Glad We Saved 'Em
It's impossible, after the taxpayer-backstopped interventions into the financial markets in 2008 and 2009, to read this story without getting just a little bit cranky.
JP Morgan, the giant -- and mismanaged -- investment bank, reported a $2 billion loss a week or so ago, because of risky trades in one of its own accounts. An account, hilariously, that was designed to be a hedge against other, riskier, accounts.
Who was in charge of risk management for the bank? From Bloomberg:
The three directors who oversee risk at JPMorgan Chase & Co. (JPM) include a museum head who sat on American International Group Inc.’s governance committee in 2008, the grandson of a billionaire and the chief executive officer of a company that makes flight controls and work boots.
What the risk committee of the biggest U.S. lender lacks, and what the five next largest competitors have, are directors who worked at a bank or as financial risk managers. The only member with any Wall Street experience, James Crown, hasn’t been employed in the industry for more than 25 years.
Okay, stipulated: JP Morgan is a publicly-traded company. If the shareholders want to get rid of the incompetents who manage the bank, they should move to do so. None of my business. (Well, actually, it's some of my business: I own some JP Morgan shares....)
But let's all remember this episode the next time the banks come, hat in hand, for taxpayer-subsidized bailouts.
I've said it before in this space, but it bears repeating: the only -- only -- banking regulation that's effective is the sight of bankers selling apples on the street.
Next time, let them sink.
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Comments:
May '10
Re: Glad We Saved 'Em
I agree!
Dec '11
Re: Glad We Saved 'Em
I would agree Rob, if the government hadnt been directing the banks to get into the handbasket to hell. At some point the government and vicariously the voter and taxpayer that elects it, had a share of the liability. Morally if the government doesnt want to bail the banks out, it shouldn't be directing risky behavior. If it is going to direct risky risky behavior, than it has a moral obligation to a portion of the clean up work. All in all, lending 700 billion is probably as light as the government and vicariously the taxpayer and voter should have gotten off in the multi trillion dollar affair.
I am all about not bailing out bankers, and that requires me to be against telling them that they have to engage in risky behavior or face sanctions. You can't have the regulations, without the implicit garuntee to make it right when it goes bad.
Apr '11
Re: Glad We Saved 'Em
I agree with you Rob, in the sense that if we do bailout a Bank the first thing we should do is go in and punish the people who ran it. If your children let the house catch on fire because they where being irresponsible, you don't let the house and them burn down. After you save them and as much of the house as possible you punish them. It will serve to remind them in the future to be less foolish.
Apr '11
Re: Glad We Saved 'Em
I've always told my friends who complain about such things:
"If we reward people who made stupid decisions, why are we surprised and upset when they continue to make stupid decisions?"
May '10
Re: Glad We Saved 'Em
Should be a bumper sticker
Mar '11
Re: Glad We Saved 'Em
While I absolutely agree with you, it'll never happen because regulation isn't about "saving the market". It's about punishing high earners... it's all so unfair, you know... and it's also about having a carrot and stick that narcissists like Chuckie Schumer can use to manipulate markets, punish enemies, and reward toadies. That's not a weapon they'll ever give up willingly.
Re: Glad We Saved 'Em
There is one thing that we might do before we opt for Rob's form of regulation. We might break up these banks so that none is "too large to fail."
May '10
Re: Glad We Saved 'Em
Oh no, it's Occupy Ricochet...
This is the definition of an incident that's been drummed up by the media into a lot more than it is. Republicans should not keep falling for Lucy's football trick.
1. Banks take risks, they make mistakes, sometimes they lose money. That's what they're supposed to do.
2. This bank was forced to take bailout money. They didn't want to, and they didn't need it.
3. With the loss, the bank will still likely make a profit for the quarter. Their typical quarterly profit is $4+ billion.
4. The bank is far from sinking.
The big takeaway from this should be: they fired the person responsible. Contrast that to Dodd Frank...
