Too Interconnected To Fail

The below Bloomberg Law interview, or shall we say cage match, is just amusing. First, Chris Whalen tries to claim the reason JPMorgan Chase placed a bet that will lose $2 billion or greater is due to JPMorgan Chase being distracted by those pesky regulators. Yes, you will laugh out loud at this. You might notice, if you get past laughing, Whalen also amplifies that these types of derivatives trades, should be outright banned. That no amount of capital requirements can stop-gap potential losses. We agree.

 

 

Whalen isn't alone in the ridiculous spin regulators caused JPMorgan's bad placements on the derivatives roulette wheel. The actual trade in question is described by Numerian:

According to the press reports of early April, he was selling credit default swaps on a portfolio of corporate bonds. Credit default swaps are derivatives that act like insurance products – the buyer of the swap receives a cash payment from the seller if the corporation that is the subject of the swap enters into a credit default. Messr. Iksil was betting that the credit condition of the corporations involved in his portfolio would improve over time. The buyers of this credit protection were betting the opposite – that these corporations over time would worsen in terms of credit quality, and likely be subject to credit rating downgrades. The buyers of this credit default swap index were large hedge funds, and the press implied that they were buying precisely because they wanted to be on the opposite side of Messr. Iksil’s trade.

Here in lies contagion, or the domino affect of many derivatives trades and their interconnectedness with the entire global financial system. We've seen it over and over again, with AIG credit default swaps, MF Global speculative bets on sovereign debt and going back to LTCM. One cannot have bilaterial obscure trades based on bad mathematical models and even computational complexities that make that derivative impossible to evaluate. Why are these things allowed? Because Wall Street wants them. They are like crack cocaine and the potential bonus high is so craved, Banksters ignore the risk, the fact the derivative's model itself is front loaded with risk and downside. It's bad enough to pull down the company making trades like this in some Wall Street financial drug addict crash and burn. The problem here is these types of flawed mathematical models can pull down the entire global economy, and Whalen's right, there ain't enough capital requirements in the world to back up such huge risks. These types of derivatives are called black swans for a reason and as amplified in these old interviews on the financial crisis, the mathematics underneath many of these models is simply, outright, dead ass wrong! What's it gonna take? One cannot have a speculative bet structure even exist which enables a bunch of hedge funds to gang up on you and force losses. No go, no way, it's bad, bad mathematical modeling, plain and simple.

Roosevelt Institute's Jeff Madrick also agrees bi-lateral derivatives trading should be stopped, along with calling for Glass-Steagall 2.0 version.

How many times do we need to see a derivatives trade, utilizing credit default swaps go rogue, lose an astounding amount of money, yet outright banning these types of derivative trades never pops up in the conversation? Why not? Anyone with a math degree knows these things are fundamentally flawed yet billions are bet every day on them. Why? Are credit default swaps the great BP drilling rigs, who cares that they are fundamentally flawed and unsafe?

Seems at the moment, instead of confronting bad derivatives, the spin machine is out in full force to silence even describing the JPMorgan Chase trade accurately. Bill Black calls out the insanity of mislabeling these speculative trades as hedging, the latest snow job that's going on.

Financial institutions such as JPMorgan love to buy derivatives because they are opaque, create fictional income that leads to real bonuses and when (not if) they suffer losses so large that they would cause the bank to fail, they will be bailed out.

The Dodd-Frank Act's Volcker Rule was designed to solve the problem.

However, JPMorgan led the effort to gut the Volcker Rule and the provision that requires transparency. JPMorgan is the world's largest proprietary purchaser of financial derivatives -- precisely what the Volcker Rule sought to end. The bank claims that it does not engage in proprietary trading and that it purchases derivatives solely to hedge. That claim is an example of what Stephen Colbert meant when he invented the term: "truthiness."

A hedge is an investment that offsets losses in another investment. JPMorgan's supposed hedges aren't hedges under accounting rules because they haven't been shown to perform as hedges.

JPMorgan bought tens of billions of dollars of derivatives that increased its losses rather than reduced them. It calls these anti-hedges "hedges" -- in other words, it practiced "hedginess." The bank's approach to hedging is that it would like to purchase a derivative if it deems that derivative to be a hedge to something else and voila, it's a hedge.

The draft regulations of the Volcker Rule allow such faux hedges because JPMorgan lobbied to render the rule useless. JPMorgan asserts that these inherently unsafe and unsound anti-hedges are "hedges" as that term is defined in the draft regulations implementing the Volcker Rule. But if hedginess is permissible, the Volcker rule is unenforceable.

