The American Dilemma and How We Can Fix It

It