Depositary Trust & Clearing under water

Thanks to Travellerev and courtesy of Google Translate comes this story from a Dutch newspaper.

Sandy destroys shares

NEW YORK - Mega Storm Sandy also holds the stock in its grip. An enormous amount of paper stock with a value that is in the trillions, is probably largely perished by water damage.

de Telegraaf,

2 November, 2012

It reports CNN Friday. The shares were in a storage room of a New York basement during the storm earlier this week flooded.

The Depository Trust & Clearing Corp.., The affected company, manages the shares of more than 3.6 million shares with a total value of $ 36.5 trillion (nearly 28.5 billion euros).

Executive Director Michael Bodson Friday could not say exactly how many paper shares definitively lost

According to the Newsweek article the clearing house admits that the cellars have been been flooded but denies that the paper work has been destroyed stating that the real damage can not be estimated until power has been restored and the vaults can be accessed.

According to the clearing house the computer files are still in tact suggesting that they will be able to salvage details of all transactions.

Depositary Trust & Clearing Says Securities Vault Is Submerged

The Depository Trust & Clearing Corp., which processes securities trades in the U.S., said its vault in southern Manhattan is under water.

Businessweek,

2 November, 2012

DTCC, owned by member firms including investment banks, runs clearinghouses for trading of stocks and bonds. Clearing, settlement and other processes were “shifted seamlessly” to facilities outside the region as the hurricane battered the Northeast, it said.

“As the DTCC vault was sealed prior to evacuating the building and remains submerged, determining the extent of the damage would be speculative,” it said in a press release. “Although sea water levels have returned to normal, the lower floors in the building remain flooded. Our computer records are fully intact, including detailed inventory files of the contents of the vault.”

The organization’s headquarters at 55 Water Street in New York were damaged in Sandy, which flooded parts of southern Manhattan and cut electricity, it said. DTCC said the building will be inaccessible until power is restored.

Daily physical processing of securities is being carried out at a facility in Brooklyn, the organization said. Deposit services are available to clients who are able to make delivery in Brooklyn.

Making monrey from starvation

Why am I not surprised?

Barclays makes £500m betting on food crisis

Outrage as bank revealed to be major speculator while millions face starvation

the independent,

1 September, 2012

Barclays has made as much as half a billion pounds in two years from speculating on food staples such as wheat and soya, prompting allegations that banks are profiting handsomely from the global food crisis.

Barclays is the UK bank with the greatest involvement in food commodity trading and is one of the three biggest global players, along with the US banking giants Goldman Sachs and Morgan Stanley, research from the World Development Movement points out.

Last week the trading giant Glencore was attacked for describing the global food crisis and price rises as a "good" business opportunity.

The extent of Barclays' involvement in food speculation comes to light as new figures from the World Bank show that global food prices hit an all-time high in July, with poor harvests in the US and Russia pushing up the average worldwide cost of staples by an unprecedented 10 per cent in a month.

The extent of just one bank's involvement in agricultural markets will add to concerns that food speculation could help push basic prices so high that they trigger a wave of riots in the world's poorest countries, as staples drift out of their populations' reach.

Nor has the UK escaped rising food costs. Shop food prices have risen, on average, by 37.9 per cent in the past seven years, according to the Office for National Statistics, as the demands of an increasingly affluent and growing world population strain supply. Oils and fats have soared by 63 per cent in the UK during that period, fish prices by 50.9 per cent, bread and cereals by 36.7 per cent, meat 34.5 per cent and vegetables 41.3 per cent. In April, average UK food prices were 4.2 per cent higher than a year earlier.

Oxfam's private sector adviser, Rob Nash, said: "The food market is becoming a playground for investors rather than a market place for farmers. The trend of big investors betting on food prices is transforming food into a financial asset while exacerbating the risk of price spikes that hit the poor hardest."

The World Development Movement report estimates that Barclays made as much as £529m from its "food speculative activities" in 2010 and 2011. Barclays made up to £340m from food speculation in 2010, as the prices of agricultural commodities such as corn, wheat and soya were rising. The following year, the bank made a smaller sum – of up to £189m – as prices fell, WDM said.

