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.

LIFE IS CONFUSING

It is, it really is.  For example, If people without sight wear sun glasses, why don't people who are deaf wear ear muffs?  Or in a negative sense, if the nearly a dozen governmental agencies who now have responsibility for the safety and credit worthiness of our banking system are serious about their mandate why do they keep taking actions that are certain to damage individual institutions or the entire system in general.  I give you the curious case of J.P. Morgan Chase.

Now we all know Jamie Dimon who was up to a few short months ago spoken of in hushed, reverent terms as possibly the greatest banker who ever lived.  Jamie was never that but he is hardly the dim wit that his portrayal today labels him.  And whilst Morgan never was possessed with a "fortress balance sheet," it is hardly the dangerous, ill managed institution that it is being forced into admitting.  All of this stems from the saga of the "London Whale, the head of a derivatives trading team working for the bank's internal investment office who got a big trade the wrong way around and like traders have done over centuries fell in love with his position, doubled down and when jilted for a second time doubled down again trying to make it back while all the time concealing his love affair from his boss.  Truth will out is the old saying, and it did with disastrous consequences for all concerned including our friend Jamie, who, not knowing the full extent of the loss did what Jaime was always prone to do and got his mouth working ahead of his mind.  "No big deal" he proclaimed of a loss that finally came to light as being somewhat north of $6 billion a position which put him at odds with most of the people in the world save for Carlos Slim and Warren Buffett.

Enter, stage left, the SEC led by the new head honcho, Mary Jo White formally of the Justice Department's Second Circuit, a small, brilliant and incredible successful former prosecutor of white collar crime.  Following in her wake, like a school of Remora, came every shape and form of regulator types looking to collect creds from whatever chewed morsels might fall fall from Mary Jo's mighty maw.  You see Mary Jo just wasn't in the business of slapping wrists and collecting a few bucks in fines; oh no.  The new game was to get the perp to admit to wrong-doing...I mean we gotta have us a Bang the drum slowly moment!

When I was in law school a professor of mine gave me a bit of sage advice.  He said the scariest thing I would ever see in my live would be the heading on a piece of paper that said

                                                      The United States of America
                                                                           vs.
                                                                 Charles James

"You don't want to ever see that," said he.  "Just think of the power and might and money arrayed against you."  That goes for corporations as well So, it appears that J.P Morgan & Co. will agree that they were wrong, that they knew they were wrong and will settle for about a billion bucks in order to avoid a trial.  Huzzahs all around and the legend of Mary Jo lives on.  We got the bastards!  A new era dawns!

Of course what happens, now having admitted wrongdoing taking one of the major obstacles to law suits off the table, JPM will be visited by Sue Grabbit and Run, Gonif Gonif and Dreck and every other member of the plaintiff bar, all working on contingency fees, with every possible variation of class action suits that can be conjured up in the fertile minds of trial lawyers which JPM will either have to defend or settle.  Call me curious and confused but I'm having trouble figuring out how tying up this company for 25 years in law suits makes for a better banking system.  I can't seem to understand how giving the Whale immunity in order for him to testify against a couple of guys who worked  for HIM gets us to a better banking system.  Nor do I get how the shareholders, who have already lost about $7.5 billion are going to be better off with this approach.  Doesn't it seem better to incarcerate the highest ranking individuals in the institution if crimes were committed?  THAT gets people's attention and influences future actions.  Of course that's hard to do.  You really have to prove stuff.

Anyway, I'm sure there is joy on Capitol Hill over all of this, with Uber Idiot Lizzy crowing how it takes a woman to get thigs done.  I'm sorry for the rant but the politics that has overtaken reason is getting to me.  When harm is done in the name of good I get a bit irrational.  Sun glasses and ear muffs all around.


Carter:  I'm so confused I didn't get the question.  Explain please.

AN EARLY FALL (FROM GRACE?)

