Sunday, July 8, 2012

"Too Big To Fail?"; JPMorgan's $9B Loss

The "Too Big To Fail" banks are at the center of the current U.S economic problem. Below is a copy of a comment to an Op/Ed piece that appeared in the American Banker on June 18th. While it deals with issues that do not affect most of us directly, it does affect the entire structure of our Banking system. Unless you have avoided (perhaps wisely) the news, JPMorganChase ("JPM") lost $2,000,000,000 ($2 billion) in trading. Well, that was the initial reported loss. As of this morning (6/28/12) it is up to $9 BILLION. One might say that a comapny lost money - So what? - it only affects the shareholders. NOT IN THIS CASE.
The controversy is that the funds that were lost could test the banking system itself. The money lost wasn't on bad loans it was from GAMBLING. JPM will state that the losses were from "trading securities" used to "hedge" (or insure) against loan losses by buying securities as an offset to the potential losses. The practice is called "Hedging", and no one would argue against a bank's right to take steps to protect the shareholders and the DEPOSITORS from loan losses.

Here however, it is clear (to me in any case) that the loss stems from JPM buying securities/options/contracts or the RIGHTS to these instruments for its PROFIT ONLY. Well, the market went the other way and instead of protecting against losses from loans (hedge) the trading,done just for PROFIT, created a sink hole SO DEEP...

JPM takes in money from depositors. The FDIC backs those deposits up to $250,000 per depositor (lots of rules). What JPM did was to GAMBLE on the financial markets and LOST. Why is that important - the money that was lost, if the loss is big enough, could impinge on the Bank's stability and force another bail-out, but one the Government CANNOT afford.

JPM engaged in "Proprietary Trading". They used depositors money to GAMBLE on the stock market. JPM has enough reserves and capital (saved earnings) that it could absorb the loss without going to FDIC. But, what if it didn't. The loss was $2 Billion, now disclosed to be $9 Billion. What will next week show?

The Op/Ed piece discussed JPM's CEO testifying before Congess. He wasn't asked to explain. Rather Congress asked his advice on the economy. HUH? The following is my reply to the American Banker. PLEASE E-MAIL ME IF YOU HAVE QUESTIONS OR IF THIS WHOLE POST HAS BEEN, WELL BORING AND CONFUSING
To Mr. Rob Blackwell at American Banker

"I must take issue with the other commentor. $JPM's loss is important, very important. Not because I believe there is a TBTF issue, but it might point out exactly where the Reg[ulatory] system is most vulnerable. For a short time I dealt with a small number of member of Congress for the Mutual Savings Bank industry. Obviously I was of no real stature (only 5'10" - sorry but I couldn't resist), but the Senators with whom I dealt on the Banking Committee were totally committed to insuring that the legislation would serve the stated purpose.

Here we have Senators pandering to a very large Bank's President. Yes, he is important, but it was under his watch the trading losses occurred and no one outside, and probably inside JPM knows the real extent of the loss. Depending on the puts, call, options and other hedges, the loss may not be known for a while - dates of uncertain duration. But, $5B-$7.5B would not be a surprising amount. Dismaying yes but no surprise.

We need some way to stop the gambling from continuing. Even the Football "books" have better controls than JPM does apparently. My view is that we need a Volker,Dodd-Frank combination bill coupled with an SEC and OCC that will enforce those laws (if passed) and the laws already on the books."

Author's Copyright by Richard I. Isacoff, Esq, July 2012

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