I made the point years ago to my partners that as a point of logic the large dealers are severely restricted in their ability to manage themselves.

The reasoning is as follows:

Any one of the many top traders working full time in their specific area of responsibility necessarily know a lot more about it than any manager possibly can.

In other words, any manager will have his hands full keeping up with what any one of the traders is up to, making it impossible, for all practical purposes, to keep up with all of them.

So shareholders should expect things to periodically malfunction from lack of sufficient oversight and supervision as a point of logic.

JPMorgan Sought Loophole on Risky Trading

By Edward Wyatt

May 1 (NYT) — Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.

12 Responses

  1. Let’s ‘logic’ further.
    If there is the certainty that big companies regularly make big mistakes then this offers regularly huge opportunities for smaller companies.

    As far as i read over the weekend, among those that were on the other side of this trade were the following hedge funds:
    – Blue Mountain (NY)
    – Lucidus Capital Partners (London)
    – Hutchin Hill (NY)
    – Bluecrest (London)

    Bluecrest seems to have been founded by 2 former traders on JPMorgan’s proprietary trading desk.

    The bottom line is: keep it small and manageable and be very good friends of the big companies! 🙂

    1. @walter, Keep your friends close, and your idiot enemies even closer? And keep your freedom to act independently?

      Sounds like the fungal credo. Always be ready to feed upon decay.

      Timothy Leary had a saying about that.

      “Feed in, feed up, become feed.” It inspired the Soylent Green movie, but they forgot to add a distributed, competitive palette of independent, Soylent Hues. Maybe in an off-Wall-St sequel. 🙂

      1. @WARREN MOSLER, Bingo. That should be one of the Golden Rules taught in elementary school. It’s an inescapable part of aggregate risk management strategy.

  2. And when there’s a recession, hey, you don’t need don’t need so many managers anyway.

    1. @Unforgiven, Are you suggesting an under-strategy to fight Bill Black’s “Control Frauds”? Or a remedy to inevitably promoted ignorance? Or some of both?

      Anti-Control-Frauds convince their companies – or country – to do stupid things, then leave to bet against ’em.

      Nimble Control-Fraud-Mitigators (as opposed to lumbering crookodiles), leave recognizably fraudulent firms early on, and help communities lie in wait in order to recover the loot the innocent/purposeful frauds are squandering/diverting?

  3. The only problem with this is that they have the infinite backstop of the government one way or an other.

    Why these banks don’t become big hedge funds is beyond me. After all that’s what they are, huge leveraged hedge funds. They all are a LTCM disaster waiting to happen because their net writing of liabilities (not only derivatives, but also credit) and naked positions on margin.

    There is no reason for these entities to exist as ‘banks’ and accepting deposits anymore, they give poor return on deposits. The FED should offer deposit facilities directly to the public at market rates (10y yield, for example) and hedge fund banks should just become hedge funds following hedge fund rules.

    And governments should stop backstopping these entities entirely, shareholders take the pain if they fail. But for that to happen first you need to reduce the absurd systemic leverage built in these entities, so it won’t happen, the contrary will, entire derivative markets insured by governments. It’s just silly.

    1. @Leverage, “They all are a LTCM disaster waiting to happen:” Sure why not, might as well get an LTCM’er to handle things….

      Now… Matt Zames… Matt Zames… where have we heard that name before… OH YES: he just happens to be the Chairman of the Treasury Borrowing Advisory Committee, aka the TBAC, aka the Superommittee that Really Runs America. The Matt Zames who… “previously worked at hedge fund Long-Term Capital Management LP, may have benefited as the collapse of Lehman Brothers Holdings Inc. and JPMorgan’s takeover of Bear Stearns Cos. left companies and hedge funds with fewer trading partners in the private derivatives markets.” In other words, the US Treasury is telegraphing it is now firmly behind JPM.


    2. all us member banks are eligible for unlimited funding from fdic insured deposits, so all US banking is backstopped by the fed

      hence regulation and supervision

      again, see my proposals for banking

  4. Actually, I think you’re missing the real problem, which is a kind of fraud that the supervisors/managers engage in. These kinds of losses will happen from time to time, and they do and are reported. But gains of this type are almost never reported as such. When was the last time you saw breaking news about a rogue trader who made billions of dollars? Never happens. Such windfalls are always buried in the financial statements and massaged so they look like they’re accretive to a continuing business strategy.

    Investors have to recognize this, and discount a company’s cashflows accordingly if they are derived in part from risky strategies. But nobody ever does forensic accounting when profits are good.

    1. @ESM, Good point. Thanks for that.

      ps: Even forensic accountants are susceptible to rating luck differently than risk or uncertainty?

      I wonder how often Bill Black gets lucrative offers to – like Greenspan – ‘join the right accounting team’.

      Better hope he’s more fascinated with principle than rate.

    2. @ESM, “When was the last time you saw breaking news about a rogue trader who made billions of dollars? Never happens. Such windfalls are always buried in the financial statements and massaged so they look like they’re accretive to a continuing business strategy.”

      Continuing business strategy?! 🙂 I once read this book, the 7DIF, and there was this miami pool boy named warren mosler who knew about this bumbling baffoon bean pit trader, and sent him into the pits to make a trade that he hoped would fool the other bond gods, and the SCAM worked! And now warren gets to sail superyachts in the USVI while the rest of you trog along as relative slaves in this modern society.

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