The revenues that Barclays and other banks make from trading in everything from wheat and corn to coffee and cocoa, are expected to increase this year, with prices once again on the rise. Corn prices have risen by 45 per cent since the start of June, with wheat jumping by 30 per cent.

Barclays makes most of its "food-speculation" revenues by setting up and managing commodity funds that invest money from pension funds, insurance companies and wealthy individuals in a variety of agricultural products in return for fees and commissions. The bank claims not to invest its own money in such commodities.

Since deregulation allowed the creation of such funds in 2000, institutions such as Barclays have collectively channelled an astonishing $200bn (£126bn) of investment cash into agricultural commodities, according to the US Commodity Futures Trading Commission.

Barclays' dominance in commodities trading is thanks to its former chief executive Bob Diamond, who was Britain's best-paid banking boss until he was forced to resign last month following a £290m fine for attempting to manipulate the Liborinterest rate. As boss of Barclays Capital he boosted trading in agricultural products.

Dealing with the reputational headache associated with high levels of food speculation will be yet another item in the already-bulging in-tray of Antony Jenkins, who was promoted to become Mr Diamond's replacement on Thursday.

Christine Haigh, policy and campaigns officer at the World Development Movement and one of the analysts behind the research, said: "No doubt the UK's biggest player in the commodities markets is hoping it will do better this year by cashing in on rising food prices. "Its behaviour risks fuelling a speculative bubble and contributing to hunger and poverty for millions of the world's poorest people."

Banks and hedge funds typically argue that speculation makes little or no difference to food prices and volatility and argue, correctly, that no definitive link has been proved. Barclays declined to comment on the amount of money it makes from trading in agricultural commodities yesterday.

The bank defended its actions, pointing out that trading in so-called futures contracts – an agreement to buy or sell a certain quantity of a product, at a given price on an agreed date – helped parties such as farmers and bakers to hedge against the risk of rising or falling prices. "Our clients include investment companies, food producers and consumers who, among other things, seek our help to manage risks."

Barclays also declined to comment on whether it thought large amounts of speculation pushed up prices and volatility. A spokesman said: "We recognise there is a perception held by some stakeholders that participation in agricultural futures markets by some participants can unduly influence the prices of commodities. As a result, we continue to carefully monitor market trends and any research produced on this subject," a spokesman said."

Barclays Capital analysts admitted in a note to clients in February that speculation did push up prices. Barclays said: "The second key driver is that commodity investors have begun allocating to commodities again after beginning 2012 heavily underexposed to the sector." The other drivers were the "health of the global economy" and "weather and geopolitics".

Rumours of Morgan Stanley collapse

This has come my way via Max Keiser's website, and now, from Aotearoa: a Wider Perspective.

These could always be rumours, but could also be indication of something very serious.

No doubt more of this to come

Rumours have it that JP Morgan Is On The Way Out

Over the past couple of days rumours are circulating that a big banks is on the verger of collapse and many of them associate that banks with JP Morgan.

MORGAN STANLEY IMPLOSION

The insider conversation, often called chatter when it become deafening in tone, is that Morgan Stanley faces imminent failure and ruin.  

Almost two weeks ago, the Jackass provided a tip to Bill Murphy of GATA to post on his popular LeMetropole Cafe that Morgan Stanley fund managers and high ranking employees were preparing for the firm’s implosion. 

A subscriber to the Hat Trick Letter has a good friend whose father works as a fund manager and provided the story. It was not detailed, and bore no follow-up after my request.  

The older employees are selling all of their stock, some legacy stock from one or two decades ago.Many workers are making contingency plans for their next positions in another firm. 

When Lehman Brothers was killed, thousands of employees had to find new jobs, some without success. 

In the last week, the shock waves are being heard from internal Wall Street sources in an unequivocal manner. The implosion is in progress, like the collapse of several platforms and structural cables.

For full article GO HERE

Here is a iconograph showing the exposure of the five to big too fail to the  derivatives bubble

Following on from that, this Zero Hedge article from last year may be of interest

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Zero Hedge,

24 September, 2011

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

 

At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

...

Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

Bettng against the world economy

Hedge funds are betting on disaster

Hedge funds are betting on a disaster hitting the financial markets within the next several quarters, with managers holding onto historic levels of cash.

CNN Money,

23 August, 2012

That so-called dry powder gives them the cash they need to quickly jump in if markets sell off, according to numerous hedge fund managers and industry consultants.

