Abbreviated Pundit Roundup: Chasing a solution to systemic risk

Visual source: Newseum

Joe Nocera in The New York Times thinks banking should be "more boring":

We know that JPMorgan's chief investment office, which had orchestrated the debt purchases, decided to hedge the entire portfolio by selling credit default swaps against a corporate bond index. You remember our old friends, credit default swaps, don't you? Three years ago, they nearly brought down the financial world. Not content with its hedge, it then hedged against the hedge. It was all very complex, of course, and all done in the name of 'risk management.'

We also know that Ina Drew, a JPMorgan veteran who headed the chief investment office ' and who departed on Monday ' made $14 million last year. Wall Street executives who make $14 million are not risk managers. They are risk takers ' big ones. And genuine hedging activity does not cost financial institutions billions of dollars in losses: their sole purpose is to protect against big losses. What causes giant losses are giant, unhedged bets, something we also learned in the fall of 2008.

Thus, the final thing we know: At JPMorgan, nothing changed. The incentives, the behavior, even the trades themselves are basically the same as they were in the run-up to the financial crisis. The London whale was selling underpriced 'credit protection.' Isn't that exactly what A.I.G. did? The only difference is that JPMorgan has the balance sheet to absorb the losses that Iksil and his colleagues have racked up. That is small comfort.

Allen St. John at Forbes applies for a job at JP Morgan Chase:

So let me tell you how I am prepared to support your visionary leadership as JP Morgan Chase continues to pursue the benefits of synergies and economies of scale in this time of unprecedented challenge and opportunity:

I promise I won't lose $2 billion.

Honest.

Pinky swear.

As far as compensation is concerned, I'm sensitive to the firm's delicate situation vis a vis public perception, so I would be willing to negotiate a package in which I'm guaranteed somewhat less than the $15.5 million that Ms. Drew received last year. In exchange, of course, I would require a bonus package that includes a percentage of the money that I don't lose for the company. I understand that there may be some technical issues with calculating this figure'with all those zeros divided by infinity and what have you'but I'm sure that the derivatives team can handle this.

The Star Ledger Editorial Board points out that the banking industry has lobbied vigorously against making the Volcker rule applicable to the crisis JP Morgan is facing today:

This blunder reminds us it's the taxpayers who could be the ones on the hook: Wall Street's bonuses encourage this kind of risk-taking, but, while the gamblers keep their winnings, they know the taxpayers are there with a safety net.

Meanwhile, Dimon and his fellow bankers lobby furiously to weaken government regulation of their industry ' such as the Volcker rule, a piece of financial regulation that would prevent risky trades, even with the bank's own money.

Dimon has personally lobbied against the Volcker rule, which critics say should outlaw precisely the kind of trade that cost JPMorgan $2 billion. Dimon says this costly trade wouldn't be covered ' but that's only because he lobbied for a loophole that allowed it.

The Salt Lake Tribune also emphasis the fact that little has changed to protect taxpayers from Wall Street gambling:

[B]anks that take retail deposits and could turn to the federal government for a bail-out during a panic should not be allowed to gamble in complex derivatives that only people with doctorates in mathematics from MIT can understand. (Come to think of it, they don't appear to understand some of them, either.) That's how TBTF (too big to fail) can occur. Then the Federal Reserve and the U.S. Treasury have to jump in to clean up the mess, and all Americans suffer.

Dimon has been the point man in Wall Street's attack on federal banking regulations enacted following the financial panic of 2008. He has claimed they are too limiting, and that such barriers will increase the cost of borrowing unnecessarily. He has been particularly vocal about the Volcker Rule.

Instead, he has said, the big banks should be required to keep larger capital reserves so that they are better able to weather a financial storm.

The Boston Globe debunks Dimon's claim that some are attacking Wall Street's "work ethic and successful people":

JAMIE DIMON, the CEO of JPMorgan Chase, showed good judgment in his abject apology for the firm's $2 billion loss on risky trades. 'We know we were sloppy, we know we were stupid, we know there was bad judgment. . . . Of course regulators should look at something like this,' he told David Gregory on 'Meet the Press.' He then, almost immediately, showed terrible judgment in bemoaning political attacks 'on work ethic and successful people.' Actually, the attacks aren't aimed at those who are successful, but those who are sloppy, stupid, and use bad judgment. [...]

Dimon's own career disproves the idea that supporters of greater financial regulation are merely lashing out at the rich and successful. When Dimon's bank skated through the financial crisis in far better shape than its peers, he was widely celebrated. As a full recipient of the businessman-hero treatment ' magazine covers, photo layouts, A-list party invitations ' Dimon made an odd spokesman for those who feel that business leaders have been gratuitously demonized. The broader popular culture honored Dimon when he was up and, even now, is treating him with respect. His willingness to invite an investigation of his firm attests to his instincts; but he shouldn't tar his critics by suggesting they resent his successes. It's his failures, and his company's, that get under their skin.

Nomi Prims at Policy Shop argues that Glass Steagall is the only way to prevent systemic risk:

It's also supremely annoying that Dimon is right about something, that the Volcker Rule wouldn't necessarily apply to this 'hedge.' There's nothing particularly wrong with the Volcker Rule; it will mitigate some fraction of risk, though given the SEC and Fed's inability to understand what risk is, it's unlikely they'll take the mental leap to segment trades as mitigating it, or not. Yet, the Volcker Rule will not change one fundamental pillar of global systemic risk ' as long as banks are not segregated ala Glass Steagall along deposit-taking  / loan-making vs. speculation lines, they will have access to capital to burn. And burn it they will.