We're getting hearings, punditry, outrage and even open letters to Jamie Dimon, with the more astute focusing in on VaR models:

Here are five questions that an independent investigation should consider:

  1. What exactly was the trade? Who approved and reviewed the trade?
  2. To what extent were the mistakes encouraged or condoned by particular quantitative models — for example, those popularly known as value-at-risk?
  3. What did Mr. Dimon know and when did he know it? Was there disclosure to the board and to shareholders with appropriate timing? This is among the specific concerns raised by Mr. Kelleher.
  4. Does the board have adequate depth of experience along the relevant dimensions of risk management?
  5. What interactions did Mr. Dimon or any of his colleagues have with the Federal Reserve Bank of New York before and while these losses were incurred? Mr. Dimon is on the board of that institution, where his role is described as advisory. But on what exactly did he advise them in recent months and years, particularly with regard to risk management and capital levels in systemically important banks?

The OWS banking working group wrote Jamie Dimon a letter, yet is it the person, or the system, specifically the trading system that should be chastised?

Here is what we ask of you:

First, stop gambling with our money and our futures. Stop lobbying for deregulation — we are way past that now. Stop lying to us all by doing silly things like pushing proprietary trading into the treasury office and renaming it, or by pretending that there are no losses when there very clearly are, to the tune of $2,000,000,000 and growing. And, please, stop trying to convince us that nobody at JPMorgan Chase saw this coming. Ina Drew was offering to resign in April but you kept telling the world that nothing serious was amiss, a lie which could get you serious jail time.

Second, admit that your bank is too big to take risks that neither you nor anyone in your bank understands or is able to handle, and that the only thing that will stop you from misbehaving is strong, enforced, and uncompromised regulation.

Third, resign as Director of the Federal Reserve Bank of New York. It is inappropriate, and dangerous to us, for you to oversee the banking system or the economy when you have proven incompetent at overseeing your own bank — particularly since the Federal Reserve is investigating your bank and your behavior.

What we need are some real quants, acting as whistle blowers, to explain to regulators and politicians advanced probability, statistics and probability models. Quants need to step up and show how screwed and contagion laden these credit default swaps really are. Come on, if a trade has properties which enable billions of dollars of losses, something is wrong with this picture and such Wall Street crack cocaine trading vehicles simply should not be allowed. It's not TBTF that's so threatening, it is the interconnectedness, the contagion that is the real financial and economic threat.

Meta: 

Comments

At this point it's obvious the pols. and regs don't care for 99%

Everyone in the world who has an IQ above 80 (I guess that includes some politicians and regulators) knows the risks these "people" are creating that the 99% will have to pony up for. However, do they care? Do they want to end it? Nope, no way.

Didn't Madoff get exposed repeatedly during his Ponzi scheme by whistleblowers and people who cared about their clients' getting screwed? Mary Schapiro was at FINRA and now heads the SEC. She had to be aware, and yet . . . nothing. Her testimony a few months ago was embarrassing, she honestly seemed confused - par for the course. Madoff himself was active in the NASD! If you're going to rip people off, why not work for a regulator - not like anyone would or should notice! And if they do, who would you complain to? Madoff? His buddy Schapiro?

Financial blogs reveal commodities manipulation daily (including JPMorgan, GS aluminum manipulation that Coca Cola hates), gold and silver manipulation(JP Morgan), etc.)), high-frequency trading that distorts markets DAILY, and the trillions of dollars held in derivatives outstanding by all the major TBTJail banks here and abroad, and yet no pols seem to care, no aggressive law enforcement actions like search warrants, interrogations, subpoenas, etc.

Most of these TBTJail have laundered $ for corrupt regimes and drug traffickers. The Treasury mandates FinCEN doc after doc for CTRs and SARs - so with all that paperwork and proof, why aren't pols and the Treasury and DOJ shutting these money launderers/US banks down? Because they don't want to because TBTJail is ABOVE THE LAW. But the marijuana dealers on the corner who actually hand off to an undercover - oh yeah, he's a master criminal.

Corzine and his posse were subject to rule after rule after rule under CFTC and other regs. He violated them brazenly and $1.2 billions vanished just like that. Poof! JPMorgan seemed to have received quite a bit of that cash in last second transactions. So, Dimon in jail? Corzine? In an interrogation room at all? Nope, Dimon's got Farcebook IPO coming and all that loot to make off suckers. Where are the pols. and regulators and DOJ and White House?

Glass-Steagall - which honest person honestly thinks it was wise to allow banks backed by the FDIC/taxpayers to engage in reckless bets in the billions of dollars by getting rid of it? The govt. figured that it was ridiculous 80 years ago and ended it. So dimwits on the lobbyists' take ignore wisdom and go for broke - taxpayers will pay for the result anyway, so who cares. Only honest people care, not banksters or their puppets.

THEY ALL KNOW, they just don't care. But to put a nice spin on it for people who might be swayed by talking points on MSNBS/DNC channel or CNBS or Cavuto kissing some CEO ass on Fox, they hire team after team of PR folks and appear daily on CNBS and other comedy shows. How many 99%ers well-versed in the issues and coming from the opposite side are ever allowed near a TV studio? Any law enforcement people saying how easy it is to bust all of these criminals because the paper trail is so easy Mr. Magoo could see it, while he was passed out, drunk? No, but it is.

