Chase bank loses 2 billion on risky trades in derivatives

[Matthias]

http://finance.fortune.cnn.com/2012/...on-just-start/

And some of the latest fall out:

http://www.reuters.com/article/2012/...8GD3CW20120513

So... a couple years after giant banks that were allowed to make incredibly risky bets in the practically unregulated derivatives market caused the worst recession since the Great Depression, we are no better off.

I guess our strategy right now is just hoping the people who run the giant banks are competent enough and nice enough not to mess up. Because if they do, we will have to bail them out, or they will cause a global depression, because they are too big to fail.

It is just absolutely insane that nothing has been done to fix these issues. I mean, it certainly highlights how much control and weight banks have in the political process that the incredibly lucrative business of publicizing risk while privatizing profit has not changed at all, and that stuff like this is still happening, and that in fact we are in a worse position now than before the recession in terms of "too big to fail" banks.

I mean, wow, I just am shocked by such an obviously corrupt system allowing such a one-sided policy to continue.

[Kitsunegari]

I heard about this a few days ago, not sure if it will be a big deal in their future. CHASE got through the first crisis pretty much unscathed IIRC.

[Matthias]

I heard about this a few days ago, not sure if it will be a big deal in their future. CHASE got through the first crisis pretty much unscathed IIRC.

Only because the government bailed out the banks that failed. Otherwise all the banks would've failed. I don't really care about Chase's specific future, I'm concerned that the fate of nations lies in the hands of unelected profit seeking banks that cannot fail without triggering a global depression. The fact that some of them are losing billions in risky betting only freaks me out more.

[chilon]

Only because the government bailed out the banks that failed. Otherwise all the banks would've failed.

Thats not exactly accurate. First there were many smaller more local banks and credit unions that never got into the MBS derivative game. Even of the big banks, Wells Fargo would not have failed and Goldman wouldn't have either.Morgan/Chase and Citigroup would have been possible failures but probably not depending on the exact circumstances.

[Matthias]

Thats not exactly accurate. First there were many smaller more local banks and credit unions that never got into the MBS derivative game. Even of the big banks, Wells Fargo would not have failed and Goldman wouldn't have either.Morgan/Chase and Citigroup would have been possible failures but probably not depending on the exact circumstances.

It's an opinion, which, considering it's based on a "what if", is about as accurate as your possible opinion. I think the whole financial system would've collapsed. I have no idea why you think Wells Fargo and Goldman would've survived. Nor do I think you understand the implications of a bank run.

[mrmouth]

Yeah, just two pieces of legislation in 1999 and 2001 (?) did away with regulations that had been in place since the great depression. The results were obvious.

[bushbush]

I wonder who the winners are though. JP Morgan is playing with big CDS bets on the possibility of defaults against a bunch of companies (if i understand this correctly). Someone else must have bought up the whatever on the other end of the bet to the extent that JP Morgan thinks its CDS bets, worth many billions, are no longer worth anything.

[magpie]

Well Jamie Dimon is doing the rounds trying to smooth things out.
3 of the London branch employee,s have been given their marching order,s.
The big boys are trying to rewrite the Volkeur regulation proposals.
Its gone from 13 pages to 300 so it should be like swiss cheese with the amount of loopholes added.
The play with the CDS bets was probabably too big to hide from the opposition and they took advantage?
I think it will be a few dollars more than $2billion when the dust settles.

[HissingNewt]

Matthias, what do you think the solution to this would be? I'm genuinely curious how you think you can prevent capital losses like this when trades go wrong.

[bushbush]

Matthias, what do you think the solution to this would be? I'm genuinely curious how you think you can prevent capital losses like this when trades go wrong.

On this case, I really don't think CDS should be played with as a betting device by banks. It makes little sense. CDS is supposed to function like an insurance against default. But CDS is not held by people who actually have stakes in the insured entities (such as a mortgage backed security). It is as if I own your house's insurance and when your house burns down, I get paid. The incentives are all wrong.

Moreover, there is the problem of information here. It is exceptionally difficult to figure out the risks on the kind of securities these banks are playing with. Rating agencies have proved that they don't know about the stuff they rate. Banks follow these useless ratings and sell CDS to each other. They are not even sure what they are playing with.

[Glista]

Not trade its casino

[HissingNewt]

On this case, I really don't think CDS should be played with as a betting device by banks. It makes little sense. CDS is supposed to function like an insurance against default. But CDS is not held by people who actually have stakes in the insured entities (such as a mortgage backed security). It is as if I own your house's insurance and when your house burns down, I get paid. The incentives are all wrong.

Moreover, there is the problem of information here. It is exceptionally difficult to figure out the risks on the kind of securities these banks are playing with. Rating agencies have proved that they don't know about the stuff they rate. Banks follow these useless ratings and sell CDS to each other. They are not even sure what they are playing with.

Oh, I wasn't aware this was a CDS trade (does it say that in one of the articles?). CDS trades are questionable, but I really don't know if banning them will help. And if the ratings agencies aren't accurately rating companies, that's completely their fault. The amount of information you need to put out there should be more than enough to find out the current rating of any publicly traded corporation. With all the information needed to file with the SEC and then the quarterly updates and additional GAAP to standardize information they should be able to make the right rating the majority of the time.

[Matthias]

Matthias, what do you think the solution to this would be? I'm genuinely curious how you think you can prevent capital losses like this when trades go wrong.