Jan '11
Re: Glad We Saved 'Em
Tuck:
1. Banks take risks, they make mistakes, sometimes they lose money. That's what they're supposed to do.
Yes, but that's why the lack of Wall Street experience is so damning.
Education may help you identify what factors are involved in a decision. Intelligence can compile facts and create logical models, and they may even succeed most of the time.
But experience teaches you how to weigh each factor, and experience sifts through the factors to see what's really important versus what seems momentarily to be important.
Could the most experienced banker have prevented the loss? Maybe not. But the mere fact that these people weren't experienced suggests that maybe they shouldn't have been in charge of billion-dollar gambles.
May '10
Re: Glad We Saved 'Em
We keep slipping into Bachmann Syndrome on this. 1) Of course, Rob is right about the proper fate of the idiots responsible. 2) Of course, we hate the idea of bailouts.
But- TARP was not instituted or voted in because we wanted to rescue careless bankers or preserve their bonuses. It was reluctantly implemented because we were afraid that the alternative was a collapse of the banking system under a domino effect caused by inadequate capital reserves, due to reduced value of shaky assets (collapse in housing prices after an extended run-up). The problem wasn't the derivatives, it was the underlying assets. TARP was reluctantly accepted by a large number of pristine free-market, conservative economists (including Ricochet's Prof. King Banaian). The derivatives involved simply masked the underlying problem for too long, making the rescue therapy more painful than necessary. It was badly implemented, because we put Wall Street banker Paulson in charge of "policing" (protecting) his friends.
The solution is, of course two-fold, and hated by every big banker out there (and who cares what they think?): 1) break up the banks into "OK to fail" size, and 2) increase capital requirements.
Re: Glad We Saved 'Em
Duane Oyen: We keep slipping into Bachmann Syndrome on this. 1) Of course, Rob is right about the proper fate of the idiots responsible. 2) Of course, we hate the idea of bailouts.
But-TARP was not instituted or voted in because we wanted to rescue careless bankers or preserve their bonuses. It was reluctantly implemented because we were afraid that the alternative was a collapse of the banking system under a domino effect caused by inadequate capital reserves, due to reduced value of shaky assets (collapse in housing prices after an extended run-up). The problem wasn't the derivatives, it was the underlying assets. TARP wasreluctantly accepted by a large number of pristine free-market, conservative economists (including Ricochet's Prof. King Banaian).
The solution is, of course two-fold, and hated by every big banker out there (and who cares what they think?): 1) break up the banks into "OK to fail" size, and 2) increase capital requirements. · 33 minutes ago
Hey, Oyen! Stop making sense, okay? Can't a guy just vent irrationally once in a while?
Jul '10
Re: Glad We Saved 'Em
You cannot address the current knot of fubar without radical surgery on the legal and regulatory climate, and perhaps a constitutional amendment preventing the government from buying equity positions in private institutions. The federal government has radically distorted the risk environment and turned the banker's job into pleasing the mandarins in Washington. They have to to protect their shareholders.
Mar '11
Re: Glad We Saved 'Em
Guruforhire has an important point. The market that generated so many toxic assets was essentially being forced to extend credit to people who couldn't afford it or get out of the business of offering credit to people who could. When the bubble burst (as all bubbles do), the banks who were still in that business were threatened as were the banks who had lent money to the first set of banks.
Increasing capitalization of the banks can't hurt, but the banks have to be able to limit or refuse credit to prospective borrowers. Either that, or the ability of people who can afford mortgages won't be able to get them.
I really didn't know until now that Honeybucket makes work boots.
Dec '10
Re: Glad We Saved 'Em
Percival:
Increasing capitalization of the banks can't hurt, but the banks have to be able to limit or refuse credit to prospective borrowers.
Ah, but aren't they doing that already? Everyone is complaining that banks are currently sitting on their money because they can make a risk-free percentage by cycling t-bills or something, right?
