JP Morgan Chase

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Banking Woes

Talk about bad timing.

JP Morgan, the bank that can do no wrong, has announced a major loss. $2 billion to be precise. Or rather that’s the bit of the loss they know about so far. Banking is just so damn complicated sometimes. It takes a while to figure out how much capital has flown out the window.

Jamie Dimon, the banker who can do no wrong, now has a very substantial black mark against his name. In fact he’s speeding up the stupid banker charts as we speak. His damnation of the problems leading to the loss are choice words:

‰ÛÏWe‰Ûªre reducing that hedge,‰Û? Chief Executive Jamie Dimon said on a conference call late Thursday. ‰ÛÏBut in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored. The portfolio has proven to be riskier, more volatile, and less effective as an economic hedge than we thought.‰Û?

Let me get this straight.

The strategy was flawed. But JP Morgan’s executive team signed off on it anyway.

It was complex. Oh. You mean like all those rotten deals that blew up the banks a couple of years ago. I realize that in the go-go zip zip world of Wall Street that a few minutes equates to eons in human time, but really is it so easy to forget the results of overly complex trading?

It was poorly reviewed. Huh? What JP Morgan lacks sound governance? Its risk management has fallen into disrepair? It stinks? Somebody signed off on this. What kind of bonus will they get? Will they keep their job?

Worse: it was poorly executed. Whoops. So not only is JP Morgan’s governance structure full of holes, but it oversees a bunch of incompetent ninnies to boot. The blind are overseeing the dimwits on Jamie’s watch.

Even worse: it was poorly monitored. Really? In banking? Rotten oversight, stupid employees, and now this! No control either. The great ship that is JP Morgan, the bank that can do no wrong, turns out to be a dull witted rogue elephant drunkenly lumbering out into the swamps of synthetic derivatives trading all by its lonesome. We need to find some grown-ups to help it back to safety.

And now, roll the drums, the clincher. It all turned pout to be a tad more of a risk – to the tune so far of a $2 billion loss no less – a tad more volatile, and not really a very good hedge. No kidding? Only in the absurd world of modern banking can a portfolio that generates a $2 billion loss, and counting, be referred to as a little more volatile. How about a great big huge whopping more volatile.

While Dimon wipes the egg off his face he will surely rue that his bank, the bank that can do no wrong, just gave a gift to legislators who are currently wrapping up their development of the details of the Dood-Frank bank reform. The JP Morgan loss came in exactly the portfolio the Volcker rule takes aim at. Dimon has been at the forefront of the industry’s push back against the Volcker rule, so his embarrassment is doubly harmful. Not only is his personal reputation blotted, but so is the industry’s.

Bad timing indeed.

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Volcker and Banks

We have reached a crucial point in our attempt to bottle up the banks. It looks as if they will win. That means the economy will lose, and the likelihood of a new crisis immediately jumps. Read your Minsky. And weep.

There is a looming deadline in the Dodd-Frank regulations that requires rules to go into effect to govern proprietary trading. As you all know by now I am ardently opposed to banks being allowed to speculate. I refuse to call speculation ‘banking’, which is a term I like to reserve for the very dull and prosaic process of credit extension based upon sober analysis. It was yahoo trading that launched us into this crisis as banks sought short term profit at the expense of any semblance of banking rectitude – the creation of all those unnecessary derivatives in order to meet insatiable trading desk demand for commodities to move about was the ultimate reason the mortgage market mutated into a cancerous mess. Bankers still have not paid the price – personal price – for their role in casting us all over the cliff. Yes, we aided and abetted with our debt splurge, but sound credit analysis would have mitigated against our ways. We rely on banks to be measured, and not to be at the forefront of folly.

So, in my mind, it is essential to eradicate – totally – any temptation to indulge in such self destructive trading. This will not overcome the ever present dangers of credit extension. Banking will always be fraught with uncertainty, and so will never be cleansed of cyclical losses. But there is no need at all to accelerate the conflagration by adding speculation to an already combustible mix.

Banking is too important to the proper and socially beneficial workings of an economy to be left to bankers. They have amply demonstrated that they cannot, and should not, be left to regulate themselves. I say this as someone who spent more than a little time in the mid to late 1980’s writing position papers for bank lobbyists dedicated to the abolition of the twin regulations of the Glass-Steagall and the MacFadden Acts. How naive I was.

