There’s a fine line between lookin’ and cheatin’

Infidelity in most relationships can be defined in a range from the average lustful glance all the way to someone’s hands being on some else’s body. However, in most relationships, it can mean actual sexual intercourse. Then you have to factor in the inevitable ‘this didn’t happen here/this didn’t happen where people can see’ (what happens in Vegas ‘doesn’t count’, for example). All of this is a lot like the lengths to which corporations will go to avoid regulation and JP Morgan Chase’s recent losses have brought much of that regulatory infidelity to the forefront and reminded us, all over again, the terrible risks still present in our financial system and how woefully inattentive Congress is to the problem.

You’ll remember that AIG had a unit in London (just like JPMChase) that traded derivatives. This unit, the Financial Products Group (AIG FP) was established in London under separate cover from the parent company to evade US and even some British regulation. All this was so that FP could engage in their trading activities which mostly involved selling underpriced insurance on debt to people smart enough to buy it. Had the parent company done this, they would have had to reserve against potential loss. The FP division did not and was functionally operating as an insurance scam, not unlike some fly by night car insurance company who’ll insure anyone, then declare bankruptcy when things go bad. While those folks usually end up in the pokey, the bright stars running AIG FP didn’t end up in jail. Instead, many of them got lucrative ‘consulting’ contracts to help unwind the mess they’d already created (and without having to forfeit any of the money they were erroneously paid, for creating profits one deals that ended up losing billions, while creating the aforementioned mess).

Such is the case with JPMChase… as we move closer to the implementation of the Volcker Rule, some large institutions have decided that they’d like to keep going with their rather lucrative trading business. JPMChase has decided to call it risk management and they’ve located it in London, far away from the watching eyes of the few regulators still left on the government payroll. None of this would be a big deal if that group in London hadn’t lost at least $2bn and embarrassed the hell out of Jamie Dimon, the CEO of JPMChase.

Now, Dimon says this was risk management/hedging which is a normal operating activity for a bank. As Jason Stanford points out, there’s a little problem with Dimon’s claim since most RM is focused on just not losing money (effectively it’s an insurance policy). What Dimon’s team did was make a series of big bets, in short taking ON risk, not mitigating it, for the purpose of making money. THAT, my friends is proprietary trading, not risk management yet no one in Congress bothered to say anything about that little detail.

There’s also the nagging issue of making proprietary trades with depositor money, which is federally insured. Dimon said that depositor funds were not at risk which is technically true since first losses at the bank will always be absorbed by the bank itself, not depositors. However, JPMChase has $120 billion in capital which sounds like a lot until you realize that it’s floating a balance sheet of more than $2 trillion. At losses of $2 billion per, how many trades would it take for JPMChase to become the responsibility of taxpayers?

This incident, rather than reinforce the fact that banks have a gambling problem, instead seems to have created another opportunity to bash regulation and completely ignore the reality that our financial system and markets are every bit as vulnerable as they were in September, 2008 and those looking to evade regulation still seem to be able to do it with impunity.

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