WASHINGTON, May 11, 2012 – Remember those old “Jaws 2” trailers? “Just when you thought it was safe to go into the water…” The same thought might be applied to Wall Street today. Futures have been sickly all night. And this morning, as of this writing, Dow futures are down a whopping 51 points, somewhat better than the negative 81 on the board just before the stroke of midnight last night.
The cause, particularly after a relatively nice day yesterday? In the immortal words of that great trader, Yogi Berra, it was a case of déjà vu all over again. New York mega-bank J.P. Morgan was finally forced to come clean—after yesterday’s market close, of course—about the recent news from the London desk of its so-called “Chief Investment Office” (CIO). To wit: the London operation built up a huge, bullish position using—get this—credit default swaps, or CDSs, hopefully to take advantage of improving market conditions.
But the very size of the London position attracted the attention of big traders and hedge fund who placed bets against it, eventually causing the Morgan operation to lose $2.3 billion. At least up to this point. And that’s Billion, with a “B.”
JPM’s gigantic bet—first revealed some weeks back by Wall Street Journal investigative reporter Gregory Zuckerman and friends—appears to have been run by “the London whale,” aka Bruno Michel Iksil, a J.P. Morgan trader based in the U.K. In a 5 p.m. presser yesterday, JPM CEO Jamie Dimon fessed up, lamely claiming that the bank has ultimately lost only about $800 million to this point as the larger loss was offset by large profits in other trading operations. Excuse us for not being impressed.
If we take a brief trip down memory lane, we may recall that it’s precisely this kind of “investment” that brought down Lehman, Bear Stearns, and the entire U.S. economy in 2008. CDSs remain loosely regulated, if at all. Worse, on its best days, the market for these securities is opaque; on its worst days, impenetrable.
To this day, the amount of CDS garbage still out there from 2007-2008 is difficult to parse. No wonder this stuff causes huge amounts of trouble in the markets. Nobody really knows what these things are. (Or if they do, they’re not telling.) As a result, there’s no rational, agreed-upon way of evaluating these instruments. Which means that 24/7, they remain disasters waiting to happen when bought and sold in the kind of mass quantities we’re seeing in J.P. Morgan’s current debacle.
Making matters worse still, CEO Dimon has been leading the Wall Street charge in opposition to so-called Volcker Rule, allegedly put in place by the execrable Dodd-Frank financial reform legislation. Yesterday’s revelations certainly will certainly cause Mr. Dimon’s anti-Volcker crusade to take on a quixotic odor.
Making matters still worse, the “Volcker Rule” actually still doesn’t exist, even though it’s supposed to be triggered on June 21, 2012, giving banks two years from that date to comply. We put the “Volcker Rule” in scare quotes here because, well… Recall the bafflegab of Nancy Pelosi when describing the just-passed Obamacare bill. She told us, essentially, that we’d all have to wait to see what was in it. DCspeak translation: The bill is only a bunch of hooks for unelected bureaucrats and rulemakers to hang their verbiage on. When they do their job, we’ll know what’s in it.
Ditto for much of Dodd-Frank and the “Volcker Rule.” Regulators still can’t agree on the wording, and, of course, lobbyists for Jamie Dimon, et. al., are laboring mightily to eviscerate any substance that might be gleaned from that wording.
To be perfectly blunt, this mendacious crap has simply got to stop. From 2008 onward, taxpayers have been bailing out Jamie Dimon’s J.P. Morgan, along with Citibank, Bank of America, etc., etc., because they’re “too big to fail.” And here goes JPM four years later indulging in the same activities with the same abandon that caused at least two of their major peers to fail in 2008.
“The London whale” and his ilk have a distinctly buccaneering attitude out there that should have been tempered by the events of 2008 and the following years. But they haven’t learned a thing, apparently.
At this point, the easy, simple solution is to junk Dodd-Frank and the as yet-unwritten “Volcker Rule” and reactivate the good old Glass-Steagall Act that was undermined in the 1990s and gradually exterminated by both President Clinton and the Republican Congress in 1999. We’ve seen the results of that brilliance ever since.
Glass-Steagall’s main virtue was that it worked. The big bankers were actually the ones responsible for getting us into trouble in 1929, and Glass-Steagall defensed against that by taking the big banks out of everything but the actual business of banking. Why—after their 1920s track record—Washington decided to let them back in again is beyond the ken of this writer. Save that enough politicians on both sides of the aisle were bought off that the demise of Glass-Steagall was assured.
We are dismissively informed by Wall Street sages that going back to Glass-Steagall is “ridiculous” and impossible to implement. Baloney. These are the same morons who tell us we can’t do anything about high-frequency trading because it supplies “liquidity” to the market.
The facts on the ground are these: taxpayers have, at enormous cost, bailed out “too big to fail” financial institutions. But they and the politicians in their pockets in Washington have, in only four years, once again allowed the products and behaviors that caused the 2008-09 Crash to happen.
In the intervening years, taxpayers have lost their homes, their jobs, and their shirts. Wall Street’s “too big to fail” bankers have continued to collect their massive “performance bonuses” and lifestyles unabated, secure in the knowledge that, if they screw up again, the taxpayers can simply be hit up again.
Big banks no longer have the interests of their customers at heart. Washington no longer has the interests of its constituents at heart. We are no longer the constituents of the U.S. government. We are its vassals and servants. We are ruled BY the government at the banking miscreants who largely control it.
People are angrier than ever at these kinds of shenanigans. But, in the time-honored tradition of America, they’ve largely been keeping this to themselves. With yesterday’s revelations, coupled with the mendacity of the 2012 Presidential campaign, we suspect that the anger is going to become a lot more public and fairly soon. Our hope is that the outcome won’t resemble the results of Captain Ahab’s final battle with another kind of whale.
Meanwhile, we continue to try to make money in the market. But that won’t happen today unless you’re short, particularly the major banks. Our advice: start your weekend early and come back Monday when, hopefully, some of the fiscal miasma will start to clear.
UPDATE: Market opened down hard as predicted. But now the Dow is up 37 points. Mirabile dictu, as Virgil used to write. Perhaps the “Crash Protection Team” is hard at work this morning. Hard to tell. We’ll write about the “Team” in an upcoming post. Funny how this works.
(Usual disclaimers apply.)
Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington. For Terry’s investing and political insights, visit his Communities column, The Prudent Man, in Business.
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