… or so I am led to believe, having read Felix Salmon’s post “Jamie Dimon’s Failure” at his Reuters blog. I do not have a good grasp of the Ferengi mindset — that’s why I read Salmon, who I count on to explain Modern High Finance in terms where I can at least hope to grasp the general outline. Obviously you should read Salmon’s whole post, but as I understand the saga so far, today’s scapegoat Ina Drew was being paid an “eight-figure salary” because her department (the Chief Investment Office) was so successful at turning the “liability” of cash deposits into gold for JPMorgan:
…With lots of deposits coming in, and little corporate demand for loans, it was easy for all that money to find its way to the Chief Investment Office, which could take any amount of liabilities (deposits are liabilities, for a bank) and turn them into assets generating billions of dollars in profits.
But the CIO does much more than just provide profits for JP Morgan. In contrast to the bank’s lending book, the CIO is nimble. Loans, as a rule, have to be held to maturity: that’s the essence of relationship banking. Investments, by contrast, can be sold at any time. Of course, an investment which can be sold at any time has another name: it’s a trade. Thus did the CIO become home to big traders, making huge bets and huge bonuses.
In the past couple of years, of course, that raised its own set of problems: how could this group of traders possibly be Volcker-compliant? The answer lay in Drew’s love of crises: her incredibly valuable ability to prevent losses and even make profits when the world is falling apart. In that sense, the CIO was one big hedge, and in a narrower sense the CIO was the go-to office whenever JP Morgan saw a risk which needed hedging….
So, basically, Drew and her subordinates were very, very good — and for a long time also very, very lucky — at swapping chips from red to black and black to red one jump ahead of the other players on the roulette wheel that is today’s global financial market. And maybe some of those chips were bought with dollars that were, or should’ve been, marked NOT FOR USE IN THE CASINO, but as long as the CIO stayed lucky the fish wouldn’t notice the float until those dollars had been replaced. It was an excellent living, while JPMorgan was just one of many market raptors bulking up in the rich capitalist jungles of the Bush-era global finance bubble.
But then the meteorite(s) came. Yesterday’s dense jungle is today’s parched sahel, littered with craters and the bones of former giants, and the remaining superpredators are exposed and vulnerable. According to the smart people paid to peer through the cloudy casino windows and interpret these things, JPMorgan “worried [like everyone else] about a Europe-induced financial crisis at the end of 2011”, and made massive bets to protect themselves. When the crisis didn’t happen, Ina Drew was left scrambling to cover those bets (that maybe, under a strict understanding of the rules, were made with money that shouldn’t have been used for betting in the first place), and that’s where Bruno “the London Whale” Iksil enters the story. But whale-sized predators are vulnerable precisely because their size makes them hard to hide; Iksil’s two billion dollar trade was visible not just to every other large financial predator, but to all the market tipsters and reporters who survive by broadcasting the movements of large predators. Salmon concludes:
How did Iksil’s trade go so horribly, massively, wrong? Partly it’s because his position was so big and so public. When hedge funds worked out what he was doing, they managed to get the word out, using stories in Bloomberg and the WSJ. And then it was just a matter of watching the market do what it always does, when it smells blood: I’m told that Boaz Weinstein’s Saba, for one, made a lot of money taking the other side of Iksil’s trade.
Taking a much bigger-picture view, however, what was really going on here was that JP Morgan had hundreds of billions of dollars in excess deposits, thanks to its too-big-to-fail status. And rather than lending out that money and boosting the economy, Jamie Dimon decided to simply play with it in financial markets, just as a hedge fund would…
It’s always dangerous when a CEO suggests positions for an internal hedge fund to take, because the CEO by definition has no risk manager with enough authority to effectively constrain him. Dimon is powerful and secure enough that he’s not going to lose his job over this. But he probably should. Partly because the bank’s risk-management procedures were so weak that a $2 billion loss could suddenly appear out of nowhere. Partly because Dimon became too cocky, and started thinking that his job was to trade the bank’s billions for profit. But mainly because he’s lost sight of what JP Morgan has to be, in a post-crisis world.