Just a remarkable day in the Fly-Over Zone.  Middle of August and the temperature never rose above 70F under a cloudless sky.  True football weather which, thank goodness, is just around the corner.  A glorious day...but not for Jamie Dimon who was called out--though not by name--by the U.S. Attorney in New York as he announced indictments of two J.P. Morgan employees in the "London Whale" imbroglio.

Jamie has gotten himself trashed by one of many applications of the Law of Large Numbers.  The loss suffered by his bank was a VERY LARGE number to all but perhaps the Warren Buffetts of this world and people take notice.  The larger the number, the higher up goes the blame game and $6 billion gets you pretty much to the top.  Jamie also made the killer mistake of under-stating and under-playing the loss, perhaps even finding a bit of humor in the entire affair before he was in full possession of all the facts and that is a real no-no, completely unappreciated by the regulators and the cops on the beat.  Is he going to recover?  No, not completely.  Once the myth of invincibility is gone, it never comes back.  Jamie is now an ordinary, very bright and very capable guy if there is such a thing, but the minute you start to believe the hype the Gods have a funny way of adjusting reality.  I actually feel a bit sorry for the guy and I never thought I'd be saying that.  I wonder who is next in the blame game environment in which we live?

The other guy I'm beginning to feel sorry for is Larry Summers.  Now as we all know, Larry is not God's first Nice Guy creation, but the manner in which he got trashed today by NYT columnist Maureen Dowd had to be a classic.  Mo must be going through another bad relationship or something because this was most vicious I Hate Men rant in quite a while, focusing on Summers but involving Bob Rubin and even Bill Clinton as well, as the responsible parties in the Crash of '08.    Of course she doesn't know what she's talking about but I must say it was a kick to have that mob attacked by Mo in the Times.  The girls are really pulling out all the stops to get Janet Yellen the Chairgirlship,  and speaking of Janet, her guys at her bank in San Francisco didn't, IMHO, help her a lot in releasing a study which concluded the all the QEs and balance sheet build-up don't have an effect one way or the other.  Their boss is a BIG supporter of the program you see, and that and being a nice person are the two most quoted reason for the support she receives from the street.  The study also states that there is a kind of direct linkage between Fed directional other-speak and market reaction, which of course isn't the case and which hobbles the entire argument, but Fed studies and the Real World are generally not found in space occupied by Real People.  Nevertheless, it wasn't helpful but then again neither is the battle royal going on over who is the next person to occupy what is now the most influencial financial position around.  I say now because with a continued effort to infuse even higher levels of stupidity into the selection process, this administration seems bound and determined to belittle the Fed and present it as just another political component run by a political hack.  Only thing I can compair this to is a day in the 60ies in August in the Mid West.  Weird.

HAVE A NICE WEEKEND, YOU JERK

My friend, Gerry, has this great capacity (and propensity) to be a pain in the butt.  He doesn't have much to do, doesn't want to do anything, has too much money to worry about much of anything and therefore has huge amounts of time on his hands to make life miserable for everyone else, especially me.  So it wasn't a surprise that this E-Mail arrives this morning beginning with, "Nice try, Butt-Head, but you left out a couple of things."  Oh, did I mention that Gerry is almost always right?  Well, he is and today was no exception.

The Tale of the Whale has a couple of other chapters that I didn't write about which Gerry, of course, picked up and with great glee shared with me.   He accurately pointed out that in addition to the situation at JPM described yesterday and to which he agrees, there were at least two major structural deficiencies I neglected to point out.  First, it appears that the Investment unit, or CIO in Morgan terms, had its own compliance unit, reporting to the head of the CIO.  At the very least this is not what one would call "best practices," but the mere fact that it reported as such need not be a major event-shaper.  I knew of the existence of this structure but placed little importance on it which is why it went unmentioned.  Perhaps, as Gerry "suggests" more coverage should have been given.  He's probably right and for the oversight, I apologize.

