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Tuesday, October 25, 2016

The inherent problems and contradictions of Wall Street trading make government intervention a necessity.

The fiasco at JPMorgan Chase is most disturbing because it reflects the inherent riskiness of modern financial trading. Few articles have pinpointed this as the problem. It is the reason strong regulations and high capital requirements are necessary; you can’t outsmart these inherent contradictions.

JPMorgan ran its trading operation out of its risk management group, which was supposed to offset risk, not take on new ones. But even if you are trying to implement a pure hedge—that is, minimize risk—there are two big issues here. One is the inefficiency of markets and the lack of adequate information. You can buy or sell a security—usually a derivative, or a leveraged security based on the ups and downs of another security—to hedge a position, such as a portfolio of bonds you think might readily fall in value. This was the Chase situation.

However, the first problem with this is that the hedge is not necessarily properly priced, because the markets are inefficient and prices are not transparent to all. It is often too cheap. Second, the counter-party—the seller or buyer on the other side of the transaction—may not meet his or her commitment. This is what happened when AIG sold insurance (credit default swaps) to Goldman Sachs and then couldn’t pay it off without a government bailout when markets collapsed.

The next big issue is the human one. Judging from press accounts, JPMorgan wasn’t trying merely to hedge. In truth, there are no pure hedges or people wouldn’t make money at all. Nothing can eradicate risk completely. Rather, JPMorgan looked like they were taking long and short positions on balance—that is, trying to win bigger by guessing the direction of the markets, not just hedge.

Again, there are two problems within this larger issue. First is the inalterable human temptation to make a big killing, especially when the individual bankers are being paid big bonuses to do so and suffer relatively little if they guess wrong. Call this asymmetric incentive. They may even have changed their own yardstick, or value at risk, to seem like they were taking less risk. No doubt they had some kind of argument to do so.

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Copyright 2012 The National Memo
  • If the GOP gets control, they’ll just De-regulate everything for the worst, especially their money train!


  • William Deutschlander

    BANKS MUST RETURN TO BANKING and preferably be required to not have branch offices more than 100 mies from their main office.

    BROKERAGE FIRMS SHOULD BE BROKERS in the stock market and preferably not have branch offices more than 100 miles from their main office.

    VENTURE CAPITAL FIRMS should provide capital to start up firms and be limited to 35% ownership maximum.

    Mortgage Firms should provide mortgages to those who their due diligence deem able to meet the terms.

    • ObozoMustGo

      What kind of knucklehead are you Nazi Bill? You want to live in a world of command and control that actually dictates geographic boundries for a certain type of business? Why 100 miles? Why not 95 miles? or 122 miles? Or no miles at all?

      How do you have the wisdom of where businesses should be located and the people that run them don’t?

      You’re just another typical arrogant leftist nutjob that believes you have a right to tell everyone else how to run their businesses and their lives.

      From the rest of America to you and all your leftist nutjob equivalents: SHUT THE EFF UP!!!!!!!

      Have a nice day!

      • lexi001

        You have got to be the stupidest man ever. Notice I just assume you are a man? No woman would waste their time with the likes of you. Your ranting and raving is sooooo old. You continually use the same harsh and obscene language to TRY to get your point across. Even if I agreed with ANYTHING you had to say, and I don’t, your attempt to sway anyone is pathetic. You simply sound like the most ignorant, racist, angry, hate-filled man that posts anywhere. I assume you are retired or unemployed and I assume your bitterness and hatred have been brewing for many years. I actually feel sorry for you. You cannot express yourself with anything but hate. How sad your reality is.

        • ObozoMustGo

          lexi… I have no interest in “swaying” anyone that comes to read any of the trash on this Obozo propaganda site. The vast majority of the readers on this site are so far gone over the leftist nutjob, useful idiot cliff that there is nothing that can save them from their insanity. Even then, however, I have actually conversed with a few lefties on here, and find that I like a couple of them very much and have respect for them and their views, even if they are wrong! 🙂

          Have a nice day, lexi!

