Was London Whale really a rogue?
Then there's the related logic that says that a loss like the $5.8 billion London Whale loss is just an accident, bad luck, the result of a rogue trader or whatever. Again, I think that's a total misrepresentation of the core problems at global investment banks.
These banks are indeed too big to manage. And they have fully embraced a culture of risk-taking at the same time that they've refused to admit that they can't manage to keep the risk within bounds or make sure that it doesn't spiral into a culture of deception.
Notice that the defense that the CEOs at JPMorgan Chase and Barclays have both offered in the London Whale and Libor scandals blows the accident defense out of the water. (I'm pretty sure that isn't what either bank intended.)
At JPMorgan Chase, Dimon has told investors and Congress that he didn't know that the chief investment office was out of control until the London Whale trade blew up on the bank. JPMorgan Chase admitted to investors this quarter that it had a material weakness of internal controls. Some traders, the bank said, misstated or mispriced positions in order to avoid showing the full extent of their losses. And it wasn't just in the second quarter of 2012. Last week, the bank moved to restate earnings for the first quarter of 2012, as well.
The chief investment office team, the bank's internal investigation said, created a portfolio of derivative positions that "grew to a perilous size with numerous embedded risks that the team didn't understand and were not equipped to manage."
"Didn't understand?" "Were not equipped to manage?" And nobody noticed?
Either Jamie Dimon and the rest of the management team at JPMorgan Chase isn't nearly as competent as Wall Street has said it is -- which would be a serious indictment of banking analysts and conventional wisdom on the Street -- or they are indeed pretty smart men and women who have failed at the impossible task of running a very risky business at an investment banking behemoth that is simply unmanageable. That's a much scarier proposition.
Risk run amok
It gets even scarier when you consider the story line that shows the once conservatively run chief investment office gradually becoming accustomed to taking on more risk, as the managers of that unit worked to turn it into a major profit center for the bank. I don't think this is an isolated occurrence. Managers at many banks apparently no longer believe that traditional, low-risk, bread-and-butter banking generates the level of returns that a bank should earn.
Want to see what the pressure for higher returns produces when it is combined with management that isn't up to the job of running an impossibly complex global investment bank? Take a look at the unfolding Libor scandal.
So far, Barclays has agreed to pay a $450 million fine to settle charges that the bank manipulated the Libor benchmark interest rate used to price everything from mortgages to home-equity loans to derivative contracts used for hedging risk by corporations and governments so that it would look more financially solid to regulators, credit-rating agencies and investors.
How far back does the manipulation go? The Bank of England and the New York Fed, to name just two parties, seem to have stumbled upon the manipulation as early as 2008. Barclay's international documents push the beginning of the manipulation back to 2005.
But the inaction by regulators for four to seven years isn't the most distressing part of the Libor scandal. Libor is calculated daily by the British Bankers' Association as the average interest rate at which 16 big international banks based in London can borrow from each other.
It's just about impossible to imagine, therefore, that Barclays could have manipulated the Libor without the active or at least passive involvement of other banks. That is certainly the message of a memo that Barclays management sent out to the bank's staff after Barclays' settlement with U.S. and U.K. regulators. "As other banks settle with authorities, and their details become public, and various government inquiries shed more light, our situation will eventually be put in perspective," the memo says.
Where will the Libor scandal stop?
In other words, Barclays won't seem quite so culpable because further investigation will reveal that everybody does it. Who's everybody? The New York Times reports that UBS (UBS) is under investigation, but I'm sure the Libor scandal won't stop there.
I don't see any way to argue convincingly that the Libor scandal was just an accident or even that it was just a management failure at a single bank. Replacing Robert Diamond with a better CEO isn't going to fix the problem because the problem is at the heart of the current incarnation of a global investment bank: too big to manage and too addicted to risk.
And if that's indeed the case, there's also no way that the JPMorgan Chase London Whale disaster is just a one-time event. It's central to the way the bank does business.
And it's about time that the financial markets started treating it that way.
At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any stock mentioned in this post as of the end of March. Find a full list of the stocks in the fund as of the end of March here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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"First, there's the argument that the $5.8 billion loss from the disastrously complex London Whale trade (put on by an employee in London operating out of the bank's chief investment office) shouldn't count because it's a one-time problem."
So even though during the last five years JPM has been caught red handed and lying about their involvement in mortgage securities fraud, energy market fraud and manipulation, silver market manipulation, Libor rate manipulation, CDS market abuse and manipulation, proprietary trading violations of the Volker Rule, and lending violations associated with the MF Global collapse, it’s all over now. It won’t ever happen again. Everything is fixed. Really. Seriously. They mean it. They’re not kidding this time. And besides, Becky Quick and Maria Bartiromo are still willing to tell everyone that it all somehow adds up to a good thing.