"Most hedge funds I see are carrying lower market exposure than I've seen in some time," said Brad Balter, founder of investment advisory firm Balter Capital Management. "This is not to say they are net short. They simply want to conserve their buying power and be ready for major opportunity sets that may arise."

Many are anticipating that Europe's debt crisis, the U.S. fiscal cliff, or the slowdown in China will cause a 2008-like reaction around the globe, when stocks swiftly sold off in the wake of the financial crisis.

Hedge Funds Bet on Obamacare

But betting on a downturn in this environment is a risky play.

The latest Fed minutes showed central bankers leaning toward more stimulus. Should Fed chairman Ben Bernanke suggest another round of bond buying next week in Jackson Hole, Wyo., stocks could swiftly move higher. On top of that, Greece is still in limbo and talk of the European Central Bank intervening in the bond market makes predictions about an end-game for Europe nearly impossible.

"I have not seen the level of uncertainty this high for a long long time," said Komal Sri-Kumar, chief global strategist at TCW . "If you were a hedge fund and you didn't know when the correction would come but were concerned, it would makes sense to keep cash available."

Because of this defensive posture, hedge funds have missed out on the 2012 stock rally. The S&P 500 (SPX) has gained 11% through July 31, while Morningstar's hedge fund index of nearly 1,000 funds gained just 3.7%.

Hedge funds place record bets against the Euro

"They could've picked stocks poorly, but with these returns, it looks more like they're not even close to being fully invested in the market," said Nadia Papagiannis, Morningstar's director of alternate fund research.

The SEC only requires hedge funds to disclose stocks they own, and not how much cash they're holding or what stocks they're betting against.

Holding onto cash is actually one of the boldest moves a hedge fund can make. Hedge fund managers get a 2% fee for all the money they manage, so investors quickly grow irritated with managers who sit and wait. "It's a natural reaction to say why am I paying you to hold cash," said Daniel Celeghin, partner at hedge fund consulting firm Casey, Quirk & Associates.

Some funds have outperformed the S&P. Among them: Tiger Global Management, which focused on technology stocks and counts Apple (AAPL) as its top holding, is up more than 20% as of July 31, according to a source with knowledge of the fund's returns. And the flagship hedge fund at Citadel run by billionaire Ken Griffin is up 11.5% through July 31, according to sources familiar with its returns.

Hedge funds betting on the mortgage market and those focused on financials have also scored big in 2012. Bay Pond Partners, owned by asset manager Wellington Partners, is up 11%, largely through its investments in bank stocks, said two sources. Two key funds at SPM, a $3.4 billion fund focused on residential mortgages, are up 13.4% and 11.3% respectively. Another mortgage focused hedge fund, Metacapital, is up 25% through July.

Despite the industry's overall recent poor performance, investors haven't shied away. In the first quarter of 2012, the hedge fund industry held a record $2.13 trillion of assets, according to Hedge Fund Research. During the second quarter, investors pulled back slightly, leaving them with $2.10 trillion.

Since the financial crisis, investors have been drawn to hedge funds because they have the ability to bet on all types of markets and don't simply expect stocks to move up. "The thought now is that I need to have at least some of my capital with managers who have the flexibility and skill set to take advantage of unpredictable sideways markets," said Casey, Quirk & Associates' Celeghin

JP Morgan Derivatives

With thanks to Aotearoa: a Wider PIcture

JP Morgan, Derivatives and OOOOh Shit!!!

Sometimes a picture tell a thousand words: And JP Morgan got downgraded today! Source:Reggie Middleton BoomBust blog

US govt to backstop derivatices clearinghouses

As An Encore to Bailing Out the Big Banks, Government to Backstop Derivatives Clearinghouses … In the U.S. and Abroad

Zero Hedge, 26 May, 2012


The government has been bailing out the giant, insolvent banks for years. (Many of the bailed out banks are foreign.)

That is preventing the economy from recovering … like countries that have grabbed the bull by the horns.

The government has allowed the amount of derivatives to reach 1.2 quadrillion dollars.

That is feeding the parasite of casino gambling … which is preventing the real economy from recovering and is killing the host of actual productivity.
What is the government doing for an encore?  Bailing out the derivatives clearinghouses.