Those excess deposits weren’t gifted to Dimon on a plate so that he could gamble them on the CDX NA IG 9. Rather, Dimon’s job is to take those deposits and lend them productively into the real economy. Every extra dollar in the CIO is a sign of his failure to do that. And the $2 billion loss is really just a symptom of what happens when banks get too much money, and don’t really know what to do with it all.
My emphasis. Can those of you who do understand Ferengi finance further explicate, or at least explain where I’ve gone wrong here?
TenguPhule
No, it looks fairly accurate.
Save of course for a lack of calling for his head served on a platter.
Litlebritdifrnt
The answer would be of course if all of JP Morgan’s depositors withdrew their money and put it elsewhere. If you take away their chips then they cannot place any bets.
MariedeGournay
Hey, hey, hey, hey! Ferengis know what the fuck they’re doing.
TenguPhule
Essentially yes, this was not just Chum in the water, this was a Red Sea of Blood and Guts visible from the next galaxy over with a big “ALL YOU CAN EAT” flashing in neon lights above it.
BGinCHI
Future history lesson:
Why did the USA implode when it seemed so stable and successful?
The banks were bored with just having billions of dollars.
(these fuckers aren’t going to jump, are they)
Suffern ACE
So What exactly did they tie these bets to that either has or has not happened?
Ben Cisco
Can I just say that I love that the Ferengi meme has taken hold? Not that I started it or anything, but it just feels so right…
Daulnay
It isn’t true that there’s no corporate demand for loans. What’s true is that there’s no corporate demand for loans on the terms the JP Morgan is willing to give. Many, many businesses have complained that the banks are sitting on their cash instead of making loans (that they, the businesses, would be happy to have).
Enhanced Voting Techniques
@Ben Cisco: The comical ineptness combined with their greed in Star Trek just makes them the perfect fit.
WereBear
I understand it’s similar to how bank robbers psyche themselves up to get through the tricky bits; they see it as already their money.
JP Morgan had all this money.. and somehow… it was all their money.
Greg
The underlying macroeconomic problem is that there is too much money sloshing around and not enough productive places to put it. So the 1% bet it in the casino that is Wall Street instead.
Which is the real reason why we need higher marginal tax rates. There’s just not enough opportunities for productive use of capital in the private sector with the way things are structured now, so it’s just being wasted.
cinesimon
What you’ve all got wrong, of course – and this will come out on Fox and the financial media in good time, I’m sure – is that this is the fault of the working poor and those who can’t get a job due to there being no jobs available.
It matters not that in the real world they are not a part of this picture at all: rest assured the aiders and abettors will find a way. After all: the poors caused the Bush crash, didn’t they? Therefore, they MUST have had a hand in this mess.
Simple logic.
Joe
Ace, there’s a reason nobody says it out loud. If I have it correctly, they were betting that the second derivative of the cost of an index fund had a certain sign. When the companies that make up the index fund didn’t behave as they should, the curve bent the wrong way, and JPM lost billions.
Gin & Tonic
When you bet unfathomable sums of money on things *which can’t possibly go wrong* because you’re so smart, the one certainty is that things *will go wrong* in exactly the worst possible way. And when you’re standing out in front of all of Wall Street or all of London with your pants around your ankles, everybody else *will fuck you*. It’s what they do. Long Term Capital Management was similar — a bunch of really smart guys thought they had a sure thing, but then things worked against them and they got fucked.
Ken
If it were up to me, I’d handle JP Morgan the same way parents handle children. You can’t follow the rules for handling deposits? Fine, you don’t get to take deposits any more. Oh, and you also lose your access to the Fed window, since that’s for people who are responsible with depositor’s money.
Suffern ACE
@Daulnay: Yep. Now in times past, the gubmint would look at all that cash and either tax it or borrow it and then offer out small business loans so businesses could expand to meet the demand of its stimulus spending, ten tax the profits to…oh whatever. QE kind of creates a mess when it results in record profits but no one interested in expansion. It also kind of indicates how dead private equity has become. Companies put money in the bank and the market itself won’t lend money to folks like Bain to go get that cash (and the pension fund, too!) to pay back their loans. Five years ago, no one would sit on that cash.