There’s a sense of hopelessness that’s grows each time one of these incidents occurs and the banks and mainstream media try to brush it under the rug, instead of addressing the real core problems behind it. Everyone knows that similar violations and market abuse are going on right now, this instant, as they read this article and post. How many more one-off incidents do the banks think they can get away with before they must admit the apple is rotten to the core?
A wise investor once gave me great advice. Why invest in bank stock when there are so many perfectly good companies that actually produce something?
It's all smoke and mirrors with these outfits. The last four years, smoke from a crack pipe.
But they do have the politicians on their side, always bailing them out.
Terrific assessment, Jim. Now the big question is-- how do we divest them? No bank in America is worth what we will all pay for their folly in coming generations. You were- kind- to JPM. There was no discussion on their involvement in the LIBOR scandal, Corzine's Fund, massive Euro exposure that has ZERO chance of being anything but loss and most of all- Jamie's lie about the "whale" because it wasn't just an investment-gone-wrong, it was a compromise in derivatives contracts, that will continue to deliver losses.
We really have no other choice but to- Close the banks, reconcile them, terminate and bar personnel from re-entering the sector, prosecuting criminal activity, regulating and re-opening only with firm and viable oversight. It's a bushel of rotten apples. Do you invest time and effort into picking out one or so maybe good ones, or throwing the basket and all in the dumpster? What are banks to 99% of Americans today? With both Visa and Mastercard settling on fee-fixing, the trickle down to banks comes next. That AGAIN would be Chase.
From Mr. Jubak's article.=Frankly, I find the jump in JPMorgan Chase stock deeply disturbing. It's yet one more sign, if you need one, of exactly how cynical Wall Street has become and of how corrupt the world's banking system is.
Mr. Jubak nailed it. Way to go Jim, we need more media coverage on this huge problem, that will bring the US, down to its knees.
Food for thought, which presidential candidate is going to bring us out of this mess? The ineffective Obama, or Romney, a guy that is a lot closer to these Bankers, than he is to the common man.
Who is the largest recipient of Food Stamp money in America? JP Morgan, they get a cut for every transaction. They should offer this service for free as a Community Service if they can make so much money. Also see who get the most money in unemployment benefits!
If you want to get more disgusted, check out the Senate Report on scribd - titled:
U.S. Vulnerabilities to Money Laundering,Drugs, and Terrorist Financing:
HSBC Case History
The real question is ? If JPM is a proven bunch of banking crooks and you bank with them, what does that make you? That's a general question and not directed at Steve. I don't know who he banks with.
yep its sad that the opinions of the market play everyone. You dont normally see a spike in the market from bad news unless it is spiking down. The entire market lost credibility just once more but how many times have we seen this? I am sure the bottom line is devaluation and one day someone who thinks they are in the triple digit IQ club is going to be standing there with alot more of those legends in their own minds when someone who just does the audit under them has to tell them the truth.
I share a berth in an above IQ area . It is the ability to look at large numbers and figure out the bottom line to a generalization point. If the media does not quit devaluing the resources we have which is spawning @ssholes who think they can match the tax assessors audit of properties to the actual worth of the property then there will be little solid capital to inject back into our economy. Banks are taking the forclosures and turning them back for less than 50cents on the dollar to people who really dont have the cash either but are daring and have credit. This is causing the people who do own property that is worth quite a bit more to live on a daily basis being insulted by other people who listen to this downgrade. I had a woman tour my house and when she couldnt refute the place it was nor the features she told my agent that perhaps if I ripped out the carpet and painted the plywood that it might sell because ? I never found out why but apparently its because it was dated shag carpet. She also had the gall to tell me that properties were selling for the same price that the tax assessor appraised based on the taxes. I have an actual appraisal that was taken during the worst time that has recovered if I were to have it done now at least 50 grand over what it was and that appraisal is about 130 grand higher than my tax purpose market assessment. This latest confrontation was the direct result of the media downturning property worth. There are no more excuses to devalue properties. The s****ing carpet bagging morons who ran around teaching scam techniques to everyone has passed. No one who owns properties is going to give it away to any of you strays still running around trying to steal homes. I am tired of hearing one story about how it has nothing to do with property worth this tax devaluation and then have a licensed real etstae agent trying to buy my house throw it right in my face using that devaluation as a tool to try and buy my house for 100 grand lower than I am selling it which is 250 grand below what it was worth just a few years ago and almost 700 thousand dollars below what it was worth a few years before that.
We all still deal with the banks for loans but most of us know just exactly who they are and what immoral crap they are peddling. My whole problem started when two little executive pieces of trash were going to get married and had their dream home built for almost 700 grand in my neighborhood. Then these supposed adults got ticked off at each other and had a divorce leaving the bank sitting there with the debt on the house. The bank dropped this brand new home for 450 grand at auction effectively starting the tumble of property values in my neighborhood. I think the government needs to put a leash on them to stop them from destroying the USA. You see its clear to me they have a gambling problem. You know its a disease. end/prophecy not rant.
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