The problem bankers face is that traditional banking is pedestrian. It moves slowly. It is riven through with bureaucracy. It resembles a tedious department of the government in its red tape, rules, and other restrictions. It produces a clodden return for its shareholders. And it is hardly a stage on which a go-getter post grad business school ace wants to act.

Trading is a lot more fun. So is playing with fireworks. It is exhilarating. Dangerous. Filled will thrills and spills. And very profitable. Sometimes. The rest of the time the losses will wipe out all those gains. Over any decent span of time speculation ends up being a lot less attractive. The losses and profits tend to offset each other. The problem is that when trading gets jumbled in with banking – where margins are wafer thin most of the time – a single error can destroy years of steady progress. Capital can get swallowed up quickly. Liquidity evaporates. And bankruptcy beckons even though large swathes of the bank’s assets are sound. More importantly, such a disaster freezes the banking system, produces a credit crunch, precipitates a recession and thus swallows regular people, jobs, households and a lot else besides. We just lived through such an event. It is hardly a fictional creation.

As I said – banking matters. We need sound banks. Which means we need to reform our current banks because they are not sound. Or, at least, sound enough.

This is why trading should never, ever, co-mingle with banking.

Which is why a hard and fast ban on proprietary harding is essential as we re-build our banking system.

At the moment the bankers are pressing back against the implementation of the so-called ‘Volcker Rule’, named after Paul Volcker the former Fed chief. His rule would carve out trading from banking in a manner similar to the old Glass-Steagall Act. The banks are throwing up all sorts of dust in order to distract politicians, and are getting serious help from big business and foreign governments all of whom seem to fear a loss of market access.

Those fears are palpably nonsense.

I don’t recall big business and foreign governments having a hard time getting access to US money markets back in the Glass-Steagall era. Indeed I recall all too vividly some banks regretting being involved in sovereign lending. Nor do I recall big business being hamstrung by a lack of credit. On the contrary big business was a center of financial innovation as it developed all sorts of new funding devices to expand its way into direct market access. It was the banks fearing losing market share, not big business fearing tight credit, that drove, in part, the fight against Glass-Steagall.

This debate over the Volcker Rule is emblematic of the power struggle that sits at the heart of our economic recovery. This is a fight that we cannot lose. To do so condemns us to continued subsidy of the banking system, and to heightened risk of economic collapse in the near future. The big banks are preposterously sized with respect to even the US economy. They are grotesque giants capable of sinking us with one incorrect derivative decision. Their power has not been eroded sufficiently to rein them in. Only breaking them up will accomplish that task. Even with a full implementation of the Volcker Rule, behemoths like JP Morgan Chase, Bank of America, and Citibank will continue to lurch about the economic landscape supported by our subsidy which enables them top raise money much more cheaply and in much larger quantities than they could were they truly private organizations. Their quasi-public status allows them to make poor decisions – which they do with alarming frequency – and offload the consequences onto us. All while their managers benefit from rotten bonus incentives and lead the continued march towards greater income inequality.

This anti-social behavior has to stop. It is undermining democracy. It is ruining our economy.

Full application of the Volcker rule is urgently needed. But it is only a first step. Our bureaucrats may think they can devise subtle plans to deal with future bank failures. They cannot. All their clever plans will dissolve at first contact with a ‘too-big-to-fail’ event. The panic will force accommodation. The bankers will re-surface to pillage us again. Only breaking the banks into smaller chunks will prevent them from being the danger they became after deregulation.

The Volcker Rule is a beginning. It is not an end.

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The Art of Bankers and Economists

The big question, and one I have been asked several times this morning already, is this: does the good jobs report last week signal a major shift in the economy?

No.

Clearly the tone of things has changed, but there are still large reservoirs of under-used resources to be brought back on line before we can talk about a healthy economy. This entire recovery has been one characterized by baby steps. Our economy seems nowadays to be akin to a supertanker, lumbering, slow, making very long turgid moves, unable to make quick transitions. The days of fast recovery are a distant memory.

This, of course, is partly due to the nature of our recent crisis. The financial sector and the run up in household debt combined to undermine everything. Digging out from the catastrophe that our banks wrought is necessarily difficult. Particularly since they remain unchastened, under-capitalized, and way too large for our own good. Beware: the banks will be the cause of our next downturn.

