Nomi Prins: On JPM, the Whale Man, and Glass-Steagall

This is one of the better commentaries on JPM and the history and imperatives of banking regulation that I have seen recently.

I do not wish to beat this to death, but I have read too many glib economist and stock tout comments sloughing this off as 'no big deal.' Not surprisingly, these were many of the same people who said similar things during the build up of the credit bubble and the financialization of the real economy.

And I also expected something like this to happen in the derivatives markets, following the thefts of customer money at MF Global.  It just happened a little sooner than I had imagined.  Things are progressing quickly.

JPM Chase Chairman, Jamie Dimon, the Whale Man, and Glass-Steagall
By Nomi Prins
May 11, 2012

It was fitting that while President Obama and his Hollywood apostles broke fundraising records at a sumptuous $40,000 per plate dinner at George Clooney’s place, word of JPM Chase’s ‘mistake’ rippled through the news. Not long ago, Dimon’s name was batted about to become Treasury Secretary. But as lines are drawn and pundits take sides in the Jamie Dimon ego deflation saga – or, as I see it - why big banks should be made smaller and then, broken up into commercial vs. speculative components ala Glass Steagall – it’s important to look beyond the size of the $2 billion dollar (and counting) beached whale of a trading loss.

Yes, $2 billion in the scheme of JPM Chase’s book and quarterly earnings is tiny, a ‘trading blip’ as it’s been called by some business press. But that’s not a mitigating factor in what it represents. In this era dominated by a few consolidated and complex banks, the very fact that it’s a relatively small loss IS the red flag.

First - because the loss could (and will) grow. Second, because even if it doesn’t, it’s a blatant example of a big bank incurring un-due risk within a barely regulated, highly correlated financial markets. It only takes another Paulson hedge fund, or a trading desk at Goldman Sachs, to short the hell out of the corporates that JPM Chase is synthetically long, or take whatever the other side really is, to create a liquidity crisis that will further screw those least able to access credit – individuals, small businesses, and productive capital users.

We know this. We’ve seen this. We're in this. There’s no such thing as an isolated trading loss anymore. And yet Jamie Dimon, seated atop the most powerful bank in the world, has smugly led the charge to adamantly oppose any moves to alter the banking framework that allows him, or any bank, to call a bet - a hedge or client position or market-making maneuver - with central bank, government official, and regulatory impunity.

Flashback to the unimaginable in 1933

It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR...

Read the rest here.

Partnoy's Complaint: Lawmakers Must Heed the Wisdom of the 1930s

Here is Frank Partnoy's prescription for financial reform. Essentially he says that half measures are not sufficient. Wall Street will always find loopholes in weak regulation, and they have plenty of help in this in the halls of power in Washington, and in the think tanks, universities and the media. 

Even President Obama seems to be in denial about the effectiveness of his reforms, and the health of the US banking system. Obama: JPM One of the Best Managed Banks His own Treasury pressured regulators and lawmakers to create the loophole that allowed the loss in London, and that his administration has a horrible record in investigating and prosecuting bank fraud.

I do not think the US is ready to insist on serious reform. It will take another crisis.   The anti-regulatory slogans are too effectively ingrained in the public psyche. And self-deception is a powerfully addictive state of mind. Especially for those whose expansive lifestyles depend on it.

Financial Times
Rebuild the Pillars of 1930s Wall Street
By Frank Partnoy
May 13, 2012

...JPMorgan’s losses have generated renewed interest in tightening the “Volcker rule”, which would attempt to ban speculative trading by banks. Yet the losses also illustrate why the Volcker rule will not work. The synthetic credit trades were not proprietary bets; they were massive, mismatched hedges. (Well they were prop bets but were masquerading as hedges. But that merely underscores the problem with the Volcker Rule and regulating specific guidelines that can be circumvented by pathological liar as Mr Partnoy indicates in the next paragraph. - Jesse)

The current version of the rule arguably would not have barred these trades (It would have, except for the hedging loophole that JPM had obtained with the assistance of the Fed and the Treasury - Jesse). Moreover, wherever the line between speculating and hedging is drawn, Wall Street will easily find a way to step over it. It would be impossible for regulators to police what is a hedge and what is not.

