Watching Jamie Dimon earlier this week, part of me couldn't help
but feel frustrated with the commentary (from both sides), but I
also had to agree with J.P. Morgan's CEO on several points and in a
way I feel his pain.
No, this doesn't mean that I condone frivolous actions that put
customers' deposits in danger. But at the same time, banks are
almost forced to take on more risk than normal. My issue lies
more with our regulatory system than it does with JPM.
With all due respect, it seemed to me that majority of The
Senate Finance Committee had no clue what really happened, other
than the fact that a bad trade was made and they were trying to
figure out if it was a "hedge" or a trade made for profit. I
bet that not one of them would be able to reconstruct a
collateralized synthetic obligation, which is essentially a CDO
backed primarily by credit derivatives, nor do I believe that a
majority of them understand how its value fluctuates in real time.
(I feel the same about Dodd, Frank and Durbin)
Even Paul Volcker, who has been out of the investment community
for a long time, would have a tough time building a model and
trading some of these securities in real life.
It just seemed to me that the committee was trying their best to
use this incident as grounds to push forward a an even more
restrictiveform of the Volcker Rule (which still needs refinement
and wording) to quell these sorts of losses and potential damage to
customer accounts. In reality, it's a political boost for those on
the committee, period.
While I do believe that there may be good underlying intentions
by the committee and the Senate, I also know that no matter
how extensive the rules and regulations are, incidents like this
can still happen.
In fact, if you look at the Savings and Loan crisis back in the
80s and 90s, a great deal of it was fueled by the Tax Reform Act of
1986. An end of ballooning inflation, among other factors
also contributed, but it was more government policy and changes
that accelerated the damage.
Complex regulations like the Volcker Rule will only make things
worse! Thanks to Dodd-Frank, most banks are charging more for
their services and less likely to lend to consumers. So
instead of helping us, it has cost the average American taxpayer
big time.
I can also tell you that as a derivatives trader of 17+ years, I
know the ways the "real investments" can be disguised as hedges and
the other little tricks that can be played.
In my opinion, the major changes that should be made would be to
standardize and list these complex credit and swap products on an
exchange. Have the exchanges and clearing houses maintain
proper position limits, capital requirements and monitor the
transactions as they are traded, holding the traders responsible
and preventing another "London Whale" from taking on a position he
can't afford.
The more you constrict the capital markets, the more creative
banks and brokerages will have to get to make money, especially in
a low interest environment.
What's worse is that in order for banks to "hide" and make
money, they have gotten so creative with their investments that the
instruments and securities themselves are nearly impossible to
analyze and trade in and out of.
I am sure that JPM was looking to make some money off this trade
that went south; the issue was the fact that these complex
securities can have a multiplier effect when things really hit the
fan. Most of the models that these traders use cannot
predict real human action in extreme conditions. This was
what caused the crisis in the first place.
My solution is not to regulate the hell out of the banks
(they'll go broke that way and none of us will be happy), but
simplify, standardize and clarify. Measure risk not just by
the 'amount' of securities that are long or short, but what the
worst case scenario would be if things went wrong.
We option traders do the same thing when we sell a put
option. We know the ramifications on our accounts if a
stock were to go bankrupt as do our clearing houses.
It's worked for us for almost 40 years and we don't have a
Volcker Rule…
Do you think a Volcker Rule is necessary? Would
it really help us or hurt us?
I think the Volcker Rule belongs in the same place that
the bulk of Dodd-Frank belongs - In the trash
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