Regression to the Mean, JPMorgan Edition

By James Kwak

I haven’t been writing about the JPMorgan debacle because, well, everyone else is writing about it. One theme that has stuck out for me, however, has been everyone’s reflexive surprise that this could happen at JPMorgan, supposedly the best and most competent of the big banks. For example, Lisa Pollock of Alphaville, who has provided some of the most detailed analyses of what happened, asked, “could this really happen under CEO Jamie Dimon’s watch?” Dawn Kopecki and Max Adelson at Bloomberg referred to “JPMorgan’s cultivated reputation for policing risk.” Articles about Ina Drew’s resignation are sure to point out her relative success at dealing with the financial crisis of 2007–2009.

“Highly intelligent women tend to marry men who are less intelligent than they are.” Why? Is it that intelligent men don’t want to compete with intelligent women?

No. It’s mainly because if you take two draws from a random distribution, and the first is at the high end, the second is almost certain to be lower, even if the two are somewhat correlated. This example comes straight from Thinking, Fast and Slow by Daniel Kahneman, which I’m finally reading (chapter 17).

The performance of anyone doing anything will exhibit regression to the mean. If you do well at something, it’s because of some combination of skill and luck. If JPMorgan came through the financial crisis well, it was some combination of skill and luck. Remember, JPMorgan didn’t have as big a portfolio of toxic assets as its competitors because it was late to the party; only in retrospect do we ascribe this good fortune to the supposed skill of Jamie Dimon. JPMorgan was never as good as people (both supporters and critics) made it out to be, so we shouldn’t be so surprised that it just lost $2 billion (and counting).

The more disturbing thing isn’t that commentators fell for this statistical red herring. It’s that people inside JPMorgan seem to have fallen for it, too. This was Dimon’s response to a question about whether the Chief Investment Office was becoming more aggressive, as reported by Bloomberg:

“I wouldn’t call it ‘more aggressive,’ I would call it ‘better,’” Dimon told analysts yesterday. “We added different types of people, talented people and stuff like that.” Until recently, they were careful and successful, he said.

People don’t suddenly go from being good to bad overnight. What happens is they go from lucky to unlucky. They are the same people doing the same things.

“Inside JPMorgan, leadership is stunned by the situation, according to two senior executives,” also as reported by Bloomberg. If that’s true, that’s bad news for all of us. It’s one thing if, as many of us thought, JPMorgan was consciously trying to take on more risk (as has been amply documented, Dimon pushed the Chief Investment Office into profit-seeking trades) while denying it to regulators and the press. That’s what we expect.

It’s another thing if the bank didn’t realize it was taking on risks of this magnitude. That implies that JPMorgan executives had started believing their own hype—that is, they believed that they really were just good, not lucky. And that should make all of us very worried.

85 responses to “Regression to the Mean, JPMorgan Edition

  1. Dimon has more butt-kissers in the media than Carter has little pills….it’s freaking sickening.

  2. ‘It’s one thing if, as many of us thought, JPMorgan was consciously trying to take on more risk (as has been amply documented, Dimon pushed the Chief Investment Office into profit-seeking trades) while denying it to regulators and the press. ‘

    Can you provide evidence for the above assertion? According to this guy, it was something like the opposite, they were trying to protect themselves by being short high yield credit swaps and long investment grade.

    http://soberlook.com/2012/05/jpmorgans-var-model-did-not-capture.html

    That’s hedging your exposure. Unfortunately for JPMC, other market participants figured out what they were doing–probably by simply monitoring their trading–and bet against them.

    So, the above is correct it wasn’t so much pushing for ‘profit-seeking trades’ (isn’t that what everybody is seeking?) as protecting their profits, but being out-executed that caused the (comparatively trivial) $2 billion loss.

  3. Well written.

  4. Reblogged this on The Wall Street Examiner.

  5. Your association of this with regression to the mean is interesting. In biology regression to the mean happens because an organism has to stay in its viable range, so if it is near the upper end at one point, it has to be lower at the next point to stay in the viable range. From the statistical standpoint this happens because serial measurements are correlated, not in spite of it (as you seem to imply). They way thiis might carry over into the world of financial institutions is that their “viable range” is actually the range they will naturally inhabit in the current system they operate in, which paradoxically might be called their unviable range. In the end, however, your analysis is right; the fact that they looked better before and worse now is probably luck, not related to their levels of competence.

