-
Arguably the most important point of a Senate hearing investigating JPMorgan's Whale trades was the picture that emerged of a bank that didn't understand its risks and a regulator that couldn't keep up either.
March 15 -
The Senate Permanent Subcommittee on Investigations' probe into the JPMorgan Chase "London Whale" trading debacle provides a harsh critique of bank misbehavior, but also raises critical questions about the regulators trained to police it.
March 14 -
The CEO of the country's largest bank sounded off once again, admitting mistakes and waving the banner for banks on Monday in Miami.
February 4 -
Jamie Dimon got a 53.5% pay cut for 2012 after presiding over the London Whale's losses, but he will still bring home a $1.5 million salary and a $10 million deferred bonus.
January 16
Maybe the Senate hearing into JPMorgan Chase's London Whale derivatives trades will be a "
The picture that emerged from the hearing and the
Here was the trader's stated strategy:
- Sell the forward spread and buy protection on the tightening move
- Use indices and add to existing position
- Go long risk on some belly tranches especially where defaults may realize
- Buy protection on HY and Xover in rallies and turn the position over to monetize volatility
The trader probably intended that to be indecipherable gobbledygook. The higher-ups at the bank had no idea what it meant. A JPMorgan witness
So the trader bought high and sold low, costing the bank at least $6.2 billion in trading losses.
In short, the bank's executives misled regulators, investors and the public.
The hearing and the committee report raised obvious questions about JPMorgan's competence and honesty, and about the rigor of OCC's oversight, but there is a more basic question: What was the point?
The bank's "synthetic credit portfolio" had nothing to do with real credit. The derivatives trades did not make it possible for more businesses to buy equipment, pay overtime or hire new employees; no household was able to buy a new car or replace their furnace. Instead, the trades were "synthetic" credit, a bet on whether a borrower would default on debt to someone else. The bank was playing the derivatives casino and lost.
Real credit is vital to the economy. Synthetic credit, on the other hand, appears to have approximately the same economic value that plastic fruit has nutritional value.
Within days of the Senate hearing, the
The "Swaps Regulatory Improvement Act" would effectively repeal the "push-out rule" that requires banks to trade derivatives in a separately-capitalized subsidiary, not the taxpayer-insured "depository institution." The purpose of the "push-out" rule is to make banks' derivatives trading small enough and separate enough to fail without bringing down every subsidiary in a heap.
The "Inter-Affiliate Swaps Clarification Act" would let the banks slosh derivatives around between subsidiaries (they all have thousands) to avoid regulation. The bill would also let banks move souring derivative positions like the London Whale trades from subsidiaries with lower credit ratings to the depository institution to avoid collateral demands from counterparties. Instead of quarantining risk as the push-out rule intends, the bill would let a desperate bank spread contagion from one failing subsidiary to the bank's depository institution, creating far more risk of economic disruption. That is
Predictably, Scott Garrett, a senior Republican on the House Financial Services Committee,
It is hard to see how unregulated, taxpayer-subsidized synthetic credit creates real jobs, but the risk it creates is very real.
Brad Miller is a former U.S. congressman.