Silly 99%ers, rules and regulations and the truth and law enforcement are quaint tools meant to oppress the 99% and to protect the 1% by making it brutally hard for anyone else to dissent.

There's not a problem if they refuse to see it at all costs. Lies are not a problem if you don't have integrity - thus, no problem for them at all.

You must have Javascript enabled to use this form.

Have we finally taken a turn? Farcebook seen as sham finally?

Watching the IPO, my hopes were raised. Sure, BLS will still upwardly revise the previous week's initial claims no matter what to show "improvement" in unemployment the following week. Sure, unemployment will "decrease" as the real unemployment rate continues to climb as people drop off the rolls. Sure, JPMorgan execs and Goldman Sachs execs and every other 1%er can still arrange private meetings with Geithner and the White House to make sure the wrist slapping doesn't get too hard, oh, and by the way, to make sure their close relatives never have to apply for jobs like a 99%er or have to work as hard as a 99%er does EVER in anything that might involve sweat. Sure, the Fed will "loan" money out to banksters so they can loan it out at 10%, or bet trillions on derivatives, or use it to fight litigation from foreclosing on vets homes against the law or forging mortage docs, buy new HFT machines, etc.

But something happened today. I'm sure millions of us were expecting Pets.com 2.0. We were expecting Zuckerberg, manchild of the hoody and "he's so rebellious, who would have thought of ripping off millions of people by selling a product that has no barriers to entry any clown could create it while also invading people's privacy" to become a trillionaire.

But it didn't happen. Despite the fawning press, despite CNBS and Business Insider and Fox singing his praises and worshipping wealth above all else so that even P.T. Barnum and J.P. Morgan must have been spinning in their graves, Murder Incorporated, sorry, the other syndicate, Wall Street, had to prop up their own IPO up at $38 (and yes, I wouldn't be surprised if some of our very own TARP and other money was used for this nonsense). And by all means and measures they would hold the line at $38. Now, was that the free market at $38? Nope, the banksters had to buy their own just-sold-shares to keep Zuckerberg "badass hoodie I love your information and will sell it for $$$$$" from looking like an even bigger ass.

Maybe being rich isn't the be-all-end-all. Is this madness? Am I speaking heresy? Or maybe Trump and Survivor mentalities aren't the ideal? Maybe the folks who had to COOPERATE on farms had their stuff together? Maybe thriving communities don't need, nor want, backstabbing and get rich by any means necessary mentalities?

Maybe, just maybe, we're seeing the end of the beginning or the beginning of the end. Banksters, their paid-for-cronies in DC and state capitals, CEOs and Cavuto asskissers, fake anti-banksters like the White House and AGs and DOJ, maybe we're seeing 99%ers are gaining traction. Maybe, just maybe. . .

After all, with the Eurozone collapsing, Syria in civil war, Fantasyland can only last so long through MSM propaganda. An enlightened and awakened majority of citizens (not all, but enough) is a thing to behold. I look forward to it!

-Kurtz

You must have Javascript enabled to use this form.

Facebook IPO

If you noticed we sure didn't cover it. IPOs are completely rigged games, the little guy stands to lose their shirt when shares are first offered to the public.

I don't think this made a dent in the CEO/corporate rampage of the U.S. and global economies, nation-states.

You must have Javascript enabled to use this form.

Whalen is always interesting

Agree with him or not, Chris Whalen is always an interesting read.

My take: regulation always been captured by special interests, so it often is counter-productive. The REAL solution is to downsize the TBTF banks, but the Fed and FDIC don't want to do that. They ARE the banks!

So in that sense Whalen is correct. All you can do is ban derivatives (or something like that). But they will screw this up and allow for "certain derivatives" for Warren Buffett, Jamie Dimon and the Elites.

Don't kid yourself. This is a massively rigged game.

You must have Javascript enabled to use this form.

Customer Deposits probably used

I could not verify at the time of this post, what funds by the CIO in London were being used for these derivative trades. Felix Simon at Rueters says it is customer deposits. He's probably right and his reasoning, this is the cheapest source of funds is also right, except for the Federal Reserve lending rates.

And at JP Morgan, just like at any other bank, the cheapest cost of funds is always deposits. JP Morgan has hundreds of billions of dollars in excess deposits just because it’s too big to fail, and has an implicit government backstop. It’s bonkers that it should then be able to take the resulting ultra-low cost of funds, and turn it into eight-figure bonuses to people like Drew, all for taking that money and playing on derivatives indices in London.

There is no glass-steagall, a wall to separate customer deposits, which are FDIC insured, from "investment" portions of a bank.

You must have Javascript enabled to use this form.