Sunday, May 27, 2012

Pirates, Whales, JPMorgan's Loss and Banking Regulations



A Pirate

Having just read “The Hunch, the Pounce, and the Kill,” Azam Ahmed’s article on Boaz Weinstein in today’s New York Times, I am tempted to venture far out of my zones of comfort and expertise to make a simple analogy--an analogy that equates the sort of hedge fund trading that recently caused JPMorgan Chase and Company to lose $2 billion and counting with the concept of sailing into pirate-infested seas.  That estimated $2 billion loss is, in itself, quite conservative.  As one article from earlier this week observes, JPMorgan’s loss “has already grown to more than $3 billion, and some analysts expect it to go as high as $7 billion.”

To engage in derivative trading is to venture into pirate-infested seas, an environment in which hedge fund trading has swelled to the point of creating “new kinds of risk and play[ing] a major role in the meltdown of the world’s financial system.”   Moreover, because of the foolish 1999 repeal of the Glass-Steagall Act--the Depression-era legislation of 1933 that separated commercial banking from investment banking--our largest banks may still take our deposits, continue to rely upon government protection of losses through the F.D.I.C., yet now freely gamble it all by steering into these risky, pirate-infested seas.  From the point of view of the American public, this is like chartering a relaxing cruise, only to have the ship’s captain steer a course through the Gulf of Aden and the Straits of Malacca.



Pirate skiffs alongside a merchant ship


The Gulf of Aden and the Straits of Malacca are, as you may well know, among the most dangerous waters that protect and nurture twenty-first century piracy like few other places on earth.  The public never would have imagined that the JPMorgan Chase ship captain would have navigated into such dangerous waters.

Achilles Macris, JPMorgan Chase, London office


In this case, the captain was JPMorgan’s London office.   More precisely, the captain and first mate would be Achilles Macris and the man he supervised, Bruno Iksil.  Iksil, a rather shadowy figure, has become known as “the London Whale;”  he is the man who actually took those huge and risky positions in the world’s credit markets.  It has been reported that Macris had bullied JPMorgan’s New York office, which was leery about London’s risk-taking and, in the words of one former trader, “no one could sufficiently push back against Achilles, so he and Bruno could do what they wanted.”

Boaz Weinstein,  Saba Capital Management


 The pirate, in this analogy, was the New York hedge fund trader, Boaz Weinstein.   Now, call me a romantic if you like, but I can neither castigate nor condemn Weinstein for his role in this sordid tale.  Instead, I view him as a good pirate, doing what pirates do. Working on a hunch and aided by keen observation, Weinstein risked his own money by purchasing the index that Iksil was shorting; and this was truly a big risk, especially since Iksil (and Macris) were playing with enormous quantities of money that wasn’t really theirs and legally ought not to have been used to back their actions.

In Azam Ahmed’s article about Weinstein, “The Hunch, the Pounce, and the Kill,” I direct you in particular to paragraphs 18-23, in which he describes a conference at JPMorgan’s New York offices in February.  It was here that Weinstein essentially set the bait that hooked and landed “the London Whale.”  OK, please forgive this shift of metaphors from piracy to fishing, but I hope we can agree that these two activities share a lot more besides their aqueous environment.

Beached Whale (no picture available of Bruno Iksil)


 One should never steer large, albeit powerful but also in-agile and slow-to-respond vessels (JPMorgan) into hostile waters inhabited by fast, maneuverable pirate skiffs (like Weinstein’s Saba Capital Management).    But if one is foolish enough to do so, he had better be the best, smartest and most cunning captain in the world. After all, to quote our ex-Vice-President, “shit happens,” and there always is someone smarter that you.

An example of the salty observation of our ex-Vice-President

In this case, the “pirate” was a whole lot smarter (and gutsy) than the “captain” and his “first mate.” Boaz Weinstein was a gambling enthusiast and ace poker player who even had been banned from the Bellagio casino for counting cards at the blackjack table;  he also earned the designation of chess master at the age of 16.  The London Whale blundered into Blackbeard’s lair.

21st century pirates

Now, if the big ships (JPMorgan, etc.) choose their courses carefully and steer clear of the major pirate-infested waters, they can remain relatively safe.  But the repeal of Glass-Steagall was analogous to the erasure of all the warning markers on their “nautical charts.”  So, with no limitations to the courses they set, all the sea lanes became theirs.

Previously, when a big ship (read JPMorgan) needed to sail through dangerous waters, it could fall back on the protection of naval fleets (read government regulations).  Unfortunately, decades of greedy manipulation had reduced the effectiveness of such protection.  In this case, besides the repeal of Glass-Steagall, American banks had successfully lobbied for deregulation ever since 1980: the Depository Institutions Deregulation and Monetary Control Act of 1980; the Garn-St. Germain Depository Institutions Act of 1982; the rabid and counterintuitive deregulatory movement cultivated by Alan Greenspan’s Ayn-Rand-inspired, free-market philosophy; the appointment of Wendy Gramm as chairperson of the U. S. Commodities Futures Trading Commission, which led to the exemption of swaps and derivatives from all regulation (not to mention her subsequent seat on the Enron regulation board); and, after Glass-Steagall fiasco of 1999, the SEC ruling that investment banks could determine their own net capital.

Emboldened by these acts, our big banks felt that they ruled the seas and were invulnerable.  No one could impede their progress, and they could take all the risks they wanted with impunity.  In fact, even as they greedily pressed for still more deregulation, by this past year our four biggest banks (JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs) “held roughly 95 percent of the industry’s total exposure to derivatives.” This is not where banks should be.

Jamie Dimon,  chairman, president, CEO of JPMorgan Chase

For this reason, we should thank our privateers, our pirates like Boaz Weinstein, for exposing the global threat of our deregulatory markets.  We should thank them for showing that Jamie Dimon, JPMorgan Chase bank chief, is far from the “smartest man in the house,” and for showing just how foolish and error-prone were some of his senior investment bankers, such as Achilles Macris and Bruno Iksil.  And we should thank them for exposing the fallacy behind the idea of a deregulated free market and for underscoring the need for much stiffer governmental regulations. We desperately need a new version of the Glass-Steagall Act. Naturally, Republicans in Congress will have none of it.  And, when it was repealed in 1999, many Democrats voted against it as well.  Watch this hard-hitting video by John Barksdale to see just “Who Repealed the Glass-Steagall Act?”

The best we can hope for is for Barack Obama to be re-elected and for Democratic gains in both the House and the Senate. Obama at least understands how the repeal of Glass-Steagall encouraged “a winner take all, anything goes environment that helped foster devastating dislocations in our economy,” as he told an audience at Cooper Union in March of 2008.

Mitt Romney, on the other hand, seems clueless as to any historical connections between what happened in the last few months at JPMorgan Chase and our deregulation.  His only comment so far was that “this was a loss to shareholders and owners of JPMorgan and that’s the way America works.  Some people experienced a loss in this case because of a bad decision.  By the way, there was someone who made a gain.”  Is this man for real?  What insanity!

As Romney sees things, just as long as someone makes money, everything is all right.  God help us.  If Romney becomes our next President, he will continue to push for more deregulations of the banks, and that will create the conditions for another financial crisis.  Our pirates have clearly shown that our big banks have no idea how to safely navigate the economic oceans of our world. And with continuing blunders, such as this most recent one by JPMorgan Chase, our big banks have done nothing to earn that blind faith that a Mitt Romney or most of the Republican establishment still put in them.





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