  6. edward ericson

    “I’d rather be lucky than good.”
    –J.R. “Bob” Dobbs

    Pat S: If JPM were just hedging its positions, then it would be net neutral regardless of what the bonds it was playing with did. Clearly that didn’t happen. Looks like what happened was, it was running a short-squeeze on some of its smaller counterparties who bought CDX from it. JPM saw its bet going the wrong way, so it tried to flood the market with more CDX, lowering its price. But it got caught. So instead of a few puny counterparties, suddenly it had a whole pile of little ones and some pretty big ones. It got “short-squeezed” by them.

    That’s why those “The London Whale” stories the WSj wrote last month mattered: those were the signal that JPM was playing around and getting caught. Likely as not, one of the bigger hedgies leaked it to the Journal in a bid to get more pile-in. As well at to alert the authorities, who are always the last to know.

  7. I think that those who have good luck often attribute it to skill whereas those who have poor skill often attribute it to bad luck. After all, we all like to feel good about ourselves and our kids are all above average.

  8. Obviously caused by excess government regulation, Freddie Mac and so on. What these guys don’t understand is that regulation is in part to provide protection against themselves. Left alone they will push until they fall…..off a cliff

  9. “No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.” – Matthew 6:24

    Sometimes I wonder if those who work in the complexity of modern finance lose sight of the simple truths present in the human heart. We read about humans with “psychopathic tendencies” working at banks. While some may be quick to condemn these people, tragically, it is often their own flawed upbringing as a child that has made them the way they are. Truths about the cause of the last financial crisis and the next will be abundantly found in human development and psychology, at least as much as they will be found in economic and political theory.

  10. ‘If JPM were just hedging its positions, then it would be net neutral regardless of what the bonds it was playing with did. Clearly that didn’t happen. Looks like what happened was, it was running a short-squeeze on some of its smaller counterparties who bought CDX from it. JPM saw its bet going the wrong way, so it tried to flood the market with more CDX, lowering its price. But it got caught’

    That sounds like an argument that Morgan Chase was trying to move to a net neutral position but didn’t execute it properly. Wouldn’t be the first time.

  11. I have worked, lived with, known incredibly smart and talented people and one thing I’ve learned from it is:

    There are no demi-gods.

    Jamie is just a guy. Maybe he’s real smart. Maybe he’s real talented. Maybe he works very hard. None of that allows him to subvert the laws of physics nor the laws of economics.

    Basically we’ve become a society easily lost on the “cult of the personality”. People becoming essentially star struck by what turn out to be normal supremely flawed human beings (“supremely flawed” being redundant with “human beings”). Generally speaking from what I can see we have a bunch of people who are better at selling themselves than anything else, but even if they are pretty damn talented, in the end they still aren’t that much better than the rest of us.

    So, I’m not surprised the Jamie screwed up. I’m surprised how many grown adults can fall over and over for the idea that some people are somehow magically an order of magnitude better than us (didn’t we fight a revolution to end this shit?).

    And this is the key failure of “Social Darwinianism”. The people that you choose for aren’t necessarily “better” in any sense we should be filtering for, they’re just better at self promotion, or worse, “better assholes”.

    Lately I’m mostly convinced it’s the later. We’re selecting for the “best assholes” not the “best people” (and the weird thing is, the people most pushing for such selection seem to be the most religious)(er, outwardly – which may be a clue). As long as we look for kings and demi-gods instead of to ourselves, the world is going to be a sucky place.

  12. One of the realities that seems to have escaped a lot of folks is that there’s no possibility of isolated strategies any longer, not in a world where information is this cheap. As others have pointed out, once players got wind of the game JPM was playing, they used it against them and their trader got killed to the tune of $2+ billion.

    Short of factoring in every possible player and counter-strategy and planning for it – an impossibility – you have to live with the knowledge that all the games are zero-sum in the end, that for any win you have, someone will be losing and vice-versa. That’s a passable definition of a random walk in my book. Fool yourself into believing that you’ll always be on the upside of all those transactions, and you’ve already lost.

  13. moremonkeys

    Great article James.

  14. There once was a gal named Ina Drew
    Who bet the farm on something she thought she knew
    When the counter parties came calling
    She had to know she was falling
    Into something truly resembling the appalling

    http://dealbook.nytimes.com/2012/05/14/after-2-billion-trading-loss-will-jpmorgan-claw-back-pay/?nl=business&emc=edit_dlbkpm_20120514

  15. From my blog last year, reposted this week in honor of the JPM fiasco: The most disconcerting thing about all of this is that it became obvious to me that these folks honestly believe that they deserve everything they have and more. They actually think they got where they are because they are smarter, more industrious, better prepared, more enlightened, and ultimately more deserving than the rest of us. They have bought in, wholesale, to their own bullshit, and they are occupied, full-time, curating their singular circumstances.

