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Sandy's Destruction Inspires Deep Thoughts About Bank Risk Management, Economics

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'Water, Fire, Darkness': Hurricane Sandy is wreaking havoc on the East Coast. Streets are flooded, millions are without power, dozens of homes have been destroyed by a fire and a nuclear plant in New Jersey is on, well, low-to-medium alert. The New York Stock Exchange will be closed for a second straight day Tuesday, a decision that the Journal says is raising questions about the market's disaster preparedness. NYSE and other exchange operators will test a new contingency plan, which involves keeping the Big Board closed but using its all-electronic Arca platform to handle trading of NYSE-listed securities and opening and closing auctions. (The previous contingency plan called for operating the NYSE itself using Arca's systems.) Insurance companies could pay an estimated $5 billion to $10 billion in claims related to the storm, making Sandy one of the 10 most expensive hurricanes in history. According to the Post, it's getting harder and harder for actuaries to predict losses from weather-related damage. The Journal has a thorough run-down of the disaster's impact on various businesses, including JPMorgan Chase, whose "facilities will be open during the storm except for major office centers in lower Manhattan, and only key personnel would work out of the affected buildings while business activity was being relocated to other sites." Despite the interruption to business and destruction of property, economists tell the Times that the event "could actually pump up growth temporarily in a few sectors, like construction and retail sales, when cleanup begins in earnest in a few days." "Temporarily" being the operative word: "Eventually, most spending or other activity is simply pushed forward, a phenomenon known in economics as intertemporal substitution." Or, perhaps, pushed from one sector to another: Suggestions that the hurricane would stimulate the economy were quickly countered by citations of the nineteenth-century economist Frederic Bastiat’s "Broken Window Fallacy." (If you never heard it before, the parable goes roughly like this: Baker's son throws rock in bakery shop window. Baker yells at son. Fellow Parisians tell baker to cut the kid some slack, that it's all just as well, since the money he now has to spend fixing his window will fatten the carpenter’s wallet, allowing said carpenter to buy himself a nice bottle of wine with his usual baguette. Baker says, "yeah, but I was going to spend that money to buy myself some new shoes." You get the idea.) While we're getting deep and philosophical about Sandy, Reuters Breakingviews columnist Rob Cox sees a lesson for banking from the storm: "It is better to stand ready for the worst-case scenario than to skimp," whether that means sandbags and preventative evacuations before a hurricane or building up large capital buffers to absorb future financial hits. His Reuters colleague, the blogger Felix Salmon, sees a different analogy for finance in this disaster. Building skyscrapers in flood zones, but according to sophisticated probability models, is no substitute for the common sense practice of just building them on high ground; hence Goldman Sachs is now reduced to placing sandbags outside its Manhattan headquarters near the waterfront. Likewise, Salmon argues, "dumb regulations like Glass-Steagal[l] and Basel I, which weren’t very sophisticated" nevertheless work better than fancy risk models to mitigate financial calamities.

 

Wall Street Journal

Tomorrow's the one-year anniversary of MF Global's bankruptcy. What's Jon Corzine up to since then? Well, this year he "worked on a service project in Central America and relaxed in France, where he and his wife have a pied-à-terre. He also spent time running and golfing with friends on Long Island. He sold his Hoboken, N.J., penthouse for $2.8 million, or 14% less than its 2008 purchase price. Always an avid trader, Mr. Corzine continues to buy and sell investments with his own money from an office he set up in Midtown Manhattan." But the former New Jersey governor and U.S. Senator and one-time Goldman Sachs honcho "has expressed worry about the chance he could lose his license to work in the securities industry." If that's the worst that can happen, he's a lucky man indeed.

New York Times

Columnist Peter Eavis critiques ISDA's claim that new margin rules for derivatives will force the world's banks to come up with $30 trillion in cash, or $5 trillion more than the top 10 banks hold in assets.

"White Collar Watch" columnist Peter J. Henning speculates on how Bank of America could fight the Justice Department's suit seeking $1 billion in penalties for garbage loans that Countrywide sold to the GSEs.

 

 

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Q1 Earnings Outlook to Put Focus on Lawsuits, Stress Tests, Lending
With JPMorgan Chase (JPM) and Wells Fargo (WFC) set to issue the initial round of first-quarter earnings reports Friday, big bank CEOs are bracing to answer questions about executive departures, capital shortfalls, seemingly unending legal risks and oh, yeah how they are going to make money.

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Comments (1)
Still having trouble understanding why MF Global CEO Jon Corzine gets to trade for his own account, relax in France, play golf with friends on Long Island while Peregrine Financial CEO Russell Wasendorf sits in jail. They both broke the law by playing fast & loose with other people's money. How can FINRA and the SEC tolerate such a blatant example of a different set of rules for the well-connected?
Posted by jim_wells | Tuesday, October 30 2012 at 11:36AM ET
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