Risky Bank Investments and The U.S. Economy
http://thedianerehmshow.org/shows/2012-05-14/risky-bank-investments-and-us-economy
JP Morgan Chase’s chief technology officer, Ina Drew, retired this morning following last week’s disclosure that recent trading losses would cost the bank at least $2.3 billion. The losses, described by CEO James Dimon as “ a terrible egregious mistake”, have reignited debate over what new rules are needed to limit risk at government insured banks. Please join us to discuss managing risk and too big to fail banks.
Guests
Greg Zuckerman
reporter, Wall Street Journal
Michael Greenberger
director, Center for Health and Homeland Security at the University of Maryland; former senior regulator, Commodities Futures Trading Commission.
Gretchen Morgenson
Pulitzer Prize-winning business reporter and columnist for The New York Times; co-author of the book, “Reckless Endangerment”
Kathryn Dick
managing director, Promontory Financial Group
Comments
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Great link, no politics involved.
The Dodd-Frank act
Too big not to fail
Flaws in the confused, bloated law passed in the aftermath of America’s financial crisis become ever more apparent
http://www.economist.com/node/21547784
"The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173) is a federal statute in the United States that was signed into law by President Barack Obama on July 21, 2010"
Check date of Dodd Frank vs Wall Street crash.
DEREGULATE - DEFRAUD - DENY
If this worst case scenario plays out, it would reduce their earnings by almost 10% and impact their cash reserves by nearly 2% of total cash on hand! With losses of this magnitude, the entire economy might implode!
The fact that Dimon admitted there was a problem is a start, but as a member of the Occupy movement (by no means representative), I have to ask the question of why he and members of the investment team using the London Whale's strategy didn't pull out of the plan when they noticed they were starting to hemmorhage money. In poker, if you know you are starting to have a bad hand, you don't go all in. It appears in this case that the group was going to push more money and wait out the losses with the hopes that they'd get all of the investment back. From my view, it seems Dimon said "no, this can't happen again, we've lost bad, we need to cash our chips." Even though 2 billion isn't much considering how profitable and thriving JPMorgan Chase may be in comparison to other banks that played a similar game and lost in 2007-2008, this is a major loss in the eyes of the public who thought that big banks and businesses learned from the crash.
When you consider two of the main characteristics of human nature: greed and dishonesty, what can you expect? Human nature is the human characteristic that cannot be changed. The only thing that can be done is to have laws in place to prevent such behaviour. And even then we still have the same problem, because even those designated to enforce those laws can be corrupted. Is there a solution?
Apart from eliminating the human race, there is no obvious solution. The idea that the markets can solve all economic problems has been proved, time and again, to be a total failure.
Mr. Dimon keeps his job? And he sits on the NY Fed Board to boot?
Just another fine example of the "free hand" of the market, I suppose.
Disgusting.
We have yet to see one sub prime loanster or foreclosure fraudster prosecuted by the Obama administrations dept of justice or the US congress. This most recent example of JP Morgans blunder fuels the need for more regulations and oversight.
I have said for over two years that this is Obama's achilles heel in this upcoming election.Can any of your guest explain why we have not witnessed one prosecution of those who brought the US economy to its knees? Please do not say that no laws were broken. According to Professor William Black there are plenty of ways to prosecute those who knowingly committed financial crimes
And will the Rehm team please have Professor William Black on your program to discuss the lack of accountability. He has said that during the Savings and Loan debacle that his office at the time put together over 10,000 prosecuturioal referrals and over 1000 prosecutions.
I'm not certain you're wrong. The Gramm, Leach, Bliley Act and the change of gaming law in 2000 seems to have opened the door to reckless behavior.
I do agree they're criminal by any other standard.
I'd like to know what the specific investments were. Were they "Naked Credit Default Swaps"? Any truth to the rumors Chase was betting that Greece might default? What exactly did Chase invest in that has lost so much value?
Diane, could you please ask your guests about allegations about JPM manipulation of the precious metals markets and what effects this might have on the recent problems at the bank.