Which leads me to a beef of mine, something that has dogged me throughout the crisis. I wish we could stop calling the yahoos who destroyed our economy ‘bankers’. In my day we referred to them as ‘traders’. Its a better description of what they do. They sit at desks and move mountains of money about. They do not do banking. They trade. Their incentives are built around rapid movement of bulk capital and cash in order to turn wafer thin spreads into huge profits. It is a volume business. It is largely self-contained. It has very little to do with banking.

Bankers take positions. They own the assets they create when they lend. They husband those assets when necessary. They are in contact with customers. They assist when credit weakens. They build reserves to offset losses. They stay very far away from speculative capital flows. They are the epitome of dull and boring.

We need bankers. We don’t need traders.

Our problem, which was emerging during my tenure in banking, is that our major banks are all run by traders. They have extremely short term decision horizons, and they believe they can fudge risk away by offloading it on other banks or by insuring against it. Every single bank seems to think it can accomplish this risk immunization. Hedging is everywhere. Structured finance sits precariously on top of a narrow foundation of basic assets that are not at all altered by the fun and games erected up above. The risk still exists, only it is masked behind accounting conventions and tricky book entries designed to fool regulators and shareholders into believing a 30:1 leverage ratio is not just sensible but is sound to boot.

I would laugh at this were it not so damn dangerous to you and I. These indescribably ignorant fools have the ability to ruin our economy. They will do so again. Soon.

Why?

Because we didn’t punish them. Nor did we have the courage to rid our politics of their influence. Their money still flows. So their games still continue. Until JP Morgan Chase, Citicorp, Wells Fargo, Bank of America, and the others are broken into little pieces, and until we have re-established a separation between banking and trading, our economy is not safe. It is as simple as that.

And we are not there yet.

So, while the economy may be turning around in its pondering way, we cannot be assured this recovery will last.

Further: we are now being treated to an object lesson in the irrelevancy of economics.

The good jobs news has brought to the fore the great divisions within economics. Those of you who are new to the subject might be forgiven if you imagine it to be a scientific pursuit laden with sage insights and bursting with solid advice. Not at all. It is an art. It is an adjunct to politics. It is full of ideological axiomatically driven bias. Its object is to discuss its own artifacts not those of a real economy. Thus it expends derisory amounts of time on a general equilibrium that no one, not once, has actually witnessed. It stylizes consumers as being automatons with inhuman cognitive capacities. And it flattens business firms into a ludicrous other wordily construct that no business person I know would recognize, let alone dignify as a grown up interpretation of what goes on. This is all done in order to pursue the holy grail of determining, definitively, that markets are more efficient than any other form of allocating mechanism – like the government for instance. At the end of all this its more honest adherents will admit the entire enterprise is disconnected from the real economy, while its more ardent defenders will argue this paraphernalia actually helps interpret the real world.

Quite how, I am at a loss to say. But there we are.

Meanwhile the more politically connected representatives of this melange of arts get involved in the debate about the jobs news.

One side, represented by the infamous Glenn Hubbard – of ‘Inside Job’ notoriety – says that the pick up in employment is despite Obama’s policies. The other side, represented ably by Larry Summers – the leader of bank deregulation amongst other oddities – says that the gain is entirely due to those self same policies.

Nothing could articulate for you the irrelevancy of economics more clearly. Which is it? Did those policies help or hinder? A scientist could answer that question. An artist can always paint a picture or tell a tale to defend whatever side needs a good story. Some people like abstract art. Some people find orthodox economic theory appealing. Whatever pleases your eye. And whatever plays into your preconceived views. Capitalism is great. Or it is an abomination. Economists have no idea which. But they can sure as heck talk about it. As artists they are unsurpassed. The stories they tell are riveting. The pictures are full of color and texture. Our walls and libraries are copiously equipped with the product of economic artistry.

The connection between bankers and economists, beyond their artistry, is that they have the power to be really dangerous. They both believe themselves in possession of magic that allows them to defy uncertainty. They have concocted recipes for brews and potions that addle the rest of us into thinking that we, too, are free from the ravages of uncertainty. Since that is so alluring, we were in their thrall.

Then they trashed the place.

Only to emerge as the people we turn to fix things. Now the bankers are called creditors. They’re the ones calling for wisdom and sacrifice on the part of the devastated economies. And the economists are the ones we turn for the wisdom and to organize the sacrifice in order that we all may return to our happy ways. So the economists negotiate with the bankers on our behalf in order to right the wrongs they wrote.

