Dear readers, I was really surprised this morning when ,opening my blog statistics, I discovered that much more than a bunch of you were reviewing my considerations about JP Morgan recent activities . For a bank that earned more than $19 billion last year , the trading loss, according to what I wrote a month ago , could be even higher than the $2 billion mentioned . The trading in such an hedge roiled markets, made by the nicknamed “London whale“, as I reported, was too big , even for a giant bank which too often celebrate its fortress balance sheet.
This stumble of $2 billion in trading loss, promesses to increase the debate over the needed regulations. JP Morgan’s setback will empower the hands of the Washington regulators who are presently writing the new rules , in particular the “Volker rule” I mentioned in my precedent blog concerning Bruno Iksil.
It appears evident that if a bank invest such a large portion of money in a so called “market -making ” ,or if you wish, “hedging”, in reality what it’s causing is nothing less than a pure distortion of the market.
In addition to this unethical behavior, something else should be taken into analyses. Simply JP Morgan’s ability to manage its own risks. In reality the trade was structured in such a way that the bank bought insurance against losses on corporate debt through credit derivatives. Such a move provokes an increase in value, if the creditworthiness of the companies is perceived deteriorating . But such a bet ,was at the same time followed by an opposite bet on credit derivatives. This second move was made under the “idea of mimizing the credit hedge itself ” . A non sense. As I wrote in several blogs, we have to go back to the main golden rule: re-establish a clear separation between true hedging and trading.
An other aspect that sounds strange is the fact that no comments to the Iksil ‘s actions were made at that time. This attitude put in a very bad light the entire J.P. Morgan’s way of operating ………How in hell such a huge bet could be made so pourly and so pourly constructed and monitored by the second largest financial US bank….. With perfomances like this ,we should not even thinking of a new legislation. The Obama’s government should reinstate the old , but excellent Glass-Steagall Act. I should remind my readers that the Fed collapsed already three times in the past and presently shows a $202 trillion debt ………..
Instead of worring about Europe and its banking system ,I think that the Fed authorities should take more seriously the idea of a firmer control over the speculative transactions and increase the “net capacity” overall.
The decision made in 1999 by the Congress of repaeling the Glass -Steagall Act reveale how wrong that decision was . It was right then and even more nowadays to separate the conventional banking from the investment banking . If we wish to sanitize the financial sector we’ll have to take into consideration the lessons of the past to avoid further mistakes in the future.
Meanwhile I ‘m writing this blog, a good friend of mine sent me an article edited on WSJ that could be of great interest for my italian fellows. It sais that the Goldman&Sachs exposure to short -mid terme Italy’s sovereign debt , more than doubled from December 2011 , to March 31st 2012 . In fact going from $3.05 billion to $8.22 billion. But this is not all. In the meantime Goldman succeded in eliminating its exposure to the italian banks going from $6.72 billion to pratically nothing, $623 million ! So in one shot they reduced their risks and vulnerability to the italian banking sector and invested in the sovereign debt which gives them higher profits and pratically a total coverage.
It appears too evident who is on the loosing side of these trades……. Our Prime minister,Mr. Monti, should be in a position , as former advisor of that zaibatsu group which is G&S, to stop this constant speculation against the italian banks. Citing Hollande ‘s proposals in my last blog, I was mentioning the possibility of a E.U intervention . We could in reality go from barring any activity, to confiscate the funds.
I know, it won’t be the case, but we cannot offer an open territory to go shooting. Beside, I find their christal ball too clear….I would not define that trading in these conditions !! At these levels is more like shooting fish in a barrel. Think about ; they borrow free money from the Fed, then they make proprietary bets, use high frequency computer trading and finally collect the money . Too easy to be true!!! Too much , having always good inside information……. Lies? No, simple truth , not only in Greece, Portugal and Italy , but also in USA. Don’t you recall Blankfein talking with Paulson when the market crashed, to learn when they should trade government intervention? Well , too often in the last two years the reality bypassed the fiction….. So let’s start cleaning …..and good luck.
Good life to you all