Use access key #2 to skip to page content.

TMFPostOfTheDay (< 20)

Banking: Where's the Beef?



May 22, 2012 – Comments (0) | RELATED TICKERS: JPM

Board: IV Value Central

Author: TMFRoZany

[This post is from our premium service Inside Value. Click here to take a no-risk, free thirty-day trial of any of our services.]

Where’s the Beef?
A U.S. television commercial cliché for the Wendy's chain of hamburger restaurants in 1984 comes to mind - “Where’s the beef?” Referring of course, to the lack of meat in a hamburger, now expanded in my mind to the JPMorgan event and more.

Morgan Housel writes an article, “Banking: Same as it ever was.” This one and several others tell the background that led up to a hefty loss at a big bank in some peoples judgment, other notables scoff with saying it is ‘just the cost of doing business.’ CEO Dimon pleads stupidity and many more adjectives admitting a mistake that was self inflicted – ‘the trade was only a hedge’.

This whole story is about the flaws of unregulated banking capitalism, we can crash over and over as long as we use other people’s money. A case of overestimating ability to manage risk in portfolio hedging. The total notional exposure of all of JP Morgan’s trades has been estimated to be $79 trillion. No that is not a typo. (

According to Michael Hiltzick at “The Los Angeles Times”, the JP Morgan CEO’s defense essentially amounts to: “Hey, everybody makes mistakes — sure, we lost $2 billion, but we’ve still got billions more, and we’ll figure out this one ourselves without the need for any further regulations, thank you.” Still, JP Morgan is expected to report a profit coming up.

Where is the ‘meat’ in those financial reports reflecting the trades by ‘bots’, the computerized ‘casino’, the giant hedge fund in the middle of what is supposed to be a bank? Where is the meat in financial regulations?

Or where is the admission by the CEO and others that they do not really understand some of the implications of the algorithms devised by what can be pictured as the guys in years past who had plastic green visors, figuring out gambling tactics, now updated with bots.

What happened to regulator mechanisms and reviews?
Dimon has campaigned vigorously against revising the Volker rule as a safety net. The rules of regulation have no clues or claws to deal with ‘bot trading' going wrong. Regulators run regular exams to make sure the banks are playing by the rules. They get the same reports the top officials of the bank receive. Neither executives or regulators saw what was coming.

Congress raises questions about the future implementation of the Volker rule (reform regulation) that Mr. Dimon vehemently discredits. Volcker rules have yet to be implemented, pointed out the OCC (Office of the Comptroller of the Curreny) in a statement on Tuesday. “Even if both were assumed to be in effect, the transactions at issue are complex, and whether they would qualify for exceptions under the statute or proposed rule requires careful analysis,” it said.

There is another element to consider here, let’s call it an economic imbalance. Let’s say regulators get a paycheck of $150,000 (I really don’t know the figure) and then compare that to compensation in the banking industry in the millions for ‘risk takers’, especially the bankers in the back room with their incentives and bonuses writing algorithms that Jamie didn’t understand and for that matter neither did the regulators.

Destructive behavior
Back to square one, understanding risk applied to bot trades, hedging, and regulations in banking. We need first to start figuring in the incentives for destructive behavior, which is a part of the risk never discussed. Destructive behavior behind the scenes on Wall Street, we will put a very simple label on it, self interest.

However, some could have put some thought into the actions of the “London Whale” (a big time hedgie) who had enormous financial positions in the derivatives markets (large positions in bond-index derivatives and that might have alerted trouble in the making on this one.

Your judgment should be washed by the fact that regulators have no responsibility to stop a bank from losing money says a former analyst at the Federal Reserve Bank of New York. “They should only step in if could become a systemic issue or taxpayer problem.”

Where’s my beef?
The public has an interest in systemic risk. Let me say that again, the public has an interest in systemic risk, especially when it can be demonstrated it was on purpose. This moves into the philosophical domain markets and morals.

Those leveraged bets aren't so likely to be in the public's interest.

CEO Jamie Dimon’s plea that it is only a mistake is, in my opinion, about a diversion plan to divert attention to any thought of regulation.

And this is my “beef” that I have with the current banking system: it encourages risk and offers no incentive for “civic obligation or civic morality”. (

“Critics say the J.P. Morgan fiasco proves that greed in the U.S. is out of control. But America’s deeper problem is the death of civic morality and responsibility.”

“We can't withstand moral temptations reliably as individuals, or create firmly moral cultures in our companies, without identifying a clear connection between what's right and what's smart--a way to bridge the gap between ethical standards and self-interest.” says Keith and Tobin ( Streetsmart Ethics, with the subtitle, "Connecting What's Right with What's Smart on Wall Street),

There is a sickness that we have come to accept as normal and that will be a topic that I will discuss further in a post about a new book – controversial of course in some corners. The problem of morality of self interest must be transformed into a sense of national purpose, we need a dose of ethics to decrease risk to America’s soul. The book addresses big issues of everyday life in a democracy.

Do you think it will ever come to pass that someone taking blame for an untoward public interest event might utter, “What I did wasn’t good for America.”

Inside Value Fool

Selected References:
Banking: Same as It Ever Was.

What Jamie Dimon didn’t tell you on meet the press.

JP Morgan loss: Did US regulators know what CEO Jamie Dimon apparently didn't?

JP Morgan and Systemic Risk

Michael Tomasky: Why Jamie Dimon Should Resign From J.P. Morgan.

Interview With a Philosopher: A Conversation With Keith Wyma and Tobin Senefeld on Goldman Sachs l

0 Comments – Post Your Own

Featured Broker Partners