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Editorial See other Editorial Articles Title: AND NOW WE KNOW THE TRUTH ABOUT WALL STREET: It's Just Kids Playing With Dynamite AND NOW WE KNOW THE TRUTH ABOUT WALL STREET: It's Just Kids Playing With Dynamite Henry Blodget | 33 minutes ago | 1,290 | 21 A A A Building Collapse See Also Goldman Vampire Squid How Goldman Sachs Blew The Facebook IPO timothy geithner GEITHNER'S FULL OF CRAP: The Bank Bailout Wasn't "Profitable" -- It Will Cost Taxpayers $120 Billion jamie dimon obama barack Jamie Dimon Takes A Massive Shot At All Politicians Yesterday's JP Morgan implosion has now put any lingering questions to rest. Wall Street banks simply cannot be trusted to manage the massive risks they are taking. After the financial crisis, when most of the world's banks were revealed to have been run by reckless gamblers, a couple of institutions stood above the fray. JP Morgan was one of them. The idiocy of a handful of gamblers should not be construed as a problem with the system as a whole, institutions like JP Morgan said. Well-run banks should be trusted not to be so colossally reckless and stupid. Well-run banks should be allowed to manage their own risks. Well-run banks should not be hammered with straight-jacket regulations that would stymie their marvelous and creative innovation. Well-run banks should be free to look after themselves, like responsible adults. And the banking lobbying engine rushed this message to Washington and threw money around. And the lobby quickly persuaded Congress that Wall Street was fine, that the financial crisis was an an aberration, that Wall Street should be left alone. Jamie Dimon KPLU885 Jamie Dimon. JP Morgan was the prime engine of this message. And its brilliant CEO, Jamie Dimon, was Wall Street's defiant Adult-In-Chief. Dimon had credibility, because unlike all the other incompetent banks, his bank hadn't imploded and brought the system to the edge of catastrophe. And unlike all the other CEOs, to his great credit, Dimon actually talked like a human, with language and confidence that persuaded even skeptics that he knew what he was talking about. But now JP Morgan has blown up. So we finally know the truth about Wall Street, a truth most Wall Street observers have known all along: Wall Street can't be trusted to manage--or even correctly assess--its own risks. This is in part because, time and again, Wall Street has demonstrated that it doesn't even KNOW what risks it is taking. In short, Wall Street bankers are just a bunch of kids playing with dynamite. There are two reasons for this, neither of which boil down to "stupidity." The first reason is that the gambling instruments the banks now use are mind-bogglingly complicated. Warren Buffett once described derivatives as "weapons of mass destruction." And those weapons have gotten a lot more complex in the past few years. The second reason is that Wall Street's incentive structure is fundamentally flawed: Bankers get all of the upside for winning bets, and someone else--the government or shareholders--covers the downside. The second reason is particularly insidious. The worst thing that can happen to a trader who blows a huge bet and demolishes his firm--literally the worst thing--is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm. Meanwhile, if the trader's bet works--and the bigger the better--he'll look like a hero and collect an absolutely massive bonus. If you had those incentives, you would do exactly the same thing that Wall Street traders do: Bet the company, day after day. (It's not your company, after all, so who the heck cares?) So, what's the solution? It's very simple. Congress needs to: Radically increase bank capital requirements, so even massive bets can't threaten the system Once again, separate "banking" from Wall Street gambling. Glass Steagall worked very well for 70 years--let's bring it back. Lay out a plan, in advance, to manage the failure of even the largest financial institutions--by stepping in, seizing the bank, firing management, zeroing out shareholders, haircutting bondholders, and then injecting new SENIOR capital (fully protected) and re-floating or selling off the firm. This will allow the entity to keep operating, and it will stick the losses where they belong--with the idiots who bought the bank's stock or loaned it money. Meanwhile, the systemic threat will be eliminated. That's the answer. And now that JP Morgan has proven that even "the best" banks haven't the faintest idea what they're doing (or don't care), it's time for Congress to finally make it happen. That nothing changed after the financial crisis is outrageous. But if nothing happens now, our entire government should resign in shame. SEE ALSO: How Goldman Sachs Blew The Facebook IPO Please follow Business Insider on Twitter and Facebook. Follow Henry Blodget on Twitter. Ask Henry A Question > Tags: Goldman Sachs, Morgan Stanley, Merrill Lynch, Tim Geithner, Banks, Jamie Dimon, Congress, Washington | Get Alerts for these topics » Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: tom007 (#0)
4/11/12 Bruno Iksil, the $100bn bet and JP Morgan’s CDS Is Iksil betting on the JP Morgan CDS spread? Well, at least JP Morgan’s CDS looks enviously better than the spread of the other Three Big banks. Their graphs separated late last summer. Earlier, I toyed with the idea that JP Morgan’s Bruno Iksil might be making these humongous bets to lower JPM’s CDS spreads. Humungous: the number $100bn is circulating. Here is some more data – comparing JP Morgan’s CDS with that of the three other big banks: Bank of America, Morgan Stanley and Goldman Sachs. Let’s look at the (illuminating?) graph: It shows that before the enormous fluctuations in autumn 2008 the four banks had more or less been on the same road. Following the great quakes of autumn 2008, JP Morgan has slowly slowly separated itself from the other three. From last summer the three have been hovering together, ever rising and/or fluctuating more wildly than JP Morgan. True, this doesn’t prove anything – but it’s intriguing. JP Morgan might have been seen to have more prudent – though recent CFTC fines of $20m and various other things don’t seem to support that theory – and/or it might have been more clever at managing perceptions. Or, just possibly, it might have done like Kaupthing did, on Deutsche Bank’s advise, and done some clever trades to influence its CDS. Some question marks hanging in the spring air. From the beginning of this year the JP Morgan CDS has been steadily falling, as the graph shows. Interestingly, it has fallen in the last three months, when the trades in the CDS index has surged, apparently due to Iksil’s diligence. As pointed out earlier: possible just a freak development. Other forces than Voldemort’s might certainly be at large. But can anyone be so hubristic/daring/foolhardy/foolish to manually influence its own CDS? Well, the know-how to influence one’s own CDS has been out there for a while. In the summer of 2008 Kaupthing was suffering from murderously high CDS – the management felt it was all horribly unjust since the bank was, according to the key figures, doing incredibly well. Kaupthing seems to have aired their concerns with Deutsche Bank, which came up with a brilliant solution: companies should be created to buy CDS on Kaupthing. Deutshce seems to have thought it was a brilliantly viable plan – it even invested in it. Kaupthing implemented the idea – not via its prop trading, a la JP Morgan, but by getting favoured clients (some of whom the bank was lending heavily to invest in Kaupthing shares so as to keep the share price from crashing) to lend their names as owners of companies, which Kaupthing and Deutshce lent into – and then these companies did the trades. Did it help? Well, for whatever reason Kaupthing’s CDS did move… downwards.* ---- An old lonely slave comes back from the grave From a theoretical standpoint, a default swap on yourself is exactly the thing that should go into your risk model. The problem is, it's too hard to price / trades too thinly. No free lunch.
An old lonely slave comes back from the grave |
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