Di(a)mon(d) no more

Editor's Note

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Jamie Dimon, JP Morgan 

Oh my, now this is a pickle. On May 10, JP Morgan, the so-called poster child for smart bank behavior during the 2008 crisis, announced a $2 billion loss due to credit derivative positions that went bad. So much for being a market leader. 

Some irony: Before this news was released, I was at a Treasury conference in Florida listening to a panel that included a representative of JP Morgan who urged everyone to read CEO Dimon’s note to shareholders on the true cost of Dodd-Frank to the banking community. Guess I can hold off on that reading for now. 

Am I alone in taking some sickish delight in this news? Wasn’t JP Morgan accused of being part of the reason for MF Global’s downfall? Maybe not justified, but alleged. And frankly, to hear Dimon tell it (which we did often), Dodd-Frank is a terrible answer to the ills afflicting Wall Street. Perhaps some of the regulations are flawed, overly complex and a mess, but apparently, so is JP Morgan’s risk management.

The conference I was attending was for corporate treasurers and risk managers, and focused on issues affecting that contingent, from foreign exchange risk to regulatory uncertainty to bank management. I had just left for the airport when the news broke about JP Morgan, but I would have liked to get a take from a few treasurers who, like traders who don’t want to worry about broker risk, don’t want to worry about banker risk.

Once again, the Wall Street arrogance astounds me. Under the turmoil of the markets, with regulations coming around the bend and everyone in the financial industry — from banks to brokers to corporates — scrambling to survive, that a large bank could operate so carelessly is shocking. It shows not only a “too big to fail” lack of caution, but also an “above the law” mentality. 

Something akin to MF Global, which now could be under investigation by a Department of Justice independent counsel (see Trendlines). As the request is coming from Republican congressmen, and from the tenor of the statement, if it happens it might be more a witch hunt to tie the Obama administration to the debacle than to help those whose money is missing. However, an investigation is needed into how so much went so wrong when MF Global went under. I kind of doubt the reason for MF Global’s failure has much to do with the politics of inaction, but more with incompetence by the broker and its regulators. Surely an investigation may bring about criminal charges, and I’m all for that if needed. I know emotions are running high and money, rightfully owned by clients, is missing, but the sad part is it’s most likely ineptitude, and not willful law breaking, that’s the reason behind the fall. 

Either way, let’s face it: Some glorified titans of industry just aren’t that good. The bloated payment packages, only now feeding shareholder anger and causing some revolts, are typically unjustified based on company performance. 

Traders are measured daily by the P&L of their account. If a trading manager loses money, chances are he loses clients. But plenty of “star CEOs” have been paid well even in losing years, and even after being booted from a company. JP Morgan looked to be the best of a questionable bunch, and because of the nature of the losses, appears to have learned nothing from the fallout of the last few years.

High risk may mean high reward, but it’s called risk for a reason. Traders who don’t understand that are out of business. It seems the same ‘eat what you kill’ penalty doesn’t apply to the Wall Street 1% — but it should.

About the Author

In her many years covering the futures industry Ginger has interviewed some of today's best global hedge fund and commodity trading advisors. Ginger received a master's degree in journalism at Northwestern University's Medill School of Journalism and a bachelor’s in communication arts from the University of Wisconsin – Madison

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