Mark S.
Hundreds of billions? Is that a typo or an exaggeration? Cause that’s fucked up (and makes a two billion loss not seem like that big of a deal).
Off Colfax
@MariedeGournay:
Quoted For Fucking Truth
Belafon (formerly anonevent)
OT: I wonder what Sully thinks of this: Romney donor pulls support, backs Obama, over same-sex marriage
jl
Those black swans will not turn out to be as rare was advertized if too big to fail banks are hatching them in financial genetic engineering labs.
In finance, everyone is a genius, until they are not. In derivatives, probably 100 percent are not sooner or later, so it is just a matter of time. Then they just have to hope that that there is not that much shit and the fan stays on low. And since it is a too bid to fail bank, we have to hope so too.
tjmn
PBS reporting that JP Morgan shareholders are meeting tomorrow. Rusty pitchforks for all.
me
What a weaselly fuck Corker is. He’s on the Snooze Hour trying to explain why Republicans don’t hate all regulation and it’s not their fault JP Morgan does whatever they want.
Roger Moore
@Mark S.:
As I understand it, the hundreds of billions is correct, but that means customer deposits that they haven’t loaned out. IOW, that’s money that they have a legal obligation to hand over at the drop of a hat; it’s not shareholder equity that they actually have a moral right to gamble.
jc
This whole thing is just scummy. These banks line up at the free – FREE! – Fed market window. Get funds at 0%, then lend them out immediately at 3%. Huge giveaway.
Then they know that they are still backstopped by the government.
Then, they take that money idly sitting there – and DON’T lend it to smaller businesses that need it.
And on top of that, they take that money, those billions – and gamble with it, on hedges – when this again could take down the bank, requiring propping up for the system!!
and on top of all that – they don’t pay taxes on a lot of this stuff, but use every loophole imaginable!!
This is outrageous, egregious, crazy, insane, utter piggish banksterism plutocracy.
What the F*****CCCCCCKKKKK!!!!
jc
And really – the ‘700 trillion derivatvies market’?
What utter bullsh*t is that?
That market doesn’t exist – it’s little boys playing with imaginary ones and zeroes, then banking the profits, and pulling out real Ferraris, and mansions with that imaginary money.
There IS no ‘700 trillion’ market. If you add up the GDP of the whole world, it’s not 700 trillion.
Utter fabricated bullsh*t.
PurpleGirl
Bring back Glass-Steagall. I said it years ago, I’ll continue to say it. It kept the system relatively stable for 60-odd years… bring it back. Bankers think it makes the sector boring; well, guys, the rest of us need the sector to be boring, reliable and stable. You can take your own damn money to the c*sino, not mine.
Maude
We don’t know yet what happened. With the regulators going over things, it may be a while before we find out.
This is far from over. Heard a guest on Bloomberg radio wonder if Morgan Stanley is next.
The games have been running for a bit and perhaps other investment banks are going to have serious problems.
I didn’t hear McConnell come out and say that too much regulation caused this.
Mitt’s ad about the steel mill is funny. He wouldn’t know a steel mill if he fell over it. Bad timing in light of the JP Morgan problems.
Yutsano
@PurpleGirl: THIS!!
Hill Dweller
@Maude:
What they don’t say is Bain was just one of eight investors, and the mill received $37 million from the state of Indiana and DeKalb County.
Jay S
I believe the trading was actually around 100 billion, the 2 billion was one estimate of the 6 week losses.
Citizen_X
@Ken:
Nanny state! Nanny state!
Maude
@Hill Dweller:
Mitt can’t seem to get it right at all.
@PurpleGirl:
I still fume about Bill Clinton signing that bill.
It’s the regular depositors that need protection from the sharks. That firewall worked, it wasn’t broke so they fixed it.
Bill Clinton is worth over $110 million.