A better way to stop the cycle of financial fiascos would be to emulate 1930s reforms, when Congress erected twin pillars of financial regulation that supported fair, well-functioning markets for five decades. First was a mandate that banks disclose important financial information. In today’s complex terms, that would mean disclosing not just a value-at-risk number but also worst-case scenarios. The law should require JPMorgan to tell investors what would cause a $2bn loss.

The second pillar was a robust anti-fraud regime that punished officials who did not tell the full truth. Unfortunately, this has been eroded by legislation and judicial decisions that make it more difficult for shareholders to allege fraud. Prosecutors are also reluctant to bring criminal cases, leaving the Securities and Exchange Commission to mount largely toothless civil actions. Instead, the law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.

By rebuilding these two pillars, regulators could create stronger markets and greater trust. At a minimum, they could wean bank managers, and themselves, off flawed maths. They could stop allowing banks to satisfy disclosure obligations simply by reporting one inevitably inaccurate value-at-risk number. They could give Mr Dimon more than a slap...

Read the entire article from the Financial Times here.

Gold Daily and Silver Weekly Charts - The Unhappy Life of Sir Francis Bacon

I ignored the markets for the most of today, although I did add a bit to my bullion position 'on the dip' as they say, and took a little off the more volatile portion of my short equity hedge.  Today was a good day to avoid the noise and reconnect with the broad perspective.

I spent part of the day rereading Dean Church's biography of Sir Francis Bacon from my library. I first came across Church in references and descriptions of him from his contemporaries.  I have of course read his Oxford Movement.  He is an interesting man, and was a notable Dean of St. Paul's among other things.

This introduction to his biography of Bacon excerpted below struck home as somewhat emblematic of many of the figures of our own age, if not the generation itself, although I am quite certain that most of the public characters it might describe were not nearly so gifted as Bacon, being largely creatures of privilege, so they might not have sold themselves so cheaply or tragically as the great man did. They merely serve the system that raised them up. 

Tragedy must entail the fall either from greatness, or from the failure to realize the greatness of potential.  On the whole, I think Messrs. Geithner and Bernanke are fully valued, as they say, and then some.  As for Obama, there is still some question, but it does not easily maintain a foothold.  As for the rest, tools and cravens, soon and well forgotten as empty souls, dried leaves on cobblestones.

We are a people in need of moral giants but served, alas, by what we have deserved.

"All his life long his first and never-sleeping passion was the romantic and splendid ambition after knowledge, for the conquest of nature and for the service of man; gathering up in himself the spirit and longings and efforts of all discoverers and inventors of the arts, as they are symbolised in the mythical Prometheus.

He rose to the highest place and honour; and yet that place and honour were but the fringe and adornment of all that made him great. It is difficult to imagine a grander and more magnificent career; and his name ranks among the few chosen examples of human achievement.

And yet it was not only an unhappy life; it was a poor life. We expect that such an overwhelming weight of glory should be borne up by a character corresponding to it in strength and nobleness. But that is not what we find.

No one ever had a greater idea of what he was made for, or was fired with a greater desire to devote himself to it. He was all this. And yet being all this, seeing deep into man's worth, his capacities, his greatness, his weakness, his sins, he was not true to what he knew.

He cringed to such a man as Buckingham. He sold himself to the corrupt and ignominious Government of James I. He was willing to be employed to hunt to death a friend like Essex, guilty, deeply guilty, to the State, but to Bacon the most loving and generous of benefactors.

With his eyes open he gave himself up without resistance to a system unworthy of him; he would not see what was evil in it, and chose to call its evil good; and he was its first and most signal victim."

R. W. (Dean) Church, Francis Bacon

SP 500 and NDX Futures Daily Charts

By and large a tedious day, better spent reading than watching. High drama and all that, but the Facebook IPO awaits.

I did add some bullion 'on the dip' and trimmed up the more volatile hedge which had swollen in value.