I think the Glass-Steagall rules being put back in place could help to an extent, so that banks can't bet on risky things like this. Basically, certain institutions shouldn't be allowed to bet on risky things. For those that want to invest in such corporations, they should be seperate and clearly marked as such.

I think even more fundamentally, giant banks need to broken up. That way, if a bank fails, it doesn't destroy our economy or get our politicians involved. Also, it's tough to manage such giant institutions with so much wealth, not to mention the unhealthy political pull they have in government.

I would think even hardcore free-marketers can see that having all of one's eggs in one basket is not wise, nor really a reflection of a healthy free market system.

[HissingNewt]

I think the Glass-Steagall rules being put back in place could help to an extent, so that banks can't bet on risky things like this. Basically, certain institutions shouldn't be allowed to bet on risky things. For those that want to invest in such corporations, they should be seperate and clearly marked as such.

I think even more fundamentally, giant banks need to broken up. That way, if a bank fails, it doesn't destroy our economy or get our politicians involved. Also, it's tough to manage such giant institutions with so much wealth, not to mention the unhealthy political pull they have in government.

I would think even hardcore free-marketers can see that having all of one's eggs in one basket is not wise, nor really a reflection of a healthy free market system.

Fair enough. I actually agree that Glass-Steagall should go back into play, but they can't just break up every big bank. There were certain banks like Chase that hadn't been taking major risks and it paid off for them in 2008 until they were forced to take bailout money. Banks that were less responsible should definitely be broken up, but that doesn't seem to be the strategy the Federal Reserve is going for.

[mrmouth]

Fair enough. I actually agree that Glass-Steagall should go back into play, but they can't just break up every big bank. There were certain banks like Chase that hadn't been taking major risks and it paid off for them in 2008 until they were forced to take bailout money. Banks that were less responsible should definitely be broken up, but that doesn't seem to be the strategy the Federal Reserve is going for.

Chase hadn't been that deep into it, but they were into it. They were in with Enron, Worldcom, etc. They paid roughly $3 billion in fines from 2002-2008.

Most disturbing is that they started getting deep into this shady stuff, after 2008. Brilliant.

The Glass-Steagall Act served us well for half a century. Steady economic growth and no financial crises. While it is tempting to say: “Let’s go back to Glass-Steagall and separate commercial from investment banking!” the problem with that is that the world has gotten more complicated. The banking business has changed. Things like derivatives didn’t exist back in the time of Glass-Steagall.

In effect, the modern equivalent of the Glass-Steagall Act is the Volcker Rule, which is still being drafted. Banks like JPMorgan have lobbied hard to have the Volcker rule allow this type of portfolio “hedging”. That contrasts with any normal definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.

http://www.forbes.com/sites/steveden...jpmorganchase/

[Snoopy]

I think the Glass-Steagall rules being put back in place could help to an extent, so that banks can't bet on risky things like this. Basically, certain institutions shouldn't be allowed to bet on risky things. For those that want to invest in such corporations, they should be seperate and clearly marked as such.

I think even more fundamentally, giant banks need to broken up. That way, if a bank fails, it doesn't destroy our economy or get our politicians involved. Also, it's tough to manage such giant institutions with so much wealth, not to mention the unhealthy political pull they have in government.

I would think even hardcore free-marketers can see that having all of one's eggs in one basket is not wise, nor really a reflection of a healthy free market system.

Or you could just let the banks fail anyway, allow the debt to be liquidated, and let the next generation of banks understand that they aren't getting a safety net if they screw up.

Would there be a massive depression? Yes, definitely. But as the world economy is structured now, there is absolutely no scenario in which the world economy doesn't collapse in a giant way, so its better to get the inevitable day of reckoning out of the way so that the economy can restructure itself in a more sustainable manner.

Slapping on more regulations is a bit like stopping a hangover by drinking more; you're stopping the hangover alright, but you can only drink so much before you either give up (in which case you get a nastier one than had you simply stopped early) or drop dead from alcohol poisoning.

[Condottiere 40K]

Depends on the cause; if it's miscalculation, then you need stricter regulation and oversight; if it's malfeasance, than you need stricter regulation and oversight. If it wasn't either, than you have to break up the banks, since the kind of risks they feel comfortable in taking on makes these financial institutions a clear and present danger.

[Sphere]

Naked hedges of any kind are concerning. What turned the housing-bust of 2007 into a full blown financial meltdown was the all the naked hedging going on in the dark by the financial markets. When Lehman went under, massive liabilities were created by those who had sold credit default swaps thinking there would never be a credit default. These liabilities couldn't be covered, which pushed more intitutions into insolvency, which created more liabilities which couldn't be covered, and eventually even the banks like Sach's and Chase who had made the correct "bets" would never have collected on them because the Casino had gone bankrupt.

But the main tool for preventing what we saw in 2007-2008 is requiring higher capital requirements. JP Morgan-Chase can take this $2 Billion loss with little fuss because it is very well capitilized. Financial firms will always find ways to lose money and be irresponsible, government regulation should focus on making sure financial firms and banks are more resilient to loses, and that the financial system as a whole is more resilient because the next shock might have nothing to do with naked hedging.

[fkizz]

Another wanabee zombie bank

[visser300]

This forum must be a house of genius or something.

I enter history research centre and there are guys that can tell me exactly the characteristics of ancient and medieval Japan weapons

In another forum, I met a guy that can tell me in detail about quantum theory that I never ever dream about.

And now I see some people could tell me in very detail about derivative products which is not easy to understand.