Suffern ACE
@Jay S: And I would not stick to that number. It is going to get worse before it gets better. Maybe we can cut a PSA on that.
Daulnay
@Mark S.:
What’s really happening is that the ‘excess deposits’ are all the wealth that the 1% has siphoned off and has no place to invest because the wealthy have screwed our poor pooch of an economy. So they’re holding cash instead of investing in ‘unsafe’ businesses.
Raven
@Cato: Go fuck yourself dicklick.
Daulnay
@PurpleGirl:
Agreed. Two things would fix the finance industry: re-impose Glass-Stegall, and raise the top tax corporate and individual tax rates to Eisenhower-era rates.
We’ve had 30 years of ‘liberating’ (coddling) the ‘job creators’, and all it’s gotten us is a kleptocracy that’s mugged the American Dream and put it on life support.
Hill Dweller
@Cato: Romney is leading with women in that poll. Does that sound even remotely possible?
Hill Dweller
@Cato: As for gay marriage, the Republicans are whining about it being just a political ploy for Obama. It isn’t a political winner for them, and they know it.
You and your party have nothin’.
arguingwithsignposts
FFS, why call this shit a ‘trade’? it’s a bet. the only difference between wall street and Las Vegas is that I have more respect for ‘the Family’ that for these shitheads.
Yutsano
@Hill Dweller: I’m still at work, but that poll needs some serious crosstab research. That much of an outlier screams something is off with the numbers. But let our resident homophobe have his hollow victory. Obama is up 294-190 in electoral votes. Plus he still refuses to give any positive for voting for Willard. Bless his heart.
Narcissus
Can we drop some of them off a skyscraper now
please
Baud
Money go bye-bye now.
burnspbesq
@Narcissus:
Not until you finish eating your Obama-mandated broccoli.
Roger Moore
@Daulnay:
Can advocate for a third? I’d like to see a 0.01% financial transactions tax. It’s small enough to be a rounding error for real transactions that are intended to do the work of finance, but it’s big enough to make a lot of the pure money manipulation stuff like high frequency trading a lot less attractive.
PeakVT
Would someone please make banking boring again? Kthx.
Narcissus
@burnspbesq: well can we at least shoot one out of a cannon
Villago Delenda Est
@PurpleGirl:
DING DING DING DING DING!
If Banksters want excitement, I suggest that they take their bonuses to Vegas and go nuts.
Then their children can go to a public school after they’ve lost the tuition money for Ivies.
jwb
OT, so what sort of weird sample weighting do you think the latest NYT/CBS poll did to give Romney a 2% lead with women?
Villago Delenda Est
@burnspbesq:
I’ve finished off my Obama-mandated broccoli. I’m not a wussy like George H.W. Bush.
Now. About shitstain Dimon’s head on a silver platter. I’ll take a pewter platter instead. The head of the Ferengi asshole is not negotiable.
Omnes Omnibus
@burnspbesq: I didn’t have broccoli. Are Brussels sprouts an acceptable substitute?
PeakVT
@Roger Moore: 0.01% probably isn’t the right amount, and it likely should vary by the specific type of financial instrument. IIRC the EU is looking at 0.1% for shares and 0.01% for derivatives.
ReflectedSky
@Daulnay: Others have also mentioned this, but yes, it’s CRAP to suggest that there’s no market for business or any other kind of loans. It’s just that that involves WORK, and competence, and doesn’t make you feel like you have three foot long cock you can wave around willy-nilly.
The small business I founded went belly-up in the downturn because my clients and the entire, formerly vibrant sector I served collapsed, because they couldn’t get rotating and other previously common business credit, even when the companies were growing at a rapid clip. The banks just want to take their government hand-outs and go the the casino, because it’s more fun and if they lose, Big Daddy makes them whole.
It never ceases to amaze me how much projection is going on in conservative talking points.
WereBear
@PeakVT: In any case, the free-riding has got to stop. The 1% are ripping off the rest of the population; we are getting hit very badly, while they are raking in serious money that nonetheless has no impact on their standard of living.