  16. Per Kurowski

    @James Kwak “People don’t suddenly go from being good to bad overnight. What happens is they go from lucky to unlucky. They are the same people doing the same things.”

    Nonsense… they might be doing the same thing, but in an ever changing and extremely dynamic environment. Sometimes they read the changes sometimes not, and anyone believing in someone’s “infallibility” is just as dumb and naïve as those regulators who believing in infallible sovereigns and other super-safe havens, decided that banks, in those cases, basically did not need capital.

    Again for the umpteenth time, the role of regulators is never to believe those they regulated will not fail, but always prepare for when they do… and it was their failure in grasping this basic principle that got us into this crisis.

    Come on! The basically only pillar of Basel bank regulations was that credit ratings or the bank’s risk models would not get it wrong…. How naïve was and is not that?

  17. Robin Thomas

    There were SOLID reasons for the post-Depression regs. I wish that Pecora could get a hold of these bastards. Or even Black. Why do we have a class of speculator pricks getting backup from the taxpayers? I’m surprised that some assassin hasn’t started picking them off. Oh, and Homeland Security, I don’t care of you’re listening.

  18. Joe McHugh

    Of course JPM believed its own hype. (Over) pay anyone enough and they are bound to believe they deserve it. The alternative is believing you are a fraud. Which would you pick?

  19. @Pattrick R. Sullivan: JPM wasn’t being SHORT on HY Credit Default “SWAPS”…. it was rather short on HY Credits and thus buying HY Credit default Swaps….if you are short on something, you need protection on it. that’s what JPM was doing. by being long on IG credits, it didn’t need to hedge it. it was just that it wanted to be short on HY credits and feared fluctuations and was actually BUYING HY credit default swaps.

  20. Picking up Patrick Sullivan’s point above about the ‘comparatively trivial’ $2 billion loss. I agree. The JP Morgan CIO portfolio (seldom mentioned in articles decrying the losss) is vast – somewhere between $300 billion and $400 billion. So $2 billion represents 0.67% or less of the total: daily value swings could be expected often to be more than this.

    So why the scale of the fuss? The CDX index trades may have been an ill-judged, oversized hedge that turned into a bad bet, but the CIO was not ‘betting the farm’ – not even really one field of the farm.

    Sure, the timing is bad, given the heat of the Volcker rule debate and Jamie Dimon’s aggressive stance, but doesn’t the $2 billion need to be put in perspective? Or am I missing something basic here?

  21. Per is right again, and I have been saying this for some 5 years on blogs. Any (or anyone who has seen one) one can act on behalf of a clown and be handsomely paid for it. The fact that the most of the clowns have left the stage and left the bad economic and law making actor’s with less than nothing shows how a firm can lose 2 billion dollars in just a month.

  22. Per Kurowski

    And in fact, when push comes to shove, Jamie Dimon and JPMorgan know immensely more of their business, than the regulators and the Basel Committee do of theirs. http://bit.ly/KpJ9ka

  23. Jo Procter

    Example of HUBRIS: When conceived it was a project of almost unimaginable boldness and foolhardiness, requiring great bravura, risking great hubris. —Simon Winchester, The Professor and the Madman, 1998 (Merriam-Webster dictionary)

    JPMorgan was hoisted by their own petard; they believed their own hubris. Share holders should call Jamie Dimon to account. Why haven’t you questioned Dimon pushing the blame down to Ina Drew? He’s the one in charge and should take the responsibility: Dimon should resign or be fired. JPMorgan hangs the women and the men stay in the game. Plain and simple.

  24. Per Kurowski

    What is JPMorgan hubris when compared to that of the bank regulators, who thought they could be the risk-managers of the world, and started to dole out risk-weights here and there?

  25. James, this is absolutely another winner. Keep up the good work.

  26. Thanks to Sachin for the clarification on what the market was, and to David for his input too. Per makes a good point about the COMPARATIVE failure with that of the regulators who thought MBS were such a safe way to hold capital.

    It’s as though the manager of the Boston Red Sox would say to himself, ‘Well Ted Williams strikes out four times as often as he hits home runs, so now that the bases are loaded I guess I’d better pinch hit for him.’

