Thursday, May 17, 2012
JP Morgan-Chase Failure, Glass Steagall, Dodd-Frank and Financial Reform: The risk of underestimating investment banking losses!
Keywords or Terms: Investment Trading; Glass-Steagall Act; 2008 Recession; 1929 Depression; Wall Street; Dodd-Frank Financial Reform Law; Bankers; Insurance Brokerages; Trading in Derivatives; Volker Rule; JP Morgan Chase Bank; Jamie Dimon; Tempest in a tea cup; Two Billion Dollars; Politicizing Banking Reform; and Presidential Politics
During the past week, the nation has learnt of the huge loss by the Wall-Street biggest bank, JP Morgan-Chase. Many Americans wondered if banks learnt anything from the 2008 melt down of the nation's financial sector due to poor decisions and judgment regarding derivatives.
The ripple effect of trading in derivatives and the consequential impact of poor banking decisions at the nation’s biggest Wall-Street Bank are continuing to evolve; and, many Americans are wondering if it made sense to have jettisoned Glass Steagall Act. What is the Glass-Steagall Act? Glass-Steagall Act separated investment and commercial banking activities consequent to the 1929 stock market crash; a crash associated with improper banking activities just before the great depression. Unscrupulous financial banking activities that moved into stock market trading bemoaned the 1929 depression. In somewhat of a similar experience with the great depression, overzealous bankers forayed into risky derivatives trading at JP Morgan-Chase, an experience that once undermined the credibility of
America’s financial sector in 2008.
The dynamics of hedging risks, or what investors are terming, gambling with investor's money, remain as confusing to investors just as it is to the public. Hedging risks while trading on derivatives looks a familiar strategy or practice to bankers and insurance brokerages; however, the average investor still sees this more of a mambo-jumbo; or magic. The excessive loss of a ginormous or humongous amount, simply referred to as a normal order of doing business in investment banking, is just too breath-taking. To appropriately quote Jamie Dimons, the loss of two billion investors' dollars in derivative trading is a "tempest in a tea port." Yet the apprehensive investors and public are wondering if the Chairman of JP Morgan-Chase appreciates the weight of his assessment or characterization. Many critics insist that, though JP. Morgan Chase is a trillion dollar corporation, two billion dollars loss, is still huge; and, characterizing this loss as just another order of doing business, is a painful underestimation of the real risk of bank derivatives trading; and one more good reason, why extensive regulations are necessary to dissuade risky trading in derivatives; an objective of Dodd-Frank Financial Reform law.
In as much as banks are expecting to face some risks, a reckless disregard for the weight of potential loss, are matter of concern to investors, and an issue that must be addressed and not underestimated. Hence, it is imperative that some tools and guidelines are in place to ameliorate risky behavior of bankers that may lead to excessive loss of investors’ money. In addition, there is the need to address other issues that are antecedent to derivative trading, which may seem very little, but can really undermine the whole investment banking sector and possibly, the whole economy. The concept of too big to fail is a reality for at least six of the biggest banks on Wall Street; and this reality, calls for responsible regulations not deregulation as sought by some bankers. The pattern of losses or failures associated with investment banking tells the whole industry that there is something missing that even well seasoned bankers can trip over, leading to huge losses of investor's money.
The financial industry and their lobbyists in congress, out of the desire to continue to engage in somewhat of an unsavory banking behavior, continue to ask for many exemptions, since the insitution of the financial reform law of 2010. Immediately Dodd Frank was signed into law by Obama's Administration, many critics began to bemoan many of the provisions or safeguards in the law that would have prevented the type of failure at JP Morgan-Chase; and the loss of as much money as two billions dollars in a swap. Few critics indicated that the provisions in the law are stifling commerce and some regulatory goalposts in the law are unworkable. Dodd Frank Financial Reform Law, which is expected to reform trading in derivatives, was being questioned for over-regulations by the same financial gurus who were caught with their pants down in the Chase Bank loss.
The Volker rule that could have put some restraints in the way banks trade in derivatives, which had not come upstream, was until recently being bad-mouthed by the same Jamie Dimon, the Chairman of JP. Morgan-Chase Bank. While many objective minds, including some in the financial sector, insisted that we adhere to our initial game plan, that we hold fast to the reform that were recommended in Dodd-Frank, a few of the bankers advised that we better let the horses run wild on the plains. If we had not kept our eyes away from the ball, we as in investors, wouldn’t have been burnt badly, when investment bankers at JP Morgan Chase let their guards down and lost a huge some of money. Frankly, playing with fire burns badly; and as long as banks executives are not ready to take necessary precautions as recommended by Dodd-Frank, the investors and the public will continue to suffer loss and potential humiliation from wrongful investment decisions of investment bankers in derivatives. Like Grandma said: fool me once, shame on you; fool me twice, shame on me!
