Bill Black: JPMorgan’s “Wild, Crazy Insane Gamble” Puts Global Economy at Risk

[marmar]

Jamie Dimon was not on Capitol Hill Tuesday but he and JPMorgan's big loss were center stage at a Senate Banking Committee hearing.

"The company's massive trading loss is a stark reminder of the financial crisis of 2008 and the necessity of Wall Street reform," said Committee Chairman Tim Johnson (D-SD).

The Securities and Exchange Commission is looking into the "appropriateness and completeness" of JPMorgan's "financial reporting and other public disclosures," SEC chairwoman Mary Schapiro told the committee.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said the CFTC is also investigating trades that led to JPMorgan's loss of $2 billion -- and counting. ..............(more)

The complete piece is at: http://finance.yahoo.com/blogs/daily-ticker/jpmorgan-wild-crazy-insane-gamble-puts-global-economy-190421884.html

[coalition_unwilling]

1. FWIW, Bill Black is a prof of economics at the U. of Missouri-Kansas City (my

alma mater). I believe Black joined the faculty after I had left, as I do not remember him from my (student) days there (late 70s-mid 80s).

[dixiegrrrrl]

5. the same William K Black that investigated the S&L fraud.........

I do believe the article affirms.
Wish we could have him in charge of the SEC.

[coalition_unwilling]

6. Not sure. I'll check later today and PM you if I find

an answer.

It does sound familiar, now that you mention it.

[marmar]

7. It's the same Bill Black.

nt

[dixiegrrrrl]

8. I edited my post after finding his blog....

which I am reading now. Excellent blog, adding to my list of must reads.

[alcibiades_mystery]

2. I've read upwards of 65, 70 articles on this trading loss

I have yet to see one decent explanation of the structure and nature of the deals that led to it (and continue feeding it). Not one. Not in the New York Times, or Wash Post or Economist or WSJ. Nobody explains how these deals are supposed to work, what underlies them, what the deal makers are trying to achieve, and how, and how it goes wrong, or who the counterparties might be, nothing. Nothing. They say "outsized bet." On what? They say "betting on derivatives." What derivatives? How so? Nobody ever explains how these fucking deals are supposed to work.

It's fucking ridiculous journalism. Most of us know why the space shuttles blew up, in fairly fine grained technical detail. That's because the news explained it ad nauseum. There were models, images, diagrams. There were detailed process descriptions. Are we to believe that rocket science is less complicated than derivatives trading? I don't fucking think so...not given the know-nothing dumbfucks I've known who were successful derivatives traders. So why can't the fucking news explain this shit?

[DCKit]

3. From what I understand, it was the "insurance" arm of JP Morgan.

They were supposed to cover the financial bets of the other groups. Then Jamie Dimon demanded they make ever-riskier bets to increase their own group's profitability.

In other words, Jamie Dimon is an incurable gambling addict, totally willing to take down the economy for the rush of it.

[ljm2002]

4. You ask whether derivatives trading is more complicated...

...than rocket science?

From what I can gather, indeed it may be.

The reason is, rocket science is constrained by the actual laws of physics, whereas derivatives are constrained only by the imaginations of the bright boys (yes they are overwhelmingly males) who dream them up. They are PhD level mathematicians who cash in by selling their services to the financial sector, and they are given free rein to invent anything that will siphon $$$ up to their employers. Deregulation has allowed them more latitude in this endeavor. For example, banks don't need to have adequate reserves to cover losses when things unravel (see, for example, the case of AIG).

These guys invent extremely complex systems, that are executed by rapid computer trading, and whose sole purpose is to optimize the return to the originating organization. The systems are not well understood as to their side effects in the overall market, as the models do not have to obey any hard and fast rules -- there are no physical laws to be adhered to (*). Neither are they well understood as to their downside potential. All that is well understand is the upside. It doesn't matter to them anyway, because when the system doesn't work and their backsides are exposed, they know that some government somewhere will cover their bare asses back up.

(*) The laws they do have to adhere to, are laws created by governments -- and these laws did not foresee the clever packaging and complex interactions that would be created.

[dixiegrrrrl]

9. also the laws they DO have to adhere to

as Mr. Black expains in his blog, has loopholes that make the law ..unlawable.

"Jamie Dimon leads the banking industry’s opposition to the Volcker rule.
Dimon has a three-part strategy:
stall the Volcker rule, gut its effectiveness by creating a massive loophole, and get the rule repealed by a future Congress.
The loophole takes advantage of the fact that the Volcker rule was not intended to prevent banks from using derivatives to create (true) hedges.
The current draft of the rule, however, renders the rule useless because it allows banks to call non-hedges “hedges” – it adopts a standard I call “hedginess.”
http://neweconomicperspectives.org/2012/05/jpmorgans-senior-officers-addiction-to-gambling-on-derivatives.html#more-2328

[coalition_unwilling]

10. They aren't 'deals' in the traditional sense of the term. Instead, they are 'bets' that

a certain sector of the market (in this case interest rates, IIRC) will go up or down. These 'bets' have counter-parties who are betting on exactly the opposite outcome. Used properly, derivatives can be a useful tool for hedging risk. The problem here is that the size of the bets (can't remember if they were bets that interest rates would increase or decrease) were out-sized and all in a single direction. Such that, instead of hedging risk, JP Morgan's trader actually amplified its risk.

In other words, JP Morgan's own risk management unit (the unit that manages JP Morgan's own risk profile) was asleep at the wheel, it would seem. Black argues that federally insured entities like JPM should not be allowed to 'gamble' in the market without strict federal supervision. Essentially he's arguing that if JPM's own internal risk management unit can't do its job, then the FDIC or Fed should do JPM's job for it.

I have read some good explanations of this imbroglio on niche sites (like SeekingAlpha.com, Zerohedge.com and NakedCapitalism.com) that are couched in terms a layperson can understand, once you get past the alphabet soup of acronyms the derivatives market seems prone to. I did not bookmark any of them, but PM me if you would like me to try to find them for you.

[librechik]

12. it's difficult to diagram, explain or blueprint the gigantic golden loom

that spins the thread for the Emperor's invisible clothes. It's invisible too.

[xchrom]

11. Du rec. Nt