JPMorgan’s Senior Officers’ Addiction to Gambling on Derivatives
ritholtz.com
...Big wins from gambling in financial derivatives can only come from enormous, extremely risky gambles. A bank that makes enormous, extremely risky gambles is a bank that desperately needs to have its senior management team removed – immediately – and that is true regardless of how those bets turn out in any particular year. There is no conceivable social purpose to providing the explicit federal subsidy of deposit insurance and the (much larger) implicit federal subsidy of “too big to fail” that all SDIs enjoy to a bank so that it can take massive gambles on financial derivatives. The Jamie Dimons of the world know that if they win the gambles they will be made immensely wealthy and that when they lose the gambles massively the federal government will bail them out. Every gamble a federally insured bank (or an implicitly guaranteed SDI) takes is a gamble with government money. Bank leverage is always extreme in the modern era; it vastly exceeds the reported (and often inflated) capital. The government is the true creditor through its explicit and implicit guarantees of the bank’s creditors...
The reality is that Dimon is running the largest hedge fund in the world and that, in economic substance, he is gambling with our (federally-guaranteed) money on huge positions in financial derivatives. If he continues these bets, it is only a question of time before JPMorgan suffers catastrophic losses and we have to bail out the bank’s creditors. True conservatives support the Volcker rule because they agree that we should not be subsidizing a government sponsored entity (GSE) like Fannie, Freddie, or JPMorgan, to bet on financial derivatives. The NYT reporters do not even seem to understand the issue, even though it is central to the Volcker rule...
So we have a bank whose senior officers claim not to take any speculative bets, but who in reality not only have been making enormous bets for at least four years and have greatly and contemporaneously increased the risk of those bets along multiple dimensions. Neither JPMorgan’s senior managers nor the regulators took any meaningful action to prevent this massive, increasing addiction to ever riskier gambling even though investments in fraudulent mortgage-backed derivatives (the “green slime”) drove the ongoing financial crisis. What would it take for senior bankers and regulators to learn the most important lessons of the ongoing crisis? The derivatives scandal at JPMorgan did not begin a few months ago – it began at least as long ago as 2008 when the CIO made increasingly large bets in financial derivatives. A competent investigations would likely show that the bets began far earlier than 2008...
JPMorgan is in trouble because Dimon and his senior managers are addicted to gambling on financial derivatives with our money. The lesson they learned from the ongoing crisis is that they could get away with this. If they continue to gamble on financial derivatives it is only a matter of time before they suffer catastrophic losses. It is imperative that the SDIs be shrunk to the size that they no longer pose a systemic risk and can be closed without bailing out their creditors. The regulators need to replace Dimon with a manager who is not addicted to exploiting federal subsidies to gamble on financial derivatives...MORE...LINK
No comments:
Post a Comment