        • wayneonly

          Lexi001, ObozoMustGo is really hard to take and usually has nothing of worth to say. Maybe we should all ignor him and he will go away.

          • lexi001

            That has been my thought every time I see his name and I swore I would not give him the attention he obviously so desperately needs, but the ignorance drives me to madness! However, I absolutely agree with you and have no intention of ever responding or reading anything with his name attached again. I don’t know if his response shows for you to see, but I would never respond back. He doesn’t even make any sense. Now that I have responded to him this one time I’m mad at myself for giving into such stupidity. I hope your suggestion is taken up by all.


        You’re the bozo…You totally missed the point…but then you’re a ignorant fool…

        • ObozoMustGo

          My response is to Nazi Bill’s post you idiot, not the trash piece article.

      • joyscarbo

        I’m not saying I’m an economic whiz or anything…but if you have $19 billion that’s taken a year to make and you lose $2 billion in one day…that’s nearly 11% of your profit lost/gone in one day. Wouldn’t any business who lost 11% of their profit in ONE DAY be freaking out? Certainly the stockholders can’t be sitting around eating bonbons thinking this was good for their investment.

        • ObozoMustGo

          Hi Joy! I missed you this week. 🙂 I hope you are doing well.

          I think the point I was trying to make was NOT that $2B is not alot of money. It is. But in the big picture of the bank, it’s really not a problem to absorb it. And by the way, the trade was not a one day event. The bank and the trader in charge of this particular bet were getting into this over a long period of time. Here is a good place for you to go learn about how this unfolded and how it works:

          If you Google “JPMorgan’s Trading Loss Is Said to Rise at Least 50%” it will give you a NY Times link which takes you to a section they have called “DealBox”. It will also give you good info on the nature of the risks that the bank took, which legitimately they should not be taking if they are a depository institution unless such trading is done through separate legal entities, in my opinion. But again, in the end, they are projected to make $6B in profit this Qtr, so in the big picture, it’s not a big deal. it is a good lesson, though.

          I hope you have a wonderful weekend, Joy!

  • ObozoMustGo

    When are people going to learn that government bureaucrats are so much smarter than everyone else? When are people going to learn that government really should control every aspect of every business, not just banking, but every business? After all, if the government just controlled everything, we would never have any problems would we?

    Yeah, right. Sure. Sure! Only in leftist nutjob world!

    Have a nice day!

  • ObozoMustGo

    Jeff, why do you leftist nutjobs and useful idiots give a damn whether a private bank or any business makes a bad deal or not? It’s NONE of your friggin business, unless you’re a JPM stockholder.

    By the way, what all you leftist nutjobs dont like to mention when you’re trying to stir up the hardcore left for Obozo on this issue is that JPM earned $19 BILLION last year. This is a big loss, but it has no real long term impact on the finances of the bank. None whatsoever.

    So quit making muchado about nothing!

    Have a nice day!

    • Landsende

      Bozo the reason we should care about private banks and businesses making bad deals is because if to many of them do and fail, they can bring down an already struggling economy as happened under GWB. Then they expect the taxpayers to bail them out so they can continue their bad behavior. Jobs were lost, 401k’s were wiped out, and homes were foreclosed on. Been there, done that and don’t want to do it again.

      • ObozoMustGo

        Hi Land… while I understand your concerns with the broader issues (which are misplaced IMHO), this case is NOT one to hang your hat on. JPM made $19B in net profits last year. A $2B loss, while big, is NOT a big deal to them. It’s pocket change in the long run, at best.

        But it’s an election year, and The Memo IS part of the Obozo reelection propaganda machine. So, it’s sort of expected that something that means nothing in reality would be overblown to try to get some sort of political advantage in the public’s mind for Obozo and the leftists. Just like the completely made up and phony “war on women” horse crap Obozo tried a couple of months ago.

        The point is that IT’S ALL AN ILLUSION and The Memo is part of the illusion generating machine. When you are objective, you will see it.

        Have a nice day, Land!