How did that happen?

I don’t know.

But it goes to show how relevant irrelevancy can be.

Alice in Wonderland?

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Bank Reform Fades Away … With a Thud

There it is. Sitting on my computer desktop, pristine and unopened. The vast 650 odd page Levin report on Wall Street and The Financial Crisis. OK I had to open it to see how many pages it was, but that’s it. At this point we can all throw our hands up in despair and move on with our lives. The big banks, notwithstanding their protestations to the contrary, soundly defeated any chance of thorough reform. They are bigger than ever. They are meaner than ever. And they are just as incompetent as ever. I add this last comment because thus far there has been no evidence that all those rotten risk managers who brought us to our knees have been fired. The same is true for the traders who gorged themselves on toxic paper. The same is true for the executives who paid themselves handsome bonuses whilst overseeing the disaster. Unfortunately the same is true of the economists who dreamt up the horrible fiction that undergirds the structure of modern day finance.

Oh well.

It takes, at least for me, a heroic effort not to gag over the anemic response throughout the world to the enormous and outrageous destruction that the banks managed to get away with.

The have been no significant legal proceedings. The old guard is still safely ensconced applauding itself. The regulators still act as if they in the thrall of the bankers whose lives they should be making as miserable as the bankers made ours. And politicians hope desperately that no one notices how they caved into the lobbying and associated flood of money the banks deployed in order to maintain their ability to hold us all to ransom.

Which they continue to do.

Why is this so hard to understand?

Banks as big as Citi or JP Morgan are simply too big for our economy. They are even bigger, relatively and absolutely, than before. We are thus even more devoted to propping them up. Instead of breaking them up, punishing the mangers and shareholders, and restructuring our banking system to make it less expensive to subsidize, we went in the other direction. We made future bail outs more expensive and provided an even greater amount of subsidy. Were it not for the recent efforts of the Sheila Bair and others to”ring-fence” higher risk activities nothing of lasting value would have come from the crisis.

Yes, the banks now have more capital. So what? They remain huge, complex, largely opaque monstrosities with so convoluted organizational and tax structures that half of their own upper management hasn’t a clue what goes on. They move money around the globe, into and out of each other’s balance sheets to such a degree that untangling one, were it to fail, would bring the entire lot down. It is the ultimate blackmail gambit: I am just too important for you to let me go down because I would take you with me. So get out of my face and let me play. Oh. And don’t call me rude names. That upsets me.

If you add in the Vickers report in the UK, the total amount of pages devoted to making clear the farcical ineptitude of our expensive bankers runs to almost a thousand pages. It is sad that all that investigative effort is for nought. At least so far. I suppose the problem is that the reform effort took place before the full expose was available to embarrass the bankers. After all what is the point to publishing a huge report two full years after the crisis and during a period when our attention is focused on the debt and deficits left in the banker’s wake?

And for all you who think I am just being sour: remember that bank crises are regular features of our economy. There will be another one soon. Banking is inherently unstable and bankers are hopeless at being sensible, careful, thoughtful, or fiscally responsible. They like to gamble. Taking risk is part of banking. Gambling need not be. There is a difference, fine though that difference might be. So as we speak our brave bankers are busy creating the next crisis. Who knows exactly what it will affect?

This knowledge should have led to a more drastic reform, and to a more speedy publication of the facts surrounding the last crisis. It should have led to a decisive movement to stop the banks blackmailing us. It should have led to deeper investigations into the conflict of interest that lies at the very heart of the system. It should have led to serious efforts to bring executives to account, publicly, for their evident failures. It should have jolted shareholders out of the soporific indifference the way in which management squandered vast sums of capital.

Then again maybe not.

Given the way in which modern capitalism works none of this should be surprising.

Shareholders do not own the companies anymore They simply own, and trade stock. That’s a huge and material difference. Modern stockholders have no long term commitment to the businesses underlying the stock. They have abdicated responsibility. This severance of ownership from management allows managers to take enormous risks. Indeed it encourages them to take such risks since the shareholders are not driven by long term, but by short term profits and the resultant stock price movements. So pumping up revenues this year, or even this quarter, at the expense of next year’s or next quarter’s is the game managers have embraced and play so well. In banking this is a recipe for disaster, as it is everywhere, but more so in banking. It places the emphasis on the more volatile aspects of finance, and detracts from those aspects where a long term view, and steady credit evaluation play a key role. The economy suffers as money is syphoned off into gambling and away from long term investment because bankers can make more profit playing in the casino world of trading than in the more humdrum world of lending.