And now they don’t even put any money back into the economy, letting it die of starvation.
PeakVT
@WereBear: I agree (and I think a transaction tax is a good idea, since I didn’t make that clear).
Richard
Besides the disturbing fact that they were playing with depositor’s money, this story underlines the reason why there hasn’t been a recovery for the 99%. Banks don’t need to make the loans that ultimately generate jobs, because they generally can make more money in the casino. If you close the casino, they’ll have to start lending again as they will have to make money the old fashioned way.
Not that that is going to happen under current circumstances.
MTiffany
Modern High Finance == (Ancient Low Thievery * (An Expensive Suit + Epic Sense of Entitlement)) – Shame
Ken
@PeakVT:
I’d set it at the same rate as the sales tax, VAT, or other local equivalent. Why treat the sale of a share of stock or CDS differently from the sale of a cheeseburger?
If someone howls that it would destroy the market, I would have to say that apparently that transaction doesn’t add as much value as the preparation of a cheeseburger, and maybe it’s best that people not waste their time and labor on it.
elftx
Gin & Tonic at 14: “Long Term Capital Management was similar—a bunch of really smart guys thought they had a sure thing, but then things worked against them and they got fucked.”
And Zames the new CIO for JPM was with LTCM when it crashed..wahoo!!
But I have questions for anyone that may help:
1. From what I have read they were buying on the 5yr contracts in an index and selling on the 10yr..but the hedge funds got teed off because they were “holding” on to the 10yr??? I don’t understand that at all so if someone can explain or correct me would appreciate it.
2. Why are some blaming The Bernank for zirp if in fact these banks have been “getting their chicks for free” and in turn selling it back to the Feds and others at a rate??
Have seen the Ferengi references on some other financial sites as well and it is soo apt lol.
sharl
Just listened to a former Bain manager, Rmoney supporter, and author of soon-to-be-released book on the public radio show On Point. He did not receive a warm reception, and a quick glance at comments at the On Point website suggest he ain’t doing much better there.
It looks like his Amazon reviews are going better; kinda weird, since the book isn’t out yet. Could be freeping, or review copy releases to friendlies, or both. He did get a bunch of attaboys from the Galtian Economics crowd, but Noriel Roubini was also in there, saying the book was stimulating, ‘regardless of whether you believe the conclusions’. Serious comment, or just some reciprocity from a potential future author? Beats me…
Suffern ACE
You know, if they never had a loss, I’d find their run of luck impossible. I’d also rather have them face the wrath of shareholders than the wrath of congress, because shareholders should be tougher. I don’t think this is going to be the disaster that say bear stearns or Lehman. However, if it is, and this turns out to be a catastrophe, I’d have to say they couldn’t have picked a worse time. I don’t think they have the votes to bail themselves out this close to an election. I can’t see either party jumping over themselves if the treasury secretary comes asking for a bazooka.
Roger Moore
@PeakVT:
If somebody who knows more about the details than I do thinks that 0.01% is too small, or that we need to change the size of the tax depending on the security being traded, I’m willing to listen. But I think some kind of transaction tax is an essential part of reform. As long as gambling is very profitable, banks will do their damnedest to work around and subvert any regulation designed to keep them from doing it. If we want to get to the bottom of things, we need to make safe, boring banking more profitable than gambling.
Xenos
@Roger Moore: I have heard that 30 basis points has been worked out to be the best figure for discouraging leveraged speculation without overly discouraging legitimate trades. Historically we had something like a 3 basis point transaction tax for stocks, but this was assessed on the par value of stocks. As this turned out to be impracticable it was dropped in the 1960s.
Wall Street objects to the transaction tax because it forces the financial transactions overseas. Already we had much of the disastrous trading leading up to 2008 in London, and the London Whale, of course, was in London. I would argue that Wall Street is a good place to start, and we can work on changing the government in London next. Once London and New York get deflated by a transaction tax, let Citibank justify speculating on the Singapore financial markets if they like.
mclaren
This once again just goes to prove what Krugman and deLong have been saying for years now — there’s a huge shortage of high-quality investments out there. This is why T-bills are paying a slight negative yield (when you add in the current inflation rate).
