The Motley Fool Discussion Boards
Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: Jamie and the Whale||Date: 3/24/2013 2:23 PM|
|Author: WatchingTheHerd||Number: 418763 of 446616|
The March 22, 2013 edition of Moyers and Company featured a discussion with Sheila Bair on the recent Congressional findings on JPMorgan and its London Whale trading debacle and the larger picture about "too big to jail" banks.
When the loss was first exposed in May of 2012, I commented (see #1) that even if you give Dimon and his merry band of bankers every ethical benefit of the doubt, the actual results at the bank make a clear case for eliminating a system of regulation that relies on the best and the brightest being at the helm to avoid icebergs that can tank not only a bank but the entire system.
Bair's recap of the Congressional study seems to indicate all of the areas of concern I mentioned earlier wound up applying:
* JPMorgan traders and execs distorted inputs to its own risk-management decision processes
* Dimon himself explicitly approved ADDING risk to their portfolio because high risk was associated with higher returns
* the loss was magnified by hedge funds working to exploit JPMorgan's exposed risk
The real reason to watch the segment with Sheila Bair is her explanation of the larger problem illustrated by JPMorgan's loss and the overall regulatory structure present even in a Dodd-Frank world. Capital ratios banks must maintain between reserves and "assets" are not cut and dry. Current regulations impose different ratio requirements based upon the "risk" of the assets involved. "Lower risk" assets allow for a higher capital ratio. And guess who gets to characterize the risk of the assets used in the capital ratio determination? The banks. If you're a bank with tens or hundreds of billions in assets and you want to put more of that to work to eek out another ten or twenty million in profits, by simply categorizing more of your risky deriviative positions as safe positions, you can reduce your reserve requirement, take a chance on lending out even more money and if things work out, it's just another winning quarter for the $35 million dollar man. If things go south, then clearly we must do what's right for the economy and protect "the system" from this clearly unforeseeable black swan.
As an unrelated, lower-case-p political aside, Sheila Bair really needs to run for Senator or President. There really is no more concise, eloquent and on-target public figure addressing the rot within our core financial system than Sheila Bair.
|Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|