  27. William K Black (author of “The Best Way to Rob a Bank Is to Own One”) was a guest on Democracy Now ( democracynow.org) today (May 15 2012) and gives about the best nutshell summary of what happened to the 2 billion that I’ve heard or read to date. (The lexicon has been expanded, we now have “hedginess” – the show is worth a peek.)

    Not that Mr Kwak piece wasn’t excellent too. Thanks.

  28. Paul Robinson

    Hard to imagine attributing what went on to “luck”. Clearly, a key part of JP Morgan went after risky investments in a market that even they didn’t really understand. That’s bad policy for them and the country.

    Plus, regression to the mean, and the extent to which performance varies modestly or falls back some (consider the sophomore slump that happens in baseball after a rookie has a phenomenal first year)– it doesn’t change from black to white or white to black– as it would if the behavior variations were truly due to luck. No, the performance fluctuates within a range around the true or mean level of talent. In this case, however, it went from very, very good overall to dismal in one part of the company. That’s a very different thing than “luck”.

  29. What the FDIC says about bank capital;

    http://www.fdic.gov/deposit/insurance/risk/rrps_ovr.html

    ‘ “Well Capitalized.” Total Risk-Based Capital Ratio equal to or greater than 10 percent, and Tier 1 Risk-Based Capital Ratio equal to or greater than 6 percent, and Tier 1 Leverage Capital Ratio equal to or greater than 5 percent.’

    Where Morgan-Chase is;

    http://www.jpmorgan.com/tss/General/Regulation_F_Capital_Ratios/1102380208957

    Total Risk-Based Capital Ratio 13.17%
    Tier 1 – Risk Based Capital Ratio 9.58%
    Leverage Ratio 5.68%

    Well above ‘well capitalized’. What more would a regulator want.

  30. The Bond Man

    You can cite all these ratios until Bessie the Cow jumps over the moon, and it won’t change anything. No one stays lucky or good or both indefinitely, so sooner or later, your derivative bet or hedge is going to blow up in your face.

    It’s wrong for a bank to be engaged actively in the business of casino gambling, because someone smarter or better informed, or more devious, is going to beat you to the punch. Ask the Beached Whale.

    Derivatives caused this financial meltdown in 2008, and could once again rear the ugly head and strike again. IF it does happen, let the zombie banks eat it once and for all, the filthy bastards.

  31. Bond Man, was it derivatives, or was it the underlying mortgages that caused the problem. Suppose the underlying mortgages had all been made to people with sound credit histories who had put down 20% down payments. Would derivatives of those mortgage loans have caused any problem?

  32. The Bond Man

    Suppose that loan originators exercised due diligence and normal business prudence, would NINJA loans have come on the scene?

    You are typical of your ilk, Pat, blaming the victim, and not the perp.

    You must be a republican. No offense.

    They knew exactly what they were doing, Pat, and to maintain otherwise is to miss what happened.

    Stop kissing Chase’s rear end, while you’re at it, they hate you as much as anyone.

  33. @Patrick R. Sullivan

    Yes, those who took loans and who didn’t, or couldn’t, pay them back are also at fault in this morality play. However a massive house of cards was built on this faulty foundation by people who were paid to know better.

    It’s like commissioning a large ocean liner from known faulty steel, and then when running it at dangerous speeds it sinks and drowns a thousand people, blaming the steel maker. Sure, the steel maker is a bad guy too in this equation, but the idiot who knowingly commissioned the disaster and pushed the limits on top, well they hold more (particularly since their constructed “collateral damage” is far worse than the base underlying problem).

    The point is, the mortgages only lit the match, the derivatives formed the massive bomb that did the real damage. The mortgages by themselves wouldn’t have created anything near the debacle we saw. It took leverage to create the disaster, and that’s exactly what derivatives are – leverage.

  34. The Bond Man

    You still are defending reckless conduct, Pat. Sorry, I am a conservative and always seeking a defense of ordinary business prudence and propriety, and never offering solace to those abrogating common sense dictates in pursuit of a dirty dollar.

    Bankers deserve the scorn and ridicule of the public, because they earned it in droves. And these people haven’t learned any lessons that promote the common good, and this too is another reason the 99% have so much vinegar coursing through their veins.

  35. The major problem with your ‘rebuttals’ Bond Man and Carl is that the one bank that didn’t load up on MBS was…Morgan-Chase. They were the heroes and ended up helping resolve the crisis by buying Bear Stearns.