What I did miss, however, was far more serious:  Within the CIO, the head of risk management reported to the head of CIO. In other words, the Hen Keeper was reporting to the Fox.  This is a major failure on the part of Morgan's senior management and should properly fall at the feet of Dimon and his Lieutenants.  The house cleaning that has occurred indicates that Jamie and the Board learned the lesson...of course the tuition was $6.5 Billion but hey, it was worth it.  And as for me, My week-end shall be spent in embarrassed seclusion, thinking evil thoughts and plotting revenge...along with a firm determination to do better.

If you missed it--and you probably did--there was a very important decision handed down today buy the Court of Appeals for the D.C. Circuit involving the so called "Recess Appointments" made by The Leader to the National Labor Relations Board.  There are certain positions that must be approved by the Senate before an individual is confirmed to the post and a member of the NLRB is one.  The President, when the Senate is nor in session may make what is known as a "Recess Appointment, good until the sitting of a new Congress.  The argument here was whether the Senate was in recess as claimed by The Leader or in continuous session.  The fact ruling in the lower court that the appointment were unconstitutional was affirmed by the D.C. Circuit.

So who cares, you ask?  Well, not me, BUT there is another case being heard relating to Richard Cordray, the recess appointee to the position of head of the Consumer Protection Bureau, set up under Dode/Frank and organized by crazy Lizzy Warren who, having not a chance of being confirmed, runs for the Senate and wins  which means she'll have less opportunity to make a meal out of things than she would in this position which, as designed, reports to no one.  Enter Cordray, one step removed from a political hack, placed in office as a recess appointment but under the same set of circumstances as the NLRB 3.  That appointment is presently under judicial review and will probably be torn down as well.  Bye, bye Cordray who will never be confirmed as well.  Both cases will be appealed to the Supremes and if taken up will no doubt be affirmed, IMHO.  Delicious.  We now have this insane piece of crap legislation rudderless, meaning who knows what happens.  However, if The Leader and his mob continues to act in this fashion (see: "Don't Need No Damn Constitution") more of this is going to occur.  Guys, we don't need it.

Over There, the leaders are on their way home from Davos having accomplished nothing...or is it not having accomplished anything?  Probably the latter.  Could have done as much here, in the fly-over zone.  Same cold temperatures, same snow, waaaaay cheaper.  See you next year?  And as for you, Gerry, thanks for making my weekend.

A DIMON HAS IT ROUGH

Poor Jaime got knocked about the head ad shoulders in Davos today.  Seems as though some folks didn't like the results attributed to the "London Whale" and decided that it was all Jamie's fault.  Inasmuch as Jamie had always made it clear in and outside the organization that he was The Man, I suppose this particular shoe fit and to his credit he took the responsibility for the loss and embarrassment.  Also took a hell of a pay cut but don't cry for Jamie Argentina.  He still made a bomb.

Funny thing is, however, we still don't know what really happened other than the Whale and his buddies made a bad bet, doubled down and doubled down again.  There had been allegations that one or more of the folks involved deliberately attempted to mislead management but this has not yet been proven.  I guess the position was so large that half the City knew about It at which point a couple of Hedgies made their own bet that without them the Whale would be able to get out and squeezed Morgan to great success.  Or so the story goes.

Frankly, I don't care who won and who lost.  Morgan, in my experience, has never been staffed with dumb people: arrogant and egotistical perhaps (see: Dimon, James) but not stupid.  And yet a handful of risk managers apparently hadn't a clue what was going on until, essentially, market chatter led them to make, as Scotland Yard likes to say, "further inquiries."  After all is said and done I'll bet dollars to green apples that the real cause of the debacle and the reason these boys had the ability to double down was that that folks in charge of risk evaluation and management didn't understand what they were being told and were loath to admit it.  The classic mis-application of the "Average Intelligent Man Theory of Risk,"  i.e. if the Average Intelligent Man doesn't understand it, it's too much...and these were far more than average intelligent men and women.  Anyway, J.P. Morgan and Jamie will survive; battered and embarrassed but hopefully wiser and driven less by hubris than in the past.  At least that's the way it should work.

