The TBTF giant banks want to eat their cakes and have it, too. These publicly traded companies want to maximize the returns on their invested, leveraged mostly off balance sheet dollars. They still are incentivized for maximum transfer of wealth form shareholders to insiders. They want FDIC insurance so the depositors are comfortable. They do not want to suffer their own losses, preferring to lay them off on third parties (GSEs, taxpayers, etc.) where ever possible. They want low cost FOMC monies to do this with, and full tax payer support for when they inevitably crash and burn.
It is the worst of 3 worlds: Socialism for the banks, crony capitalism for the insiders, with taxpayers on the hook for the downside.
(via Instapaper)
What does that argue for? I don’t think it argues anything at all about the Volcker Rule: banning hedging can’t be a solution, and banning something that you call “portfolio hedging” doesn’t fix bad models (or tell you what a “portfolio” is). Obviously this looks “prop” if you focus on one part of the trade, but that is as always in the eye of the beholder. Iksil didn’t think he was betting on corporate credit improving; he thought he was adjusting his hedge to address current market conditions.
The more sensible response, if you want to prevent this sort of thing from blowing up the universe, is something like “stop doing sophisticated things” or at least “raise unsophisticated but large amounts of capital against your sophisticated things.” Because obviously forcing JPMorgan to have capital equal to 20% of its non-risk-weighted assets would make it less likely that this would bring down JPMorgan. So, fine, that’s probably right. But JPMorgan’s Basel III capital (for what it’s worth!) is down like 20 basis points on the loss, and there’s no evidence at all that this brought down JPMorgan or did anything close to it. That’s not much of an argument – many other banks are less well capitalized, and less well endowed with modeling skills, than JPMorgan, so if this did some small damage there it could do much larger damage elsewhere. On the other hand, there’s at least a chance that JPMorgan is doing more sophisticated-cum-dangerous trades than other, less sophisticated banks because it is more sophisticated, and the reason that this screw-up happened at JPMorgan is that only JPMorgan dared to dream big enough to screw up this big.
I am confused by the very concept of hedges….so rather than just earning the money based upon a difference in interest between savings deposits and loans of all types, they want to hedge the business loans with derivatives…to ensure that if someone defaults, they will still make money. In other words they want to guarantee that they will make money regardless of the outcomes. Doesn’t that defeat the very purpose of everything? You can’t make life risk-free (liberals), certainly can’t always win, it would defeat the purpose of making the bet, if everybody could win all the time, then what is the point?