Mar '11
Re: Glad We Saved 'Em
Karl,
Yep, they aren't loaning out the money like they were. Some of the smaller (and frankly less competently run) lenders are out of the game. I'm not sure how they are getting around lending to the bad risks that they used to have to take on. I'm pretty sure that nobody has been getting into the business though -- not when the housing market is this soft. I do know that the banks who were making loans faced stiff sanctions from the Feds if the Feds decided that their lending was "discriminatory."
May '12
Re: Glad We Saved 'Em
You might say its the lesser of two evils, but the whole situation still leaves a bad taste in your mouth.
Duane Oyen: We keep slipping into Bachmann Syndrome on this. 1) Of course, Rob is right about the proper fate of the idiots responsible. 2) Of course, we hate the idea of bailouts.
But-TARP was not instituted or voted in because we wanted to rescue careless bankers or preserve their bonuses. It was reluctantly implemented because we were afraid that the alternative was a collapse of the banking system under a domino effect caused by inadequate capital reserves, due to reduced value of shaky assets (collapse in housing prices after an extended run-up).
May '10
Re: Glad We Saved 'Em
"Yes, but that's why the lack of Wall Street experience is so damning."
It's unlikely the directors of the bank would have been informed of the details of a hedge like this...
"Can't a guy just vent irrationally once in a while?"
Once in a while. ;)
Aug '11
Re: Glad We Saved 'Em
I'm gonna go ahead and agree with Tuck on this one. The JP Morgan thing is a big deal, but that's what happens in banking. I think the WSJ article about how the Volcker (spelling?) rule would probably not have prevented this was also instructive.
However, I do agree with Rob Long:
Rob Long: I've said it before in this space, but it bears repeating: the only --only --banking regulation that's effective is the sight of bankers selling apples on the street.
Next time, let them sink. · · 19 hours ago
But we aren't going to let them sink. With all this financial legislation we've got an implicit "too big to fail." And we are going to have another set of independent bureaucrats on a banking commision "watching over" (read: getting in bed with) the big banks. What will their incentive be? To avoid a financial collapse-- there will be nothing but stealth bailouts for the most well connected from now on. Again. This isn't a left-right issue. This is simply what happens when gov't gets away from the people and into the hands of regulators.
Sep '11
Re: Glad We Saved 'Em
A small addendum to Mr. Oyen's excellent analysis; a fundamental piece of any financial system is price discovery. No one knew what the derivatives (or their underlying assets) were "worth", and that is what locked everything up. TARP, at least as originally sold to us, was supposed to simply buy the assets at a discounted rate and allow everyone's panic (and balance sheets) to calm down, and then resell back into the market when we figured out the world wasn't ending. Of course, it became much more than that, and those additional measures are what we get our knickers in a twist about.
We force banks to do stupid things (Community Reinvestment Act, etc.) and then they double down on reckless, and we get 2008. The phrase we need to re-introduce to our financial system is "moral hazard", not "Dodd-Frank".
And yes, of course you are allowed an irrational rant on occasion, Rob. So long as I am allowed the same privilege (and I think your occasions will be far fewer than mine).
May '10
Re: Glad We Saved 'Em
Oops- I've offended Rob, even though I agree with him that selling apples in the street is the appropriate vocation, post-crash. I'd be a miserable comedy writer; I don't know when to let the punch line marinate without comment.
It is interesting, though- every decade has the (while conforming to each other in their echo chamber) "non-conformists", who then, in the next decade, become part of a somewhat degraded "establishment." The '40's crowd embraced Stalin, then ran all the NY magazines in the 1950's. The "beats" of the '50's became anti-nuke journalists in the '60's, the Woodstockers all got PhDs and ruined higher education, and the post-Watergate "reformers", after destroying the US two party system, got finance degrees and screwed up the investment banking business with skimming games on Wall Street as 1980's Yuppies.
Notice that not one group ever created substantive value- nothing you could eat, wear, drive, plant, or cure someone with. The finance crowd was worst- they pretended to embrace capitalism, and they created pieces of paper that they would sell back and forth to each other without ever looking for a real price.