Of course part of the fall-out from this episode has been causing Jamie to respond to calls that Morgan and his competitors be broken up on the basis that they are too big to manage.  And yet, if I am correct and I'm pretty sure I am, in the case of the Whale all of the checks and imbalances were in place and actually worked; not as rapidly, perhaps, as one would have expected but the information was there.  It was not a failure of the structure or the complexity of the organization but a failure on the human level, to wit, humans acting like humans, which is another way of saying it's going to happen again if not at Morgan but at some institution just around the corner from Main Street, Wall Street or whatever street in your lexicon.  There will be (and should be) consequences and in this case they have been pretty wide-spread and harsh, but to demand a break-up of what is a pretty focused institution is simply stupid.  Better work can be done by both the institutions and by regulators but let us not delude ourselves that any business--especially one like finance which in some areas requires highly subjective decision making by humans--can be made risk free simply by organizational structure.  It's about people; it's always about the people so find the best you can, train the hell out of them, oversee them as best you can...and hang on!  And the most important thing?  Don't be afraid to admit that there is something you don't understand and for goodness sake ask for help when you need it.  Got it Jamie, and all you other Managers of the Year out there?  Oh, and have a great time spending the shareholder's money in the most expensive place in the world.

THAT TIME OF THE YEAR AGAIN.

Mid January means it's Davos time, that ego-serving, outrageously expensive, complete waste of time to which every CEO of a public company who attends should be immediately fired by his/her board of directors if they have any regard for the well-being of the share holders.  You could put a serious dent in world poverty if you applied the waste of this week in an effort to distribute some food.  But every once in a while something quite out of the ordinary occurs which gives, for a fleeting moment, legitimacy to the whole, sordid affair.

Yesterday, British PM David Cameron delivered perhaps one of the most important speeches heard in Europe in the last 50 years.  It was entirely political and aimed not only at his fellow leaders in Euroland but especially at the voters back home.  The PM is facing some tough battles:  A referendum later this year as to whether Scotland remains part of the UK or fulfills the dream of Robert the Bruce and becomes an independent nation.  He sits at the the head of a divided conservative party with the very real chance of having to call an election if things go just a bit out of kilter, and finally, the direction in which the EU appears to be going is not one that he can support on behalf of his electorate.

Cameron indicated that he had the willingness to stick with the EU but under far less restrictive membership that has been proposed.  But most strikingly...and some would say shockingly...he made it quite clear that unless accommodation is reached he was prepared to put the question of continued membership to the British people in the form of a straight up or down referendum later in the year.  Phrased in that manner, there are few who doubt that the result would be for the UK to withdraw.  Few suspected that he would announce such a bold plan, brilliantly delivered, or so I am told by an old friend, a British diplomat who was present.  Undoubtedly, this has solidified his position within the Conservative Party and has put a very large cat among the pigeons of the EU leadership to the point that Angie wasted no time in announcing that she was more than willing to discuss the UK's concerns at an early date.  No word on Frankie but I doubt he received this well.  Unfortunately, the poor guy's got himself in the middle of a war in Africa and is probably screaming mad that Cameron pulled this off whilst he was otherwise pre-occupied.  Pure speculation on my part by the way.  In any case, this is a very important event and now that he has let his intentions known in regard to a referendum, Dave's next act is going to be keeping the back-benchers in place for surely the cry will be, "Bugger the rest, referendum now!"  A high risk strategy indeed.

Among the common man group, Jamie Dimon waxed poetic about bank regulation today and we'll talk about that a bit tomorrow.  But under the caption of "You Can't Make This Stuff Up,"  came the announcement today the the chief actuary for Greece had been arrested for producing budget deficit numbers that were too high thereby, "thereby doing damage to the Greek State."  The reason?  Simple really.  It was to insure that the size of the bailout from the EU could be justified.  Greece, which got itself into trouble by submitting deficit numbers that were too low has just done a 180 and probably gotten half of Europe enraged at them again.  Really, You Can't Make This Stuff Up.

SEE EUROPE YET, JAMIE?