  36. Per Kurowski

    Fact 1: There has never ever been a bank crisis resulting from excessive exposures to what was perceived as not risky… they have all resulted, no exceptions, except of course for cases of fraud, from excessive exposures to what was erroneously perceived as absolutely not risky.

    Fact 2: The current capital requirements for banks are much lower when lending to what is perceives as absolutely not risky than when lending to what is perceived as risky.

    Question: How do you figure that works?

  37. I believe Liam, Matthew and Paul may resonate with this….

    Ewe Reinhardt speaks eloquently on ‘luck’ and popular attitudes. I will very roughly paraphrase him. People in Canada established their health insurance right after WWII when folks were aware that luck was random.
    So they shared in the good and the bad in one pool: single payer.

    The US did not consider health insurance until the ’70’s after a long boom and people began to think ‘luck’ was deserved, the Calvinist model… God smiled upon the rich. And people were unwilling to share the luck. With our private insurance… you bet you will be in the ‘lucky’ pool. It is non-sense of course, and costs twice as much as the Canadian system.

    This seems to be natural history at work. When times are getting better, winners want to claim the prize as MINE. When times are getting worse, it is better, in common parlance; to socialize the risk.

    To allow bets upon bets upon bets, or insurance upon insurance upon insurance, or however you wish to name your derivative, you can bet that the times will be getting worse. After all, they are now betting Our farm.
    Or as Bill Black says, they are getting hedgy like Pinocchio is getting truthy.

  38. Great comments. The lack of universal healthcare in America is a national disgrace. Instead of wars and bank failures we could provide lifelong care for every single human within our borders.

  39. @Patrick R. Sullivan

    Did I say anything about Morgan-Chase? I’m talking about the industry in general.

  40. Per Kurowski

    “Instead of wars and bank failures we could provide lifelong care for every single human within our borders.”

    As if life was that easy! You got a truly monstrous bank failure because you tried too hard to avoid a bank failure and you therefore ordered your banks to lend or invest in what was officially perceived as absolutely not risky and then they went holding no life-vest capital to swim in AAA rated securities and drowned.

  41. “you therefore ordered your banks to lend or invest”

    Who “ordered” them? Are you referring to the government mandate to give some loans to lower income applicants? That being the major factor here has been soundly rebuked by Krugman and the likes (in fact the Banks saw that bundling low income loans into AAA tranches were so profitable that they outright solicited them far beyond any mandate)(I may be wrong, but I think that only applied to Fannie Mae and Freddie Mac anyway).

    Or are you saying something else? I know, though maybe I’m missing something, of no other mandates to the banks, other than their own mandate to make profits. From what I can see they had choices here and knowingly made them, despite having other options.

  42. Per Kurowski

    In the real world of finance, if you allow banks to leverage its equity 60 to 1 when investing in AAA rated securities, but only allow banks to leverage 12 to 1 when lending to “risky” small businesses, you are effectively “ordering” it to go to AAA-land… because what bank would survive or not be bought up by another bank, if he remained in the business of “only” leveraging 12 to 1.

  43. Well, I see your point, though I think the answer is more complicated than I have time for (and probably more complicated than I am competent to give). Off the cuff there’s a bit too much “If I didn’t steal it, someone else would” and lack of the always harped on “personal responsibility” here, but I do hear you.

    I don’t know where you’re ultimately coming from, but if your answer is deregulation would be better than flawed regulation, then I don’t agree – I think legislating smarter (and with less conflict of interest) is the answer here. But if we’re down to that argument, I doubt we’ll ever agree.

  44. @Carl, check back in the blog archives and on TeaForFt.com, which is Per’s website. He’s actually proposing something very rational here; that banking regulators work to protect the system from catastrophic failures rather than act as risk definers. Bankers inherently assess risk themselves in the setting of interest rates to lenders, but that risk-assessment process is distorted when the regulatory body that sets capital reserve requirements (Basel) based on similar or shared perceptions of the borrower’s riskiness. This causes a flight to perceived safety and a positive feedback that cannot be effectively controlled.
    If regulators task themselves with controlling the limits of the lending market, then the result is a lower-distortion financial system emphasizing direct accountability of the individual financial institutions and indirectly controlling institutional size and actions.
    If I were to use a football analogy, removing capital requirement risk-weighting from the actions available to the Basel regulators (and in turn, American ones) is like the referees at a football game making sure that the ball stays within bounds and that its progress on the field is the result of proper actions by each team. Allowing risk-weighting is like the referees picking up the ball at the end of each play and moving it farther down field because they like the receiver who just received the pass.
    If we’re really in favor of smart deregulation, the deregulation to pursue is one that truly levels the playing field and removes distortions, nonlinearities, and feedback loops that give undue or unwise advantage to one player or product.