The truth of this situation is that the new federal regulation worked. JPM (and all other banks) were forced to increase their cash reserves exactly to prohibit over-leveraging. From the perspective of their P&L and/or their balance sheet, this is a non-event.
Before you complain about the complexity of Dodd-Frank or the Affordable Health Care Act or any other major federal law, remember this: if companies followed the spirit of the law and didn't look to gain advantage from any small flaw, most of the pages of regulations issued would be unnecessary. I will never forget the tax court case where a Fortune 100 company argued that a concrete block wall was not real estate but a "movable partition" eligible for a 10% tax credit.
When is the American public going to witness the Obama administration prosecute any of the individuals who "hedged" this nation to the economic edge? When? Please do not tell us that they do not have the power or ability? The question is does the Obama administrations Dept of Justice have the cajones?
Please have Professor William Black on your program to discuss this lack of accountability?
Accountant is that the same Dodd Frank pair that helped the sub prime loansters "hedge" this nation to the economic edge?
Naked credit default swaps? You shouldn't be able to bet other people's money without their consent on instruments that have no ownership interest whatsoever.
According to Wikipedia, the "European Parliament has approved a ban on naked CDSs, since 1 December 2011, but the ban only applies to debt for sovereign nations."
That may not be enough, but at least they've put some limit on it. In the futures exchange market you have an ownership interest, which is the ability to buy or sell the subject of the future (corporate stock, cattle stock, hog-bellies, whatever). Here you are making money on something you have no interest in. This is just like Las Vegas, or spectators at the Kentucky Derby.
Would it not be a good idea to talk to Mr Wynn of Las Vegas who deals with gambling, huge amounts of money, losses that are not bailed out? As a professional, I doubt he gambles. I have opposed the expansion of gambling in all forms in Wisconsin - banks taking these kinds of risks that cost us our investments like gamblers losing their homes. Bring back Glass-Steigel.
On Wall Streets ability to "privatize their profits and socializing their losses" The working class and students are waiting for the same deals. The same deals. Or we want to witness real accountability!
It might also be like buying insurance on someone else's life, in that it may create temptation to influence the market one way or another in order to make a profit.
The banks may be able to control the mortgage market by toughening or relaxing their action on past due payments.
Can I bet on whether my neighbors will pay their mortgages? It's the same thing.
It's not a Naked Credit Default Swap, it's a bet! There is a volunteer firehouse here seeking permission to run Bingo in order to pay for the cost of running the fire department. They have to ask permission but JP Morgan doesn't?
Who wants to take a bet on the outcome of the Presidential Race? That couldn't possibly be illegal!
Taxpayers are upset by this story because, A), it sounds too familiar to 2008, but more than that, B), the enormous amounts of $ here, represented by phrases like "$2 billion is a drop on the bucket" when most Americans won't make much more than 2 million dollars in their LIFE TIME, sticks in Americans'mind and imagination. Finally, C), both of these aspects rub working Americans' nose in the great gap between the top 1 or .5 percent and the bottom 50-75 percent while, in the same story, the logic of merit that justifies that gap is simultaneously exposed as patently false.
Neal
Lansing, MI.
"not enough enforcers" And the enforcers (the police) go arresst Occupiers instead of the banksters. Talk about a crisis in confidence.
Diane just said "not enough to go on" hooey
Whoa I think it was Greenberger who just said that there is "no phone number" for Obama's new "anti fraud task force" Ruh roh Obama...you better get serious or the November race is going to be even closer than you think.
Credit Default Swaps are complicated, and Naked CDS somewhat more so, but it's not rocket science nor brain surgery. NPR explained CDS and what went wrong in under an hour a couple of years ago. It was a clear, lucid explanation that anyone familiar with mortgages and banking in genertal could understand.
How can the CEO's of these companies get out of responsibility by saying that it was too complicated and they really didn't understand it. If a CEO can't sit down with the person proposing this "Hedge" and understand what it's about, then that CEO should step down or else not adopt the proposed position. These people are supposed to be the "best and the brightest"?
