Jamie Dimon, chief executive, J.P. Morgan Chase, said on the
Thursday conference call that the bank's hedging strategy was "flawed,
complex, poorly reviewed, poorly executed and poorly monitored," He called
the mistake "egregious, self-inflicted," and stated: "We will
admit it, we will fix it and move on".
I saw this movie trailer once before in 2007. The 2008
financial crash was a full-length horror film.
I pray that this isn't the beginning of another financial
crisis but this is exactly how it started in January 2007 with mortgage
companies and small banks losing money and closing followed by the first big Wall
Street failure, Bear Stearns, in March of 2008. Is it possible that the
bankruptcy of MF Global last October 31, 2011, the seventh largest bankruptcy in
U.S. history, is this financial crisis cycle’s Bear Stearns – if a full blown
crisis does occur?
A $2 billion dollar trading loss will not put J.P. Morgan out
of business. They generate that much revenue in a month. Unfortunately, other
financial institutions may not have the capital and expertise to weather
another financial crisis. JP Morgan put this strategy on and most likely other
firms. Time will tell who they are and if they will survive. However, if this
is the first inning of another crisis, before it's over, the industry’s grim
reaper may come knocking on J.P. Morgan's door. This possibility is real and is
frightening.
The western financial world is struggling with debt and
political prices are being extracted at the voting booth for this economic and
regulatory mismanagement. Look at the French and Greek elections. The citizens
in both counties rejected draconian austerity measures demanded by German
Chancellor Angela Merkel on behalf of the western banking system in exchange
for additional European Central Bank (ECB) and International Monetary Fund (IMF)
assistance. Voters in Germany’s northernmost state ousted a governing
center-right government made up of the same parties as Chancellor Angela
Merkel's federal coalition, too.
French President Nicolas Sarkozy was ousted by voters and
replaced with France's president-elect, François Hollande. Mr. Hollande campaigned
on raising taxes on the rich and protecting workers’ and citizens benefits.
Greek voters elected neo-fascists in parliament for the
first time while the hard left finished in second place. The Syriza Party, a
coalition of radical left and green groups took 16.6% of the vote. The far-right
party known as the Golden Dawn elected 10 members. This was feared but
unexpected.
Back to JP Morgan, the 2700 plus page Frank-Dodd Wall Street
Reform and Consumer Protection Act, passed in 2010, was designed to reform
deregulation of the financial industry, preventing reckless, overleveraged, and
proprietary trading by banks.
It is a flawed piece of legislation that was passed and
signed into law before it was completely written. The Volcker Rule, named after
former Federal Reserve board Chairman Paul Volcker, is but one item out of many
in the Act still being debated by congress and the banking industry and their
lobbyists.
Congress is scheduling hearings on the opaque losses and industry
regulators are also looking into the trading activity of the CIO.
Jamie Dimon also stated losses could grow beyond $2 billion.
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