  45. ‘Did I say anything about Morgan-Chase? I’m talking about the industry in general.’

    Did you notice the title of this post;

    ‘Regression to the Mean, JPMorgan Edition’

  46. ‘People in Canada established their health insurance right after WWII when folks were aware that luck was random.
    So they shared in the good and the bad in one pool: single payer.’

    No, the first Canadian law establishing socialized medicine in 1946, was nothing like ‘single payer’. That took 40 years and 4 pieces of legislation to accomplish.

    ‘The US did not consider health insurance until the ’70′s after a long boom and people began to think ‘luck’ was deserved, the Calvinist model… ‘

    Blue Cross and Blue Shield date to the 1920s. Got a big boost from WWII price controls. Harry Truman proposed a ‘socialized medicine’ scheme. So, your history is a bit dodgy.

  47. ‘Who “ordered” them? Are you referring to the government mandate to give some loans to lower income applicants? That being the major factor here has been soundly rebuked by Krugman….’

    That would be the Paul Krugman who told his NYT readership in July of 2008 that Fannie and Freddie couldn’t have had anything to do with the housing bubble/implosion because it was illegal for them to deal in sub-prime mortgages. I.e. when they were holding over $1 trillion of such.

    Yeah, there’s a great authority.

  48. Patrick, you make good points, some of which I believe I could rebut if I had time, though perhaps not all. Regardless I must concede over simple volume, which I am unfortunately unable to return.

  49. Per Kurowski

    @Carl “I think legislating smarter (and with less conflict of interest) is the answer here.”

    I doubt you would find someone who disagree with that … but in this case we are facing the problem with regulators who regulated so bad that they caused the crisis, Basel II, and, instead of being held accountable, correcting or even understanding the mistake, they are now proceeding to dig us even deeper in the hole, Basel III… and so what do we do?

    I thank Oregano for good added value explanation, all helps when trying to break a paradigm, and if you want to get a fuller picture of my arguments then I suggest my http://www.subprimeregulations.blogspot.com/

  50. The Bond Man

    “Absolutely not risky”? What kind of fantasy-land were those banking regulators living in. There is no such thing in the universe.

  51. No fantasy land – that’s where the good luck derivatives betting came into play – play the risk…

  52. Per Kurowski

    You tell me! Allowing banks for instance to lend to Greece holding only 1.6 percent in capital… which implies allowing banks to leverage their equity when lending to Greece 62.5 times to 1… just because Greece was not risky! These are the regulators that are still regulating our banks!!!

  53. Per Kurowski

    @Annie “No fantasy land – that’s where the good luck derivatives betting came into play – play the risk…”

    What is it that attracts you so much to “derivatives”, could it be that they just that they sound too sophisticated and too complicated?

    The fact though is that all derivatives out together, have not cause even a fraction of the bank losses incurred in AAA rated securities, not-so-infallible as thought sovereigns, crazy Icelandic banks, and crazy real estate lending like in Spain… and in all those cases, your regulators authorized the bank to be involved with, holding only 1.6 percent in equity.

    “Play the risk” you say, but no, don’t you get it?… the problem was one of “playing too much the safe”.

  54. Richard Buchanan

    Bruno and Achilles
    Gave Dimon the willies
    Synthetically hedging some trillions of risk
    Turns out they were shillies
    Financial hillbillies
    We will turn out our pockets
    As we all get frisked

  55. Here is recently from the NYTImes writer Azam Ahmed: “While JPMorgan has been reluctant to share the details of the transactions, it is believed that the London trader, Bruno Iksil, sold default protection on a specific index: the CDX IG 9. That index tracks the default risk of 125 major North American companies, including Aetna, Walt Disney and Lockheed Martin. If the default risk increases, JPMorgan effectively loses money. By January and February of this year, brokers were relentlessly calling hedge funds and trying to sell the contracts to them, according to investors. Given the size of the position in the relatively quiet market, the seller was quickly revealed as JPMorgan. Hedge funds and others began to chatter about the merits of the trade.

    The rationale for the hedge funds was simple: with JPMorgan selling so much of this insurance, the price was artificially cheap. In buying it, the funds were betting that the cost would increase when the bank eventually stopped selling. Such a move would notch them a tidy profit while causing steep losses on paper for JPMorgan.”

  56. The Bond Man

    @ Richard B: GOOD ONE~~!! KUDOS!!