Really, allowing billions of dollars to be "bet" in a financial transaction you don't understand is .... [Things I can't say because my comment might get censored by someone scrupulously enforcing civility. Can I call it "an unwise choice"?
I have no problem with JP Morgan losing 2, 4, 8 billion dollars, as long as I, as a taxpayer, don't have to cover their losses and it's not account holder's money. Go ahead, JP Morgan, bet all you want on the riskiest investments you can, if you win GREAT you made a TON of $$$$. If you lose (which you did), don't look to me to fix it.
One email read toward the end of the show was far off the mark. Saying the loss wasn't that large given the firm's AUM is meaningless. The firm's own balance sheet is separate from depositors' money. The commenter might have had a valid point if JP Morgan had a balance sheet in the trillions of dollars range, which clearly it does not.
Hillman and Ventura put it well,
"I party therefore I am"
CONVIVO ERGO SUM
So, let's party (anywhere we can)!
Wise-fools and wise-psychopaths playing poker creating nothing other than lining theirs pockets and causing misery for others. Make no mistake either Government start to meets its intervening task in a mixed economy or sanitizes the financial sector to what banks task are in a mixed economy. Otherwise the wise-fools and wise-psychopaths in Central Banks and financial sector, will destroy the political economic model of western democracies. The underlying problem of course is ignorant and complacent voters accepting the hodgepodge and government failure. For instance the countries in Europe that joined the Euro model without prior political and fiscal integration –as any oxymoron set up to fail. Why not continue the march of stupid and lead of Robert Mundell at Columbia let’s make a monetary NAFTA union between Canada, United Sates and Mexico. I am sure that would render another Nobel Price from the Swedish Central Bank –“stupid is as stupid does " Copenhagen May 14, 2012. Kell Petersen
Wise-fools and wise-psychopaths playing poker creating nothing other than lining theirs pockets and causing misery for others. Make no mistake either Government start to meets its intervening task in a mixed economy or sanitizes the financial sector to what banks task are in a mixed economy. Otherwise the wise-fools and wise-psychopaths in Central Banks and financial sector, will destroy the political economic model of western democracies. The underlying problem of course is ignorant and complacent voters accepting the hodgepodge and government failure. For instance the countries in Europe that joined the Euro model without prior political and fiscal integration –as any oxymoron set up to fail. Why not continue the march of stupid and lead of Robert Mundell at Columbia let’s make a monetary NAFTA union between Canada, United Sates and Mexico. I am sure that would render another Nobel Price from the Swedish Central Bank –“stupid is as stupid does " Copenhagen May 14, 2012. Kell Petersen
The people who are trying to downplay the importance of this, and are still arguing we don’t need more regulation of Wall Street’s “gambling”, remind me of someone playing Russian Roulette. Sure, you may “dodge the bullet” once, twice, even three times, but keep playing and eventually “you’re number will be up”!
For me it’s really very simple:
1) Restore Glass–Steagall.
2) Reverse the Commodity Futures Modernization Act of 2000 (that deregulated derivatives trading).
3) Recognize that any business “too big to fail” is therefore too big to exist. If they are going to be bailed out, they should be “trust busted” as part of the deal, and the Directors and Officers in charge of the company (and employees responsible for the company’s crisis) should be “shown the door” as part of the process.
Had these policies been in place during the past decade, either the Great Recession wouldn’t have happened (or been as bad), or the bailouts wouldn’t have produced the outrageous results they did, such as the people who destroyed their companies getting paid bonuses out of the bailout money!
Oh, and for anyone concerned that my "trust busting" proposal is an example of "Big Government", let me specify that failing companies can always "go it alone", and take their chances in regular Bankruptcy. I'm just talking about those companies that fail, and then ask for the taxpayers' dough. My proposal should be the price of any bail out.
Please follow up on this program. The American taxpayers need answers about why there has been no accountability for the sub prime melt down, etc and why the Justice Department has made no indictments. I agree with the listener who wrote in saying this is a VERY important issue for the Obama campaign.