This was going to be the headline yesterday but then things got even better. Jamie Dimon, idolized genius of banking, delphic oracle to Jim Cramer (The Mouth that Spout), Chairman of J.P. Morgan and son of New York (and a Greek businessman from Astoria screwed the pooch. Now I could be really unpleasant because I'm in a long line of people who doesn't like Jamie very much at all and say biblical things like. "Pride goeth before the fall," but I'm not going to do that. He is a pretty smart guy and has probably figured that out by himself but in the meantime it is fair to ask how what was always considered to be a very good bank at risk management got themselves into a mess that will probably have wide ranging ramifications in regard to regulation overall and the stupid Volker Rule in particular. The howling and screaming by people who know nothing on subjects about which they know less is a sight to behold. "Gambling with the Public's money!" "Complete fraud!" "Thieves!" and things one can't put in a family blog. Truth in any of them? I haven't a clue. Like everyone else including the accusors I haven't any idea what happened but if put on the spot my answer would be a simple, "they got it wrong."
This business of banking these days can get complicated and there is no qestion that a huge, international risk taker like Morgan faces greater risk profiles in its businesses than the new darling of the talking head set, Wells Fargo. However, one must also keep in mind that deep dow, what all banks do primarily is service their clients and today few large wholesale clients are without internayional exposure. We are, for better or worse, a global economy and our banking systems...and I say systems...because the United States is not the only country that is wrestling with the very same problems.
A particular moron on tv today, I will not say who, shouted that there would be no need to hedge anything if, like in the good old days banks just made good loans. Back then we had no derivatives! No need! Well, I was plying my trade in the good old days and indeed, we had no derivatives, but we did have futures both in foreign exchange and own currencies. We had insurance...we weren't smart enough to call them CDS's...it was just insurance. We hedged loans, currencies and our foreign branches. We did a lot of the same stuff but we operated on an age old acronym; K.I.S.S. Keep It Simple Stupid. Maybe it was because we actually used to go to Church in those days and did believe that Pride did in fact go before the fall. I will bet that what happened here was that the boys in the risk management unit put on a perfectly good hedge against whatever risk was out there and fell in love with what they had created. I will bet that they were not a profit center in the normal course of their risk arb business but felt that this hedge was so good (and had probably been profitable on a mark basis for a short term) that they decided, what the hell, let's MAKE a buck for the shareholder rather than just PROTECTING him and doubled down. Now here's something you might want to keep in mind: in any kind trading whch involves position taking there is the anticipation that you will sometimes get it wrong and there is a stop/loss number that tell you when to get out. In other words, the risk manager says to himself, "self, if this goes wrong I expect to lose this amount per hour/day/week." I can afford to do that, but I cannot lose any more so I close out the position." Yep, banking is about the only business around where you expect, at some point in time, to lose money.
Another thing you may wish to keep in mind: you cannot hedge volatility. You can anticipate, indeed expect, negative chages in situations but you cannot predict the speed at which they change. I will bet that the people at the center of this thing, believing they had a winner, increased their exposure which alerted the markets (remember the WSJ stories of a month ago about the London "Whale"), who decided that perhaps they were too far out there, shorted the positions against the Morgan Trade and when the overall market roiled as it did in the past month (think Spain, Greece, Euroland in general) the volatility was too great for Morgan to unwind. The End. Want to bet me? Hell, I'm an old trader but I was never a bold one. There are no old, BOLD traders.
And so, poor, ol' Jamie has to explain just why he didn't stop what happened to people who neither understand nor care; they just want a scalp. The delicious personal thing about all this is that four years ago, Jamie raised more mone for the election of The Leader than anybody on the Street and it is now The Leader's guys who want to collect Jamie's coup. Pride goeth, baby. Yeah, you screwed up and I admit to being tickled to death by the slaughter of hubris, but you didn't deserve all this...at least I don't think you do. Do you?
Next week, the Real Greeks and what happens with bank regulation in light of recent events
No comments:
Post a Comment