  57. The Bond Man

    PER, the banksters were also stupid; you can’t pin this debacle solely on muddle-headed regulators, who, like yourself, are bankers and expert in their field.

  58. I have come learn that anyone professing to be an expert, is usually far from it, and is usually just trying to scam money. Now as far risk is concerned, it would seem the Greeks are in the driver seat. Retire at 54 with twice the benefits of a compatible US retirement plan, get others to fund it, and bailout when the goin gets tough. They must have something the rest of the world needs or who would put up with such a thing for this extended period. The Icelandic thing was over the top, and the ratios of debt prove that.

  59. Could we *please* put Glass-Steagal back in place now? Retail banks need to go back to just being boring old banks. Loans, savings accounts, checking accounts, and credit cards. No risky plays, no gambles with implied taxpayer insurance, and no more smug “masters of the universe” taking all of us to the poor house.

    Money and retail banking need to be treated as public infrastructure, not a private profit center. Period. I’m done thinking “Well maybe we should leave it privatized…” only to watch yet another bunch of jackasses pumped up on hubris run yet another bank in to the ground. You can only watch the S.S. Hubris wreck the financial system so many times before you end the ricky practices its engaged in.

    These aren’t unexpected freak events. They are events that WILL happen when greed is unchecked by caution and the realization that we’re all affected by these failures to some degree.

  60. Glass-Steagall doesn’t shut down the shadow banking industry, which exists outside the banking system that was present when G-S was created. The shadow financiers are half the financial industry.

  61. I understand that, but putting it in place would at least be a start on solving actual problems through means that can actually help. There’s a reason the banks fought it so hard originally; it put a clamp on their greed. It needs to come back, along with repairing all the deregulation from the Reagan era as well.

    The fact that we’ve had not a single serious attempt to fix any of these major issues is the primary reason I have grown entirely cynical about our prospects of finding an adult to sit in any legislative seat. It’s just a bunch of bossy, greedy five year olds vying for the largest share of the pie.

  62. @Per – What is it that attracts you so much to “derivatives”, could it be that they just that they sound too sophisticated and too complicated?

    Because that is where all the action is taking place – the TOXIC stuff being dumped on the tax payer’s head in the dark of the night – that’s why. Are you suggesting a conniving minority doing such stuff should be above any laws of physics or government? Isn’t this the real problem – the complete non-regulation of the largest segment of the new monster arm of *banking*?

    They are about as complicated as the rules for Craps in the casino – no biggie – the house always wins in the end, right?

    And you never address how *derivatives* tie in to fractional reserve banking….

  63. ‘Glass-Steagall doesn’t shut down the shadow banking industry, which exists outside the banking system that was present when G-S was created. The shadow financiers are half the financial industry.’

    Actually not true. The Banking Act of 1933 (aka, Glass-Steagall) still is law–except for the two provisions on ‘affiliations’ repealed by Gramm, Leach, Bliley, and a couple others like Reg Q repealed earlier). The ‘shadow banks’ are prohibited from taking checking deposits, so they are liable to Glass-Steagall.

  64. Per Kurowski

    @Annie “that is where all the action is taking place – the TOXIC stuff being dumped on the tax payer’s head in the dark of the night – that’s why.”

    So you think that triple-A rated securities backed with lousily awarded mortgages to the subprime sector, or loans like to Greece are derivatives. Sorry they are not!

  65. The real problem was over regulation, then, toss in some bad regulation into the salad ,and you have one heck of a cocktail ready to be thrown.

  66. No, actually the real problem was greed and insensitivity to risk. Unable to stop themselve, banks and the floggers of their loans were blinded by the opportunity to offload risk while making tons of money. You might want to listen to the This American Life Podcast “The Giant Pool of Money” from 2008 to get the flavor of the irresponsibility. It was a scam, in part, abetted by the ginnie and fannie but almost wholly perpetrated and continued (after fannie and freddy lost their enthusiasm) by bankers and their deal makers–as well as the bond raters. The devil didn’t make them do it.

  67. Per Kurowski

    @Paul “Unable to stop themselves”

    Yes, and who played the 62.5 to 1 and even more leverage polka? The regulators!

  68. Paul, thats nothing, I hear tell of folks such as you described as being rewarded for their complete irresponsibility. Once rewarded they wanted more and as much as anyone would in their right minds, give them. And we live with that life too, screamin at the wheels of injustice as we blame the ones we are screamin at. Oh and by the way, they get away with it too. You just proved it.

