Guest post by Azizonomics.
In the wake of J.P. Morgan’s epic speculatory fail a whole lot of commentators are talking about regulation. And yes — this was speculation — if Dimon gets to call these activities “hedging portfolio risk“, then I have the right to go to Vegas, play the Martingale roulette system, and happily call it “hedging portfolio risk” too, because hey — the Martingale system always wins in theory.
The Volcker rule, part of the Dodd-Frank financial reform law, was inspired by former Federal Reserve Chairman Paul Volcker. It’s supposed to stop federally insured banks from making speculative bets for their own profit — leaving taxpayers to bail them out when things go wrong.
As we have said, banks have both explicit and implicit federal guarantees, so the market doesn’t impose the same discipline on them as, say, hedge funds. For this reason, the Volcker rule should be as airtight as possible.
Proponents of regulation point to the period of relative financial stability between the enactment of Glass-Steagall and its repeal. But let’s not confuse Glass-Steagall with what’s on the table today. It’s a totally different ball game.
With the Volcker rule about to happen in July, the timing of bringing forward JPM’s whale trader is somewhat amusing. The trader so big, we can’t call him by his name, is fueling the prop trading debate. There is no point to worry, derivatives are just used for hedging purposes, and everything is netted out, so the “true” risk is almost zero, or? From Bloomberg.
JPMorgan Chase & Co. (JPM) trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.
Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.
From the author of ”Currency wars; The making of the Next Global Crisis”, James Rickards. We advise everybody in reading the book, but here is a sample of the topics covered in the must read book. From a speech presented by Mr Rickards.
With markets trading in a rather “boring” mid day session, it’s always worth reading some extra material. Remember Volcker? Some thought by the ex Fed boss on financial reform, stability, Fed and risk;
It should be clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations, market efficiencies, and the techniques of modern finance. That faith was stoked in part by the huge financial rewards that enabled the extremes of borrowing, the economic imbalances, and the pretenses and assurances of the credit-rating agencies to persist so long. A relaxed approach by regulators and legislators reflected the new financial zeitgeist.
All the seeming mathematical precision that was brought to investment, all the complicated new products, including the explosion of derivatives, that were intended to diffuse and minimize risk, did not work as had been claimed. Instead, the vaunted efficiency helped justify an explosion of weak credit and an emphasis on trading along with exceedingly large compensation for traders.
Full article here. Courtesy Jessie.