Very few of our top bankers ever set foot inside a bank branch. And most only have contact with small business when their assistants order flowers to decorate their second/third/fourth homes.

This is the lamentable state of our banking system.

Something we failed to fix. Something we will all come to regret soon.

But we sure wrote big reports. Like the Levin report sitting on my computer desktop. Going nowhere.

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Bank Non-Reform

There wasn’t any.

There. That makes it easy to remember. After 2,200 pages of tightly worded legal jargon the law known as Dodd-Frank left our banking system remarkably untouched. Our big banks are still way too big. So big they are beyond the law. By which I mean they are fully aware that they cannot be allowed to fail, and so they can act with impunity. Which they do. Daily. Worse, they are bigger than before. The crisis saw the consolidation of the industry as big names like Merrill Lynch, Lehman, and Wachovia disappeared and their assets fused into the survivors balance sheets. So the percentage of total banks assets concentrated under the control of the lunatics who destroyed the economy in 2008 has increased rather than decreased. Next time the cost of bailing them out will be higher.

And there will be a next time.

Soon.

In fact with the roiling problems in the sovereign debt market, with countries like Greece and Portugal teetering on the brink of default, we can expect more of those “notable rare exceptions” Alan Greenspan so farcically mentioned in his ridiculous Financial Times Op-Ed article. Many more. Why? Think it through. Who holds all that Greek or Portuguese debt? The big banks. So if Greece defaults the big banks take a hit and come under the same kind of pressure they were when the fantasy of the real estate bubble burst.

As taxpayers our decision seems simple: which is cheaper? Bailing out Greece? Or bailing out the banks? Its the same problem. Frankly I would prefer to bail out Greece. At least its a nice place to visit.

What I find remarkable is how much griping emanates from the big banks even though they escaped real punishment. Even today Jamie Dimon is complaining about the negative effects of regulation. He needs to quieten down and clean out the people who pillaged the US economy before he attracts too much more attention. Then again the immunity he apparently feels encourages him to speak out. He is, after all, one of the more likable of the bunch. His roots are slightly more plebeian. Slightly.

Then there is the “threat” from Barclays to leave London and head to New York. Good. Go ahead. I am sure the British taxpayers would love to be rid of having to bail them out. Oh. And by the way perhaps you could take your families and so on with you. No more of this paperwork movement. If you’re going to threaten the taxpayers just remember who votes and who makes the law.

Oh. Damn. That’s right. You make the law.

This is odd. The bankers make the law and yet complain about it. Maybe they left something out of the draft. Maybe they weren’t explicit enough. They didn’t make it clear that the US Treasury and the Federal Reserve Board exist to do the bank’s bidding. Enough of this oversight. It cramps the banker’s style.

On a serious note: the financial system is not stable. The crisis did not engender sufficient fear in politicians that they throw off their paymasters and rise up to reclaim management of the economy. The banks withstood the challenge and now benefit from an even more explicit bail out protection. So much more explicit that the rating agencies – co-conspirators in the financial meltdown – make it clear that their current ratings for the banks depend in large measure on future government support.

That makes it clear.

We fixed nothing.

The big banks depend on our largesse and then insult us every time we beg for a little contrition. These men and women are contemptible. And they are enriching themselves at our expense. With their reputation for being smart, skilled in finance, and adept at managing risk totally exposed as a fraud they have fallen back to the safety of simple childlike disobedience and insult. Their petulance is awe inspiring. Their activities continue unabated. They maybe fools, as their ineptitude demonstrated so clearly.

But we are the clowns that allow them to persist and to corrupt our government with their political donations.

A famous judge in England once opined that income tax is a tax on income. Duh.

By the same logic: donations to politicians are a way to purchase legislation. In the US that’s called free speech. Elsewhere it called bribery and corruption.

The outcome of all that free speech? Zero change in our banking system. And a bigger bill for cleaning up their next party. Reform?

As I said: there wasn’t any. It would have cost the politicians too much at the next election.

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