  69. Per, iTf you are you saying there should have been more regulation? I’d agree.

    I really suggest you look for the podcast mentioned above to understand the party that was going on in the early 2000’s. We had a government that discouraged regulation and that’s what we got–inadequate regulation. In case you are worried, I include the Clinton years in that assessment as well.

  70. Per Kurowski

    No Paul… there has never ever been as much regulation as when regulators, thinking themselves the risk-managers for the world, imposed their risk-weights.

  71. @per – “….So you think that triple-A rated securities backed with lousily awarded mortgages to the subprime sector, or loans like to Greece are derivatives. Sorry they are not!….”

    Must be your multi-linguistic abilities mixing in with reading between the lines….I did not say that.

    Mortgages where just a moving cog in the Rube and you know it…

    This is USA – the entire economy was re-engineered to fund perpetual war in the Middle East where there is NO RISK that peace will ever break out.

    Simply by honing in your modulated, but still, an apoplectic attempt to have us look at the mouse in the corner instead of the elephant in the room and use me as the mouse is stupid. I have been respectful, as has everyone of your mono-issue…stop chasing me around as I know WAY more than you can imagine I know.

    Greenspam et al shoving their manly bile at Born for catching on to the scam so early on in the game is PROOF that they KNEW they were looting!

  72. Per Kurowski

    @Annie “stop chasing me around”…”reading between the lines”

    Oh dear, I thought I was responding to your “No fantasy land – that’s where the good luck derivatives betting came into play – play the risk…” but don’t worry I’ll take your word for that you know WAY more than I can imagine, and I will also do my best not to interfere too much with your hatred.

  73. The Bond Man

    OK, everyone chill out, people. :)

  74. @Per – Yes, classic psychobabble from Basel – the last remnants of the LOW politics believing in its superiority – it’s *hatred* to seek justice.

  75. Riddle me this:

  76. Such lying thieving BS from you, filbt – AWFUL music from peurile propagandists

    The plan WAS and IS perpetual war in the Middle East – and it couldn’t be done without taking the whole world HOSTAGE so you could loot the CENTURIES of the fruits of labor from every country’s moment of PEACE. FU, Dude….

  77. OKAY you win:

  78. If over-regulation was the problem, then why did the big crashes only start after deregulation in the 80s, culminating in the spectacular crash we are still living with to this day in 2008? You didn’t see ANYTHING like this from the late 1930s until the 1980s with all the regulations put in place after the Great Depression. The US economy was going gangbusters for most of that time as well.

    Then suddenly deregulation. The upper class and bankers had been calling for it, and their wealth grew out of control so we see why they had called for it… but the middle class was flat out left behind. “SUPPLY SIDE ECONOMICS WILL SAVE YOU! A RISING TIDE LIFTS ALL BOATS! DEREGULATE US MORE AND WE’LL PROVE IT!” cried the upper class, and for some reason everyone believed them.

    Now, even as we LIVE the results of that policy, utterly disproving that deregulation and supply side economics were the way to the promise land, some people still think the remedy is more of the same.

    “Insanity: doing the same thing over and over again and expecting different results.”
    – Albert Einstein

    Look long and hard in the mirror if you’re going to keep telling yourself we need less regulation. We ran that experiment. Look where it got us.

  79. @3-D – I guess News Hour gets enough funding to support a *David Brooks* one trick pony….scheesh, a voice activated message retrieval gizmo could have been sitting in his seat during this show…

    http://www.pbs.org/newshour/bb/politics/jan-june12/shieldsbrooks_05-18.html

    There’s no sincerity to their messages – not even to acknowledge that things were so bad that the National Guard should have been sent BY THE SITTING PRESIDENT to places identified through *hot spotting* police techniques to restore order….what a dark chapter in USA history being written – it was KKK-like hooligans conducting *foreclosures* for the banksters…and so now in this REAL WORLD context – WTF is the billion $$$$ Patriot Act”s *security* erection’s reason fro existence???!!!

  80. Lucille Ball

    When considering doing ones nails, some people never figure it out honey, so we just made a comedy from it. And US dollars. That’s the F

  81. @LBall – I developed a method for people who play string instruments to take care of their callouses (works for other hand calluses, also). I don’t do nails.

    You didn’t get $$$$ from digging out the dirt in my feet – I have no respect for people taking over the world with that mono skill…

    What else you got to trade?

  82. Lucille Ball

    Onions! ;>)

  83. @Lucille – okay, organic?