A commentary from Barry Ritholtz on 19 May 2012 in the Washington Post:
Quote:
JPMorgan's debacle, and its parallels to AIG
Finance has become a low-margin, high-leverage business. This is not surprising in an environment in which trading volumes are exceedingly low and interest rates even lower. In any other industry, a slowdown in economic activity sends management scurrying to cut costs, develop new products, become more productive. In short, to innovate. Companies can throw money at new products, marketing campaigns or discounted pricing, but a slowing economy brings down demand. What we have today is a deleveraging economy, and that is even more challenging - limiting the options that CEOs can take to increase their company revenue.
The world of finance refuses to accept that reality. Whenever Wall Street is confronted with a decrease in profits, we see the same response: Increase leverage. We usually don't hear about it until some market wobble causes the excessive leverage to blow up in someone's face. This time, the novelty cigar was smoked by Dimon, and the damage was inflicted on his reputation. The losses, we learned, were a "mere" $2 billion, described as manageable. ...
One thing that makes the JPMorgan trade look especially foolish is that it's nearly the same sort of recklessness that AIG exhibited: selling derivatives against zero reserves. As Doug Kass, who heads the hedge fund Seabreeze Partners Management, explained: "Under the knowledge of Dimon, the JPM investment office sold massive amounts of CDS [credit-default swap] premium on large U.S. corporations in 2011. Like AIG, they accumulated a large amount of reported profits in the three-year period ending 2011. In an equally familiar manner, the principals of the London investment office were handsomely rewarded. And so was Dimon."
Gee, why does that sound so familiar?
So how long did it take after AIG blew itself up selling derivatives until some trader came up short making the same reckless bet? Less than four years.
The parallels to AIG continue to mount, including on the JPMorgan risk management committee. Astonishingly, Ellen Futter, who was a director at AIG, was also on the risk management committee at JPMorgan. It's unclear what you need to do to get kicked off that committee, but the directorial equivalent of steering the Titanic into the iceberg apparently won't do it.
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We can never over regulate people who foolishly and destructively think the purpose of a company is profits.
When finance is making America strong, its executive are paid just like any other utility executive. Finance companies move money for the same reason electric companies move electricity and water companies move water. So that other companies can innovate, create jobs, increase wealth, create new markets, and innovate.