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Forum Post: "Dimon, the Whale Man, and Glass-Steagall", by Nomi Prins

Posted 8 years ago on May 16, 2012, 2:05 p.m. EST by shadz66 (19985)
This content is user submitted and not an official statement

"Dimon, the Whale Man, and Glass-Steagall"

by Nomi Prins

It was fitting that while President Obama and his Hollywood apostles broke fundraising records at a sumptuous $40,000 per plate dinner at George Clooney's place, word of JPM Chase's 'mistake' rippled through the news. Not long ago, Dimon's name was batted about to become Treasury Secretary. But as lines are drawn and pundits take sides in the Jamie Dimon ego deflation saga – or, as I see it - why big banks should be made smaller and then, broken up into commercial vs. speculative components ala Glass Steagall – it's important to look beyond the size of the $2 billion dollar (and counting) beached whale of a trading loss.

Yes, $2 billion in the scheme of JPM Chase's book and quarterly earnings is tiny, a 'trading blip' as it's been called by some business press. But that's not a mitigating factor in what it represents. In this era dominated by a few consolidated and complex banks, the very fact that it's a relatively small loss IS the red flag.

First - because the loss could (and will) grow. Second, because even if it doesn't, it's a blatant example of a big bank incurring un-due risk within a barely regulated, highly correlated financial markets. It only takes another Paulson hedge fund, or a trading desk at Goldman Sachs, to short the hell out of the corporates that JPM Chase is synthetically long, or take whatever the other side really is, to create a liquidity crisis that will further screw those least able to access credit – individuals, small businesses, and productive capital users.

We know this. We've seen this. We're in this. There's no such thing as an isolated trading loss anymore. And yet Jamie Dimon, seated atop the most powerful bank in the world, has smugly led the charge to adamantly oppose any moves to alter the banking framework that allows him, or any bank, to call a bet - a hedge or client position or market-making maneuver - with central bank, government official, and regulatory impunity.

Flashback to the unimaginable in 1933

It's 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR.

Okay, that's pretty common knowledge. But, here's something that isn't: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments. Fellow bankers hated him.

His motives weren't totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.)

Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation's cash than any other bank. It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives.

It is the size of a bank holding company's deposits that dictates the extent of the risk it takes, risk 'models' not withstanding: the more deposits, the more risk, the more potential loss. JPM Chase is not alone in using its position as deposit taker to increase speculation, but it has more to play with.

And the more access to other people's money, the greater the gambling incentive. The largest banks hold deposits (our deposits) hostage in the global game of financial warfare. Related access to capital and bailouts are enabling weaponry in the fight for worldwide insitutional supremacy.

The Alleged Hedge

Now, consider JPM Chase's alleged 'hedge' itself; a trading position taken in the London department, the chief investment office, set up to allegedly protect the bank's overall book and 'invest' its excess capital. Any investment is a bet. A hedge is supposed to mitigate loss if the bet fails. An investment is not a hedge.

Let's pretend for a moment that banks were about simple conventional - banking – taking deposits and making loans. In that context, it would be nonsensical to hedge loan risk by pouring on more loan risk, or put out a fire by pouring fuel on its flames.

In other words, if a bank lends money to, say Boeing, it accepts a rate, in return, more or less related to its assessment of the risk involved in getting its money back, which translates into an interest payment. To hedge that payment, a bank could purchase 'insurance' or 'protection' from a counterparty solvent enough to make good on any shortfall in Boeing's ability to pay its interest, or in the event of an Boeing default. What is not a hedge for the loan, is further exposure to the risk that Boeing could default. Yet, in a more complex manner, that's exactly what happened here.

By engaging in a trade that tied up 15% of its assets, or $350 billion, no matter what label that trade received, the Whale man and his managers (leading up to Jamie Dimon), went long credit risk by shorting an index of synthetic credits, thereby placing the bank in the position of paying out, or losing money, if those credits deteriorate. In effect, and super-simplistically, it doubled down. In its more complex form, the firm took a short position in an index of credit default swaps representing 125 North American investment grade corporations (including Boeing), called the CDX.NA.IG.9. The index has been diving in price, hence the loss - and mounting loss to JPM.

Deception and Delusion

Going long the corporate credit market while still immersed in the fallout of having been long the European sovereign and US real estate market, demonstrates the same cluelessness about the economy and financial system prevalent in the media and in Washington every time the words 'slow recovery' rather than something to the effect of 'prolonged, continued, enduring depression' are uttered.

In such a charade, why wouldn't JPM Chase, a bank existing on an array of federal largesse, and Jamie Dimon who was re-voted to Class A NY Fed Director, the position he held during the 2008 crisis, in early 2010 – rubber stamp a bet that corporate economic health is a foregone conclusion.