Why in the world would anyone buy a T-bill with a zero rate of return? you may ask.
Answer: because the American economy has turned to shit and almost all the businesses offering investments out there today are scams (those few businesses like Apple computer that aren’t scams offer no return on your money — no dividends on their stock), so the only place to put your money today where you have a reasonable assurance of getting it back is the U.S. government’s treasury bills.
And, since there’s such a huge shortage of reliable investments out there, this means that the few investments with a reasonable guarantee that you won’t lose all your money have been bid up to outlandish levels by simple supply and demand. Thus T-bill prices are sky-high and consequently their yields are rock bottom.
This is what you get when you stop regulating businesses and let a totally free laissez-faire economy turn into plundering and pillaging robber barony.
mclaren
@PeakVT:
In order to do that, sadly, you’d have to uninvent computers. The instant modern high-speed computers linked to a broadband internet got applied to finance, the complexity of the system passed beyond what any human could understand or predict.
This in turn made it impossible to reliably calculate the net future value of any complex derivative investment vehicle like a CDO or a leveraged arbitrage trade.
If you can’t reliably calculate the net future value of an investment in the worst case (i.e., how much can you lose if things go completely south?), then you don’t have a financial system…you’ve got a chaotic system churning out periodic mathematical singularities.
The next global financial meltdown will be so bad that there isn’t enough money on the planet to bail out all the busted institutions. So at the next global financial collapse, my guess is that capitalism will end. It’ll be time for Plan B.
Ben Wolf
This fundamentally misunderstands the banking system. Those aren’t deposits from customers, they’re reserves pumped into the banks by the Fed on the theory that those reserves will be loaned out to stimulate aggregate demand. Salmon has made the exceedingly common error of assuming that banks’ ability to lend is dependent on their reserve positions, which is flatly untrue. Banks are never reserve constrained. If they have adequate capital and a creditworthy customer they can always obtain whatever reserves are needed to make the loan.
The problem here is that the big banks are now heavily loaded with excess reserves which are only generating a 0.25 bps return, so the banks gamble with them to try and generate greater profits. Banks are not going to lend unless they find what they judge to be a profitable venture, and that isn’t going to happen for mainstreet until the economy recovers because there isn’t sufficient demand for small businesses to grow.
Ben Wolf
@mclaren: It is not possible for there to be insufficient money, central banks cannot become insolvent and cannot go broke. Banks can always be bailed out, but that isn’t what matters. The question is what effect another financial crisis has on the real economy.
Ben Wolf
@Litlebritdifrnt:
This would not stop the problem. JPMorgan would still have access to whatever reserves it requires, so long as it has adequate capital. Deposits are valued not because they are necessary, but because they are the least expensive kind of reserves.
russell
Here is a story about JP Morgan Chase bonuses from last year.
In addition to losing $2B via the CIO, JP Morgan Chase also apparently pissed away $3.2B in 2011 litigating badly written mortgages.
They posted a record profit in 2011, but the value of the stock dropped 22%. So shareholders got screwed, too.
Dimon got about $20M, CEO Gorman about $15M, which apparently is a down year for them.
The business model appears to be: take people’s money, piss it away and/or light it on fire, but not before setting aside a big pile to put in your own pocket.
It’s a fucking racket. They get away with it because Congress is a wholly owned subsidiary.
Berial
These guys aren’t just to big to fail, they are to big to manage.
J R
@burnspbesq:
I would eat a peck of broccoli if I could watch the top, say, 100 wall street
tycoonsthieves take the long jump off a skyscraper.Or at least as much of it as I could hold, with a dab of vinegar for flavor.
Jon H
Deposits *are* liabilities for a bank, the same way my car loan is a liability for me, only deposits are arguably worse in a way, because depositors can demand their money back in full at any time.
I pay a bank for the use of their money to buy a car. My bank pays me (a pittance) for the use of my money, which use would normally consist of being lent out to other customers.