    • forrest57

      obozomust go; you must be either the biggest idiot (Republican) or a banker (theif). to think that 2 billion dollar loss (at the present time and i’m sure this is just the tip of the iceburg) is no great loss, probably both. some one pays whether its the shareholders loosing money or the bank coustomers with higher intrest rates. the problem is that the bsanks are loosing money that is not theirs to loose and noone is held responcible noone is fired noone repremanded instead they are rewarded for their bad performance in the way of bonuses which are excluded from taxation. the banks and the republicans have run this country to the verge of bankrupsy

      • ObozoMustGo

        Hey Gump… Congratulations! You have won “The Moron of The Day” award. You have NO CLUE what you are talking about. Here it is:

        1) A $2B loss in a PRIVATE company that generates $19B a year in Net Profits is not a big deal, unless you are a shareholder. Even then, it’s a blip on the radar screen of the company in the long run. It’s why your leftist hero Buffett is buying their stock now.
        2) No one “PAYS” for their losses except them. What a fool like you has no idea of is that investment banks trade on THEIR OWN ACCOUNTS WITH THEIR OWN MONEY…. Unless of course your name is Jon Corzine and you’re buddies with Obozo and Eric “The Incompetent” Holder… then you can cover your bets illegally with customer money and get away with it.
        3) As stated in number 1 above, JPM is NOT losing money. Only an idiot like you would make such a statement in a public forum and NOT check your facts on Google Finance or where ever before you make such an assertion.
        4) There is NO SUCH THING as bonuses that are excluded from taxation. They are taxed like regular payroll checks, you dope! I can tell that an idiot like you has probably NEVER earned a bonus before in your miserable existence!
        5) uhhhh… hey STUPID!!!!! Obozo has been the one running us into bankruptcy. He took office with $10T in debt and 3.5 years later we are $16T in debt. NO ONE has ever spent like Obozo spends.

        Even your misspelling of the word “bankruptcy” is a clue that maybe a useful idiot like you should not be sharing your deep lack of intelligence with the public!

        I am sorry to be offensive, but you need a wake up call, dude!

        Have a nice day!

  • William I don’t know about the geography but the banks need to stop gambling. The mortgages were always with Banks and that I don’t see a problem with. They really should not be allowed to package/bundle these loans and sell them. All transactions needs to be very transparent not cloaked and veiled in some language that no one understands.

    • ObozoMustGo

      World… The center of the mortgage crises was Fannie Mae and Freddie Mac. Those 2 government sponsored mortgage backers were giving the banks incentives to write highly risky mortgages because they were offering to back them. That means, guarantee them. Of course the banks were going to write more mortgages. The reason they were selling them in large bundles was a way for them to reduce their risk and exposure. Problem is, when all of them are doing it, everyone ends up holding the bag for everyone else. When the house of cards came down, everyone realized they were all naked and the losses started to pile up.

      Think about it this way. If you had a business selling cars, and the government offered to be the warranty on your cars guaranteeing any needed repairs are paid for, could you sell more cars? You’re damned right you would be selling more cars! Would you care whether or not they were in perfect condition? Hell no! Of course not because the government would cover your butt and the customer would get the car they want fixed up anyway. Everyone’s a winner, right?

      Do you understand the perverse incentive system created by government incentives for home ownership? It’s no different. This is what is called an incentive trap. Many, many government programs and ideas create incentive traps. Once you learn what they are, and then begin to spot them, that’s the time when you become very skeptical of politician’s ideas to “help” people.

      Guys on the left like to blame “greedy bankers”. Guys on the right like to blame government. The flat out truth is that BOTH are to blame. Government comes up with stupid ideas and tries to manipulate the free market. That ALWAYS ends badly. But the bankers should know better and maintain levels of integrity and responsibility in their lending practices, no matter what the stupid politicians tell them. But, they let their greed get the better of them and the went betting in a high stakes game in a house of cards. Funny thing is, you will NEVER hear a politician tell you that it all started with their stupid ideas of increasing home ownership.

      There were a great number of banks that had no problem with the housing crisis because they never veered off the course of responsible lending. Most of them were small, local or regional banks. I hope you have your money in that type of institution.

      Hope this helps.

      Have a nice day!