It was under that same misplaced, other people's money optimism and hubris that MF Global stole (or for the apologists, 'mistakenly took') $1.6 billion of its segregated customers' money to stay in a bad bet. Former MF Global CEO, the 'honorable' Jon Corzine's bet was that certain European sovereign credits would improve. Only they didn't. Not in time for his margins to hold out.

It's more than ironic, that JPM Chase, the bank still entangled with MF Global customer money, took the same bet, albeit with different credits and is trying to pawn it off as an 'egregious' mistake, a blip on the radar of an otherwise pristinely risk-managed bank.

It's also supremely annoying that Dimon is right about something, that the Volcker Rule wouldn't necessarily apply to this 'hedge.' There's nothing particularly wrong with the Volcker Rule; it will mitigate some fraction of risk, though given the SEC and Fed's inability to understand what risk is, it's unlikely they'll take the mental leap to segment trades as mitigating it, or not. Yet, the Volcker Rule will not change one fundamental pillar of global systemic risk – as long as banks are not segregated ala Glass Steagall along deposit-taking / loan-making vs. speculation lines, they will have access to capital to burn. And burn it they will.


radix omnium malorum est cupiditas ...


Nomi Prins is an independent journalist, author and speaker. Her latest book is a dramatic historical novel about the 1929 crash, "Black Tuesday". - Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and ran the international analytics group at Bear Stearns in London. She is a Senior Fellow at Demos ( http://www.demos.org/ ), based in Los Angeles { http://www.nomiprins.com/ }.

[Article copied verbatim under "Fair Use" from : http://www.informationclearinghouse.info/article31334.htm ]



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[-] 6 points by shadz66 (19985) 8 years ago

Nomi Prins is a regular on "The Keiser Report" ( http://rt.com/programs/keiser-report/ ) and her most recent appearance was on Tuesday (15th May) :

  • Episode 288 : http://rt.com/programs/keiser-report/episode-288-max-keiser/ - In this episode, Max Keiser and co-host, Stacy Herbert have a field day dissecting Jamie Dimon’s ‘egregious, terrible mistake,’ the possible insider trading around those so-called mistakes and what the Leveson Inquiry may tell us about the SEC’s Mary Schapiro’s ‘focus’ on these oh so egregious mistakes. In the second half of the show Max talks to Nomi Prins, a former senior executive at Goldman Sachs and Bear Stearns, about the problems at JP Morgan’s London trading desk.

fiat lux ...


[-] 5 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

Love It. Thanks shadz.

[-] 5 points by shadz66 (19985) 8 years ago

Thanx ... now lets put a stop-watch on your Bot and see how long it takes to collapse your gentle and innocuous comment. Btw you must have been doing something right to have elicited such attention ! You ought to consider it as quite an accolade really !! Solidarity !!!

nil desperandum ...

[-] 6 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

You are too kind. And they are very paranoid. But I also seem to be in good company. So perhaps I am too modest.

That's Me Modest. That's my story and I'm stickin to it !!!!!!!

Hey check out my new post to end the attack by the forum.

[-] 3 points by shadz66 (19985) 8 years ago

Hey Mr. Modest - Howya Doin' ?! Put up a link here please - I'm either not sure which post you mean or I can't see the wood for trees !! LOL !!! pax et lux ..

[-] 4 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

I be fine - how be you?

Been a long day and I am a little cross-eyed actually.

Here ya go:


[-] 5 points by epa1nter (4650) from Rutherford, NJ 8 years ago

I'm trying to upvote as much as possible, but I just can't keep up.

[-] 5 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

HEY - EPA - don't bother. Until the forum fixes the issue it will do no good anyway.

Here check this out:


Feel free to share.

Thanks for the thought.

[-] 5 points by epa1nter (4650) from Rutherford, NJ 8 years ago

Saw it, and I agree.

[-] 3 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

Hope others will check it out and sign on their support.

[-] 3 points by shadz66 (19985) 8 years ago

Thanx. You should remember to take a walk and stretch out your limbs every now and again and drink lots of water too. Take a break ... try my 'Keiser Report' Link above. Also good ideas on your post.

pax et lux ...

[-] 3 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

Thanks for the advice and as always your links. Yes I am an old guy so I do a lot of that stuff - always nice to hear a reminder from a friend though.

You be sure to follow that advice as well.

[-] 4 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

That did not take long at all.

[-] 2 points by shadz66 (19985) 8 years ago

Bill Moyers on JP Morgan :

Watch Moyers & Company weekly on public television ( http://billmoyers.com/schedule/ ). See more web-only features like this at http://billmoyers.com/ .

veritas vos liberabit ...

[-] 3 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

Good article. Nice to have the option to read it - still have not fixed my sound issues. {:-])

[-] 1 points by DKAtoday (33802) from Coon Rapids, MN 8 years ago

Geithner is doing an economic song and dance on the PBS news hour - right now. Bastard.

[-] 1 points by shadz66 (19985) 8 years ago

An article by Matt Taibbi which is a very important insight into Financial Diabolism :

fiat justitia ...