Thursday, December 5, 2013

AN OBSERVATION AND A CONFIRMATION

According to reports published today, the banks lost what might be a big one in the argument about the Volker Rule over the strategy known as "portfolio hedging."  You might remember that this was suddenly discovered by regulator and politicians alike (why not before,…who knows) in the debacle in J.P. Morgan's shop in London which became know as the "London Whale" scandal for it was claimed that the activity being undertaken was portfolio hedging.  

Now if Jaime Dimond can be accused of one thing--and I have--is not knowing when to keep his mouth shut.  To claim, as he did, that what happened was "portfolio hedging done badly" was crap.  Worst of all everybody knew it was crap.  Had he said, "these bastards tried to make an extra buck, got it wrong, tried to double down, got that one wrong too and we decided to liquidate the position when everybody in the world knew it was going to be one way traffic and as a result we lost $6 billion, so we fired everyone involved including some seriously senior people," Jamie might have skated…but he didn't.  And given the excuse, the Carl Levins and Crazy Lizzys of the world were give the perfect opening and nailed everybody…maybe.  We'll see how this comes out but if it is as reported, two things will happen: first, the price of credit goes up for everybody.  Remember yesterday's post?  Ain't no competition out there any more or a lot less of it.  Secondly, feeling constrained, banks will look around for something else to do that they know nothing about, immediately become masters of the unknown and at some point screw that up as well.  Hang around to see if I am right.

Which I may be if history is any guide.  Remember a couple of years ago when I suggested that one of the things our buddies the Chinese would love to do is replace the U.S. Dollar as the world's only reserve currency?  As of last month, the Reiminbi or Yuan--take your pick--became the second most used currency in the settlement of international trade replacing the Euro.  It's way behind the dollar to be sure but these guys have been a functioning society for a few thousand years.  They know how to wait.  Repercussions?  heck, I'm not smart enough.  Ask Joe Biden when he resurfaces.  He's our new Sino expert.


1 comment:

  1. I love this bit from WaPo's Ezra Klein

    So this is to stop the kind of speculation that caused the financial crisis, right?
    Nope! You can't really trace any of the major financial failures (or near-failures averted by bailout) to proprietary trading by the giant banks, as banking industry representatives are quick to point out. As Benn Steil of the Council on Foreign Relations wrote, "A 'Volcker rule'—a ban on proprietary trading by commercial banks—would have done nothing to mitigate the worst financial crisis since the Great Depression. " The Financial Crisis Inquiry Commission did not identify speculative trading by banks as a factor in the crisis.

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