Remember when Jamie Dimon said Europe is for the Europeans or something like that?  Wonder how that trade is working out for the World's Greatest Banker.  Dreadful public statement this morning from the head of the Commission and Jean Claude Trichet (who should know better) started the whole thing off.  If you don't have something positive to say, just shut up but these guys haven't learned that yet.  Further, Frau Merkel had better start being consistant in her policy statements to her European colleagues and her voters: either she's prepared to tell both that Germany, for the foreseeable future is going to own Europe or she isn't.  She has very little time left because this thing is headed south without a clear and unambiguous statement of support.  Once again, it's all about confidence and at this stage there is no confidence in European political leadership.

Unfortunately, not much is better over here although with all the talk of the past few weeks concerning the default of the United States, the flow of money into Treasuries today at every maturity was stunning with the short bills actually producing a negative return for a brief period.  The Bank of New York actually told major depositors that they were going to start charging for deposits.  Can you imagine?  A bank that doesn't want money?  Sounds positively Swiss to me.  Of course the stock market, following the lead of Europe absolutely tanked with the DOW down over 500 at the close.  Tomorrow's job number has every chance of being awful again so God knows in what that will result.  There is real talk of a double dip, the chance for QE III was put at 75% by one talking head economist today and the realization is finally sinking in that the administration has no strategy, no plan and no clue other than The Leader's re-election.

The one bright note was the increasing jabber about The Suit wanting out (wouldn't you?) but that was immediately followed by the suggestion that Jon Corzine, forner head of Goldie and Destroyer of New Jersey wants the job and if not him then the afor-mentioned Jamie Diamon (I doubt it) or Jeff Emmelt of GE, known among the holders of the stock as Jeff Melt-Down.  Erskine Bowles name has popped and I know of a few people whose opinions I respect that have said that the guy is terrific--if so, I ask, why would he want to be part of this administration?

Look, there's really not much I can add to this truly awful situation that you haven't already figured out.  There is no confidence out here in the fly-over zone and I suspect that's the same where you live.  I'm going to wait for the number tomorrow and see what that brings and then see if anyone has a sense of how and to where we move forward.  Remember, it's August.  I don't like August.

THE RACE TO WASTE (of time)

It's going to be a close one this year. Davos is always an early leader of the pack what with it's expenditures approaching a billion dollars this year on nothing but ego. A long discussion yesterday on financial regulation produced absolutely nothing I am told except a couple of fairly heated, private arguments. Jamie Dimon announcing that he was tired of hearing criticism of banks and a general consensus that if it wan't business as usual, it was damn close. Oh yeah, Jamie also put his imprematur on the Greek bail-out and by implication, Ireland, Portugal and whatever else comes along I guess. By the by, Jamie is of Greek heritage. Beware of Greeks bearing gifts...and especially those who change their names. Wonder what it was?

The other contender for the biggest waste of time is the Financial Crisis Inquiry Commission, chaired by Phil Angelides, whose report was issued the other day. Wait, I take that back. Having but ten members THREE reports were issued: one by Democrats on the committee, one by three Republicans and one by one guy who said the other two reports were crap. Surprisingly, no one has paid any attention other than to state that this 500-odd page, soon to be best-seller, is now on sale at a Borders near you; which may be an indication why Borders is in the toilet. I have no idea what the hell this exercise cost the American people but it has to be in the millions. Now besides being the former head of the California Democratic Party, ol' Phil was in charge of the finances for Los Angeles County. The theory behind his appointment as Chair was, I guess, "it takes one to know one," but I may be wrong. The scary part is I bet at some point The Leader and The Suit will start quoting from some part of the majority's report to prove a point. The lame, leading the halt, leading...God knows what whilst ignoring the Bowles/Wing Nut commission which had some pretty good ideas to chew on.

Nevertheless, next week we shall have our own little discussion as to these meaty issues which seem to have brought all of these great minds world-wide to a grinding standstill. Stay tuned, and if you run into Al Gore, send him this way. We have a few folks around here who would like to ask him some questions about this global warming thingy. See you Monday.