As the Wall Street Journal reported Thursday:

Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.

***

The authority for this regulatory achievement was inserted into Congress’s pending financial reform bill by then-Senator Chris Dodd.

***

Specifically, the law authorizes the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies.

***

To get help, they only needed to be deemed “systemically important” by the new Financial Stability Oversight Council chaired by the Treasury Secretary.

Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club. After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.

We’re told that the clearinghouses of Chicago’s CME Group and Atlanta-based Intercontinental Exchange were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system.

U.S. taxpayers thinking that they couldn’t possibly be forced to stand behind overseas derivatives trading will not be comforted by remarks from Commodity Futures Trading Commission Chairman Gary Gensler. On Monday he emphasized his determination to extend Dodd-Frank derivatives regulation to overseas markets when subsidiaries of U.S. firms are involved.

***

If there’s one truth we’ve learned about government financial backstops, it’s that sooner or later they will be used. So eventually taxpayers will have to bail out one derivatives clearinghouse or another. It promises to be quite a mess.

(The government has actually been backstopping derivatives for some time).

Indeed, Nobel prize-winning economist George Akerlof demonstrated that if big companies aren’t held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout.  Bailing them out- in turn – creates incentives for more economic crimes and further destruction of the economy in the future.

As financial incentive expert William Black notes, we’ve known of this dynamic for “hundreds of years”.

Note: It’s not just banks.   The government has bailed out hedge funds and companies like McDonald’s and Harley-Davidson.   
 
Indeed, drug dealers kept the banking system afloat during the depths of the 2008 financial crisis.  So are the biggest drug cartels “systemically important” and “too big to fail”?  Will the U.S. government backstop the Colombian drug lords?

Sure, their actions don’t help society, and instead harm a lot of people.  But so do those of the giant banks speculating in derivatives.

And there may be more overlap than admitted in polite company.

Global derivatives market - how big is it?

FINANCIAL IMPLOSION: Global Derivatives Market at $1,200 Trillion Dollars … 20 Times the World Economy

by Washington’s Blog

Global Research,

20 May, 2012

How Large Is the Derivatives Market?
Everyone paying attention knows that the size of the derivatives market dwarfs the global economy.  But how big is it really?

For years, there have been rumors that there is over a quadrillion – one thousand trillion – dollars in notional value of outstanding derivatives.  But no one really knew.

Even though the Bank of International Settlements regularly publishes tables showing the amounts of different types of derivatives, some of the categories are ambiguous, and so it has been hard to get a good handle on what’s really out there.

For example, one blogger wrote last year:

Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.

Smart guys like bond trader Jeffrey Gundlach said last year that we’ve got a quadrillion dollar derivative overhang, the government hasn’t done anything to fix the basic problems in our economy, and so we’ll have another crash.

But I’ve now found an estimate from a top derivatives expert who  confirms the claim.

Specifically, Paul Wilmott – who has written numerous books on the subject – estimated the number last year at $1.2 quadrillion:

The… derivatives market … is 20 times the size of the world economy.

According to one of the world’s leading derivatives experts, Paul Wilmott, who holds a doctorate in applied mathematics from Oxford University (and whose speaking voice sounds eerily like John Lennon’s), $1.2 quadrillion is the so-called notional value of the worldwide derivatives market. To put that in perspective, the world’s annual gross domestic product is between $50 trillion and $60 trillion.

A Clear and Present Danger to the World Economy
The size of the derivatives market is a huge threat to the world economy:

One of the biggest risks to the world’s financial health is the $1.2 quadrillion derivatives market. It’s complex, it’s unregulated, and it ought to be of concern to world leaders ….

***

How big is the risk to the world economy from these derivatives? According to Wilmott, it’s impossible to know unless you understand the details of the derivatives contracts. But since they’re unregulated and likely to remain so, it is hard to gauge the risk.

But Wilmott gives an example of an over-the-counter “customized” derivative that could be very risky indeed, and could also put its practitioners in a position of what he called “moral hazard.”

***

Another kind of market conduct that makes markets volatile is what Wilmott calls positive and negative feedback loops. These relatively bland-sounding terms mask some really scary behavior for investors who are not clued into it. Wilmott argues that a positive feedback loop contributed to the 22.6% crash in the Dow back in October 1987.