Investment Bankers’ choice to trade in risky derivatives is still very perplexing knowing what challenges are associated with this type of banking. For one, many investment bankers insist that they hardly understand how trading in derivatives work. A few of them who partly understand how it works, say it is fraught with unprecedented and or unpredictable risks that may cause huge financial loss to the banks and its investors. The ripple effect of a loss of two billion dollars or more from derivatives trading by the investment arm of the biggest Wall-Street Bank, a leader in the banking sector, which is claimed to be led with a bright mind in Mr. Dimon, still lost big time; what do we expect from other smaller banks getting into this realm of investment banking that seem so much of a misery? To continue to be looking away and allowing the so-called too big to fail banks to continue with their reckless investment trading without more stringent regulations, is tantamount to putting the faith of our economy in the hands of gamblers; as banker fail to appreciate their limitations under this kind of trading; and or, the huge risk. The unwillingness of investment bankers to concede to some degree of regulations, to help temper excessive risks in this kind of investment trading, will probably end up being their waterloo; and if the nation allows these rascals to continue to run loose, there is the possibility of future bank failures due to excessive risks undertaken in investment trading in derivatives.
We all by now are familiar with the unfortunate term of too big to fail. The reality that there are at least six banks on Wall Street today in this category, makes it all the more imperative that, deregulation of the banking and or financial industry can no longer be tolerated, that more regulations are essential, if we are not to fall folly of their past mistakes; and that, our national interests are probably being undermined by a few men in our banking sector, who consider themselves as above board; and due the tax payers bail out, whenever they find themselves in a log-jam. The unfortunate reality calls for tighter laws if possible and more oversight, if we are going to remain the corridors of the biggest banks on the globe.
Once again, we need to re-institute Glass-Steagall Act and tighten whatever provisions are in the Dodd-Frank financial reform law. It is good to know that Congress is seeking to hold hearings in the recent loss at J.P. Chase-Morgan; it is also a wise idea to have Federal Bureau of Investigation (FBI) look into the possibility of criminality in the trading loss at JP Morgan-Chase Bank. Some members of the public are asking, why the Federal Bureau of Investigation (FBI) is involved in this debacle at Chase? There are three essential reasons: 1) was there intentional failure to disclose to investors certain risks associated with trading in derivatives that may have made them incur the overwhelming loss? 2) Was there an intentional failure to take all possible precautions to ensure that investments in derivatives follow the existing laws of the land; and 3) whether there was intentional failure to report the high volatility in investment portfolios associated derivatives in the recent failure at JP Morgan-Chase. All these reasons have some criminal undertone that is why the bureau is talking to some bankers at the biggest Wall Street Bank.
In the nature of politics, it is very important that we address the current promise to revoke Dodd-Frank Financial Reform Law by the presumptive Republican candidate for the White House’s oval office. Giving promises that can hardly be fulfilled, or ignoring the obvious, regarding how banks are managing their affairs that heavily impact citizens’ lives is not really statesman. When Banks fail, especially when they are a huge sector of our economy, they are more likely going to take some aspects of our lives and economy with them. When this happens, ordinary Americans loose their nest eggs and retirement savings; people loose their jobs, marriages and homes; and, many become depressed and in some cases, people take their lives.
Banks are important and essential part of a capitalistic system. To improve financial performance and trading activities on Wall Street, there is the need to speak with one voice. The repeal of the Glass Steagall Act has created more problems for the financial sector than we could have imagined when the law was put up for revocation a few years ago. Dodd-Frank was designed to address the kind of problems that led to the failure at JP. Morgan Chase; so is a combination of other provisions of what is now termed, the Volker Rule. To repeal these laws out of political expediency is to kick the can down the road; the nation will still have to address these issues, when the unexpected and unknown happen again: failure of many banks and the economy! The frivolity of Mitt Romney’s promise make one wonder, if the politician has the nation at heart or is just too blinded by his own ambition. There is hardly smoking without fire. The fact that our nation's number one bank in terms of capital and probably assets has suffered an untold and huge loss as this, require a well articulated and choreographed post-mortem to prevent future problems from arising. Politicizing this type of challenge is actually, irresponsible.
Now, it is one thing to claim one’s candidacy as one of a job creator, one with a private sector experience of creating jobs; however, there is another, to see one as a post-industrial investor, who is more interested in investing in private equity, maximizing wealth for investors and making businesses more efficient, even at the expense of people and the nation. The things that a leader can get away with in a private enterprise, is not the same that will happen in a public enterprise. The nation is not a private equity firm whose share holders are seeking maximum profit at the expense of the lives of its citizens. This is why this country is the land of freedom and liberty; and no one, with a reckless ambition to kick people to the curb, send millions to the unemployment and soup lines and pretend to be exercising leadership, is worthy of consideration for the oval office at 1600 Pennsylvania Avenue. Our nation cannot afford this type of ambition and person now!