Lose $5 Billion But Not Your Job

By Moustafa El Zanaty - July 18, 2012 | Tickers: BCS, GS, JPM | 0 Comments

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Since the first reports of massive trading losses caused by the now famous “London Whale,” a trader based in JPMorgan Chase’s (NYSE: JPM)  Chief Investment Office, nothing of any consequence has actually happened.  There has been a lot of complaining, a senate hearing, and the departure of many of the traders involved with the trades in question.   The traders who left received their golden parachutes, and the senate hearing that CEO Jamie Dimon attended was more of a sitcom then an intense discussion of issues in the banking sector.  The hearing quickly degenerated into a strange set of questions which left the panel members appearing lost, confused, and, instead of grilling Dimon, asking for his opinion on the matters at hand.  Dimon seemed to wield the bigger stick in the meeting, and the senators appeared to have little grasp of the financial issues that had led to this massive trading loss.  As JP Morgan released their 2^nd quarter results, it seems that Dimon will have the last laugh.   Shares surged after the call, and it looks as if Dimon had said enough to reassure investors that his Bank was solvent and profitable.  What has been quickly swept under the rug is the core problem that permeates Wall Street and the banking sector.  The problem is that even after the entire industry almost collapsed in 2008, very little has changed. 

Banks have been in the news recently, and it hasn’t been for their charity and community service.  Barclays (NYSE: BCS) is in the midst of what is being dubbed the “Libor Scandal,” in which they have been accused of fixing interest rates.  The Barclays brass fared worse than Jamie Dimon did, as they had to leave and may still face legal action for their roles in the scandal.  What Barclays did is in essence the equivalent of a football player fixing games and betting on the outcome.  You would think that type of behavior would be reserved for crooked athletes and bookies, not one of the most respected banks in Britain. What is scary is not so much the fact that these banks lose money on these plays, get fined, or lose their CEO’s, but the fact that these events, when left unchecked, progressively get worse until they reach the point where they cause losses large enough to bring down the world economy.   It was only four years ago that the American people had to bail out their banking sector while watching a huge percentage of the national wealth disappear in eroding housing values.  The European Union is still in the midst of multiple solvency issues with a number of its member countries.  This is more proof that banks will get away with as much as they can until it really hits the fan.  The most recent events, especially at J.P. Morgan, didn’t put the solvency of the bank into question but, as it seems there will be no repercussions, one would have to assume that nothing will change.

What is often lost in the media coverage of these stories is who really loses.  When banks are able to make aggressive and risky bets on complex trades, it’s usually the major equity investors that lose huge sums when their shares tumble on negative news.  The Ohio Attorney General filed a motion seeking to lead a class action law suit against J.P. Morgan as its pension funds lost more than $27.5 million due to the trades.   In my opinion, most of the legislation that has de-regulated the banking industry over the last 20 years has only benefited insiders and politicians who are promised cushy banking jobs once their legislative duties are over.  It is common knowledge that Goldman Sachs (NYSE: GS) is closely tied to most branches of the American Government and the Federal Reserve.  If we think that these close personal ties don’t play a role when legislative decisions are made, we are being extremely naive.  When the banking sector fails, all aspects of the economy and the stock market are affected.  There needs to be a separation between investment banking, commercial banking, and legislation regarding how banks can operate.  If not we will continue to see different variations of the disaster that hit us in 2008.     

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