As we noted last year:

Bloomberg reported in May:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said …“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

***

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008.

Credit default swaps were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.

And unexpected changes in interest rates could cause a major bloodbath in interest rate derivatives.

And, no, there have not been any reforms or attempts to rein in derivatives, and the Dodd-Frank financial legislation was really just a p.r. stunt which didn’t really change anything.

But the big banks and their minions claim that the huge amounts of derivatives themselves is unimportant because these are only “notional” values, and – after netting – the notional values are deflated to much more modest numbers.

But as [Tyler] Durden – who has a solid background in derivatives – notes:

At this point the economist PhD readers will scream: “this is total BS – after all you have bilateral netting which eliminates net bank exposure almost entirely.” True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small… Right?

…Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd’s bank “resolution” provision would do absolutely nothing to prevent an epic systemic collapse.

 Washington’s Blog is a frequent contributor to Global Research.  Global Research Articles by Washington’s Blog

JP Morgan

The Truth About JP Morgan’s $2 Billion Loss

by Washington's Blog

Global Research,

16 May, 2012

Before we can understand what’s really going on with JP Morgan’s loss (which will probably end up being a lot more than $2 billion), we need a little background. JP Morgan: Is the world’s largest publicly-traded company Is the largest bank in the U.S. … the biggest of the too big to fail banks which are killing the American economy Is the largest derivatives dealer in the world (and see this), and derivatives are inherently destabilizing for the economy Essentially wrote the faux “reform” legislation for derivatives, which did nothing to decrease risk, and killed any chance of real reform Is the creator of credit default swaps – which caused the 2008 financial crisis, and is the asset class which blew up and caused the loss Has had large potential exposures to credit default swap losses for years Has replaced the chief investment officer who made the risky bets with a trader who worked at Long Term Capital Management … which committed suicide by making risky bets Went completely insolvent in the 1980s … and again in 2007  ( and was saved both times by the government at taxpayer expense) Heads – with Goldman Sachs – the Treasury Borrowing Advisory Committee, which helps set government financial policy Has a reputation of being the most risk-averse of the big Wall Street players Was kept alive by a huge government bailout … but used the money to invest in India and other projects which won’t really help Americans Has made a killing by kicking companies (and see this) and governments (and here) when they are down, engaging in various types of fraud (update), allegedly manipulating the silver market, and profiting on misery by acting as the largest processor of food stamps in America In addition, JPM’s CEO Jamie Dimon: Is a Class A Director of the Federal Reserve Bank of New York, which is the chief bank regulator for Wall Street (including JPM).  Indeed, Dimon served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.  At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank Has a reputation of being the “golden boy” and smartest guy on Wall Street Has been the chief spokesman and advocate for deregulation of banks, and has lectured, scolded and cajoled everyone who has questioned his banking practices Jokes about a new financial crisis happening “every five to seven years” What Does It Mean? Pundits and consumers alike are reacting to JP Morgan’s loss like a startled herd of sheep. They somehow believed that the “best of the breed” bank and CEO – the biggest boy on the block – was immune from losses.  Especially since JPM has been so favored by the Feds, and Dimon was so favored that he was being groomed for Secretary of Treasury. And the fact that the head cheerleader for letting banks police themselves has egg on his face is making a lot of people nervous. And that the biggest of the too big to fails could conceivably fail. The government says its launching a criminal probe into JPM’s trades. Ratings services have downgraded JPM’s credit, and many commentators have noted that other banks may be downgraded as well. Elizabeth Warren is calling for Dimon to resign from the New York Fed: Even CNBC is now calling for Glass-Steagall to be put back in place. Banking expert Chris Whalen writes: Someone at the Fed should have at least secondary accountability for the JPM losses if the VaR model/process was faulty. Is there any accountability for incompetent, badly managed federal bank regulators? As our colleague Janet Tavakoli wrote in the Huffington Post: “The U.S. can count on JPMorgan to continue both long and short market manipulation and take its winnings and losses from blind gambles. Shareholders, taxpayers, and consumers will foot the bill for any unpleasant global consequences.” We think that the loss by JPM is ultimately yet another legacy of the era of “laissez-faire” regulation and even overt Fed advocacy for the use of OTC derivatives by US