of the free market is to put stupid people out of business. As long as the Fed is around, stupid bankers will survive... and that’s why they’re going to get regulation.
If we were in a meeting room, I could explain the purposes of naked option positions much better than just typing it out. Options aren’t bad instruments, and many small investors would do much better at investing if they learned to use them.
I use naked put positions on stocks all the time. When a stock has gone down hard in a relatively short amount of time, (example: AAPL), one way you can try to buy the stock even more cheaply would be to write a naked put. The historical volatility (ie, the rapid decrease in price) is part of what will make the put’s price go up over the short period of time - eg, look at put options under the current price of AAPL. You see that they have very lush valuations.
OK, so let’s say that you want to buy AAPL at a cheaper price than now? Write a naked put under the current price. If the price of AAPL continues lower, you might get assigned (forced to buy shares of AAPL at the strike price), but you also get to keep the option contract price, which effectively reduces the price of buying the stock.
Real numbers from today’s close: Stock price of about $455.
Let’s say you want to get AAPL at something closer to $400, effective price. OK, let’s look at the options for a June expiration, which gets you a pretty nice piece of time decay in the option contract. Write naked options expiring June 21st for a $415 strike, and you get a premium of $12.35/share. If AAPL gets down to $414.90 or lower and stays there into June 20th, you’ll get assigned, (ie, forced to buy X shares of AAPL at $415) and you get the $12.35/share premium to keep, which brings down your cost of buying those shares to closer to $400.
If you want to eliminate “leveraged gambling,” then you’d have to go after not only naken options, but also single stock futures, various ETF futures (like the SPY futures) and various index futures. Futures in stocks and financial instruments are closer to gambling than options, IMO, because options have other purposes than just speculation. Options are ways of capturing and buying/selling volatility, hedging, forcing buys or sales of stocks, etc.
As for transaction tax vs. hold time limit - I’d prefer that a bid has to remain up on the tape for at least a minute or something similar. It’s a pretty simple fix and it guts HFT straight away. The transaction tax could also be used to make various bespoke (non-listed) instruments effectively non-profitable and eliminate them from the markets, but I agree with your assessment that it’s a camel’s nose of a thing.