News & Analysis
JPMorgan Has Lost US$ 2 Billion, Now It's Time for the Volcker Rule
For Volcker rule, JPMorgan's $2 billion loss says it all ... It's never polite to say I told you so, but JPMorgan Chase & Co.'s $2 billion trading loss has proponents of a tougher proprietary trading ban saying . . . well, you know what. JPMorgan's admission is a shocker. The bank said the losses resulted from errors, sloppiness and bad judgment, which top bank executives didn't know about or understand until it was too late. On Wall Street and around the globe, JPMorgan was a standard-setter for risk management. If regulators can't trust JPMorgan to get it right, whom can they trust? – Bloomberg
Dominant Social Theme: Tall Paul Volcker is in the house! And it's about time ...
Free-Market Analysis: Even the 'Net alternative media seems attracted by this "rule" that the former Federal Reserve Chairman is flogging. But we can't help recall that virtually all his life Volcker has been a right-hand man to the Rockefeller dynasty. There's some irony here, yes?
Here's how Bloomberg describes The Volcker Rule:
It's part of the Dodd-Frank financial reform law, inspired by former Federal Reserve Chairman Paul Volcker. It's supposed to stop federally insured banks from making speculative bets for their own profit ? leaving taxpayers to bail them out when things go wrong.
We're kinda depressed about the losses JPMorgan took, in fact. We wish 1) they'd been so large that the firm had gone out of business and 2) they'd helped spark a larger takedown of Wall Street.
See, here at the Daily Bell we're all for private equity and private investments generally. But the monster Wall Street has become is not something we find much sympathy for.
We don't see, in fact, how those in the alternative media – those interested in a freer and better market – can support something like the Volcker Rule. The idea is that a similar rule, Glass-Steagall, helped maintain Wall Street by curbing the worst instincts of its traders.
But the problem with Wall Street is money itself – the printing of monopoly fiat paper money, which is what gives rise to Wall Street's casino-mentality. Here's more from the article:
The huge trading positions taken by the London branch of JPMorgan's chief investment office certainly drive home the point. As first reported by Bloomberg News, the investment office, operating much like a hedge fund, built a position that may have totaled $100 billion in a credit-derivative index known as the CDX, which tracks the default risk of a basket of companies. Those are the positions that blew up. They could ultimately cost the bank much more than $2 billion now that the market knows they are being unwound ...
In truth, the London trades fall into a gray zone in the Dodd-Frank law. The act gives regulators discretion to exempt "risk-mitigating hedging activities" for "individual or aggregated positions" from the proprietary trading ban. JPMorgan still argues that it was following the letter of the law because its trades were meant to hedge the bank's overall portfolio risk. If the Federal Reserve and other bank regulators agree, and write a Volcker rule that allows such broad-based hedging to continue, they risk a systemic failure ...
Overseas regulators are considering alternative approaches that could work just as well, so long as the end-goal is to limit proprietary trading. The U.K. allows banks to conduct prop trading as long as they split their banking and securities activities into independent, separately capitalized entities, an approach known as ring-fencing. The European Union is also considering requiring risk profiles as well as higher capital requirements for securities that aren't easily sold.
Banks say these rules will impair their ability to act as market makers in service to clients, harm liquidity in bond markets, and impose costs that will reduce lending and slow the economy. What banks don't mention is that depositors' money will be safer, taxpayers won't have to bail out big banks that suffer large trading losses, and financial crises and recessions may occur less often. That's a lot of upside.
No, it's not a lot of upside at all. These articles are written as if the system we have currently is sane and practical. It's not.
There is currently an overhang of some US$ 600 TRILLION in "derivatives" of various types around the world. The system itself is a product of endless money printing. The idea that such a system can right itself with proper regulation is a kind of elite dominant social theme.
Banks, large and small, along with Wall Street's proprietary trading shops are part of the problem. But the solution isn't MORE regulation; it's less. Allow real competition in the money business and see just how long the conflicts of interest actually last.
The idea that the government itself via enlightened regulation can put a stop to Wall Street's worst "abuses" is a promotion of the very people who most invested in the system.
Conclusion: People should investigate Volcker and his background before piling on to his ideas so enthusiastically. Volcker is a prime proponent of the money system as it is – and has been throughout his career. Is he really a "savior"?