banks. Fed officials such as Pat Parkinson, who retired as head of the Fed’s division of supervision and regulation in January, were effectively lobbyists for the large banks and their derivatives activities. It seems a little ridiculous for the same Fed officials who caused the problem over the years to now be tasked with investigating JPM, much less regulation of large bank dealings in OTC instruments. And Reuters correctly notes: JP Morgan Chase’s loss is the perhaps inevitable result of the interaction of two policies: too big to fail and zero interest rates. *** Too big to fail, the de facto insurance provided by the U.S. to financial institutions so big their failure would be disastrous, provides JP Morgan and its peers with a material advantage in funding and as counterparties. Depositors see it as an advantage, as do bondholders and other lenders. That leaves TBTF banks flush with cash. At the same time, ultra-low interest rates make the traditional business of banks less attractive, naturally leading to a push to make money elsewhere. [See this.] With interest rates virtually nothing at the short end but not terribly higher three, five or even 10 years out, net interest margins, once the lifeblood of large money center banks, are disappointingly thin. Given that investors are rightly dubious about the quality of bank earnings, and thus unwilling to attach large equity market multiples to them, this puts even more pressure on managers to look elsewhere for profits. Investors believe, rightly, that the largest banks won’t be allowed to fail; what they also appear to believe is that they very well may not be able to prosper and that to the extent they do shareholders won’t fairly participate. What would you do if you had a built-in funding advantage but little demand for your services as a traditional lender, i.e., one which borrows short and lends long? If you are anything like JP Morgan Chase appears to be you will put some of that lovely liquidity to work in financial markets, hoping to turn a built-in advantage into revenue. JP Morgan stoutly maintains that the purpose of the trades was to hedge exposure elsewhere, as opposed to being proprietary trading intended to generate profits. That’s contradicted by a report from Bloomberg citing current and former employees of the chief executive office, including its former head of credit trading. http://www.bloomberg.com/news/2012-05-14/dimon-fortress-breached-as-push-from-hedging-to-betting-blows-up.html The Volcker Rule, now being shaped, is intended to stop such speculative trades, though in practice debating what is a hedge and what isn’t is a sort of angels-dancing-on-the-heads-of-pins argument which makes effective regulation almost impossible. *** The keys are motive, opportunity and ability. Profits – and the investment office is reported to have made considerable ones in the past – provide a more believable motive than simple hedging. Opportunity is afforded by the combination of a privileged funding cost combined with poor alternative places to put money to work elsewhere in the banking business. While there may be some active borrowers, and TBTF banks enjoy an unfair advantage in serving their needs, the trans-Atlantic balance-sheet recession means households and businesses are showing a preference for paying back loans rather than taking them out. Bruce Lee, chief credit officer of Fifth Third Bancorp, which isn’t TBTF, was frank about this recently, saying that the value of deposit funding was now at its lowest in his career. Finally there is ability, and like common sense all bankers believe they have the ability to trade successfully despite the wealth of historical evidence to the contrary. While events show clearly that JP Morgan wasn’t able to adequately manage its own business, an attack on it engaging in speculation doesn’t actually hinge on that. There is clearly a public policy outrage here because should JP Morgan find itself in difficulties due to speculation the taxpayer will end up paying the freight. That’s probably not even the worst of it. All of the profits that TBTF banks make through speculation have been subsidized and enabled by the taxpayer. It is obvious that managers and employees have an incentive to take risks because, after all, TBTF may not be forever but they will capture 35 or 40 percent of the inflated takings so long as it lasts. Even if JP Morgan never blew up speculative trades, we should still oppose them so long as they are made possible and profitable by government policy. Raising interest rates in order to remove an incentive to speculation probably wouldn’t work; low rates are the result of too much debt as well as a palliative for that disease. The Volcker Rule won’t be effective; it is impossible to distinguish hedges from speculation and either can blow up banks. The better alternative is to end the policy of too big to fail, preferably while at the same time forcing all banks out of the business of market speculation through a revival of the kind of Glass-Steagall-like policy which encouraged a small and useful financial sector for decades, forcing those that want government insurance to act like utilities, taking deposits, processing payments and making simple loans. Let the investment banks take their risks, take their chances and suffer their losses – as separate entities.

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