Posted on 05/27/2012 6:29:16 AM PDT by TigerLikesRooster
Former FDIC Chief Bair: JPMorgan Worth More in Pieces
Friday, 25 May 2012 12:13 PM
By Forrest Jones
JPMorgan Chase and all other big banks should be broken up, says Sheila Bair, former head of the Federal Deposit Insurance Corporation.
Big banks today are hard to manage, as evidenced by JPMorgan's recent $2 billion hedging loss, and they don't add too much value for shareholders anyway.
Breaking them up would benefit all involved and create a more efficient financial services industry, Bair writes in a Fortune column.
"Whatever economies the megabanks achieve from their size are more than offset by the challenges in managing trillion-dollar institutions that are into trading, market making, investment banking, derivatives, and insurance, in addition to the core business of taking deposits and making loans," Bair writes.
(Excerpt) Read more at moneynews.com ...
P!
She’s been right about a lot.
While we are at it, let’s break up the EPA, DEA, IRS, HUD, DOE (Energy AND Education), SSA, GSA, DHS, DOA, and on and on and on and on and on and on.......
Another advantage of breaking JPM into smaller pieces is that it helps get rid of this policy:
“’Too big to fail’ is an American English colloquial term in regulation and public policy describing certain U.S. financial institutions as so large and so interconnected that their failure will be disastrous to the economy, and therefore the federal government has a responsibility to support them when they face difficulty.”
Too big to fail has screwed the middle class of this country. Well, if it is a sensible reform she is recommending, we can be certain that won’t happen. :)
It's open season on Dimon because he dared to not drink the koolaid. And that was after he made wall street fraternities look like the petty cliques they are.
RUMORED $2 billion hedging loss will found to be at least twice that before it's all over.
There is also an idea circulating that they could afford to lose $31.5 billion before they would have to suspend their share-repurchase program.
They suspended their share-repurchase program (as their share price was declining, which would ordinarily be an incentive to repurchase shares).
Therefore, the conjecture is that they have lost more than $31.5 billion.
The first thing that has to be corrected is the notion that JPM’s losses were connected to a “hedging” strategy or position.
They were not.
It was outright, naked speculation.
How do we know it was not a hedge? If it had been a real hedge, then the losses would a) not be so large and b) the street wouldn’t be wondering how much larger these losses are going to become.
That’s because a true hedge would have offsetting gains in the underlying position. An example of a true hedge would be that Banker Bob owns a large position in the sovereign debt of Dirkadirkadirkastan. He wants to hedge against a default.
So he can hedge this one of several ways: He can buy CDS on the paper (if offered), or he can set up a derivative trade on the “spread” between the interest rates in the markets of Dirkadirkadirkastan’s debt and a benchmark yield (eg, the US 10-year Treasury). If DDDS’ debt goes down in value, the spread will blow out (ie, DDDS’s yield will shoot upwards - much the way Greek debt has done) and in some non-zero, hopefully-greater-than-0.5 correlation, the hedge, properly constructed, will offset the loss in the underlying position.
Let’s say that the reverse happens: Dirkadirkadirkastan’s debt goes up in value (against all odds) because they had an internal coup and they shot all the Keynesian economists on the government payroll (or sentenced them to forced labor in a gold mine to prop up their currency) - now the value of the hedge leg of the strategy goes down while the value of the underlying sovereign debt in Dirkadirkadirkastan goes up. It should be close to neutral, either way.
The fact that JPM’s position blew out so spectacularly, so quickly, means that it wasn’t a hedge - it was a naked, speculative position. The fact that the “London Whale” put on such a big position that he actually distorted credit markets is another indication that it wasn’t a hedge - the “hedge” positions outweighed the depth of the market in the underlying debt or spreads.
JPM should be broken up into at least two parts - one commercial banking, prevented from speculating with customer deposits, and the other side speculative and not backed by FDIC, et al insurance.
The reason these guys become TBTF is that moral hazard has been official government policy for thirty years — they get bailed out every time by the crony capitalists who happen to be on the government side of the revolving door of the banking-government complex at the time.
In my fantasy world, we would somehow rid ourselves of this corporatism so that the next banking “diaster”, whether it really is one or is simply called that by whoever is in the Hank Paulson / Alan Greenspan role at the time, will play out as it’s supposed to: bankruptcies and pies in the faces of bondholders without harm to FDIC-insured depositors. That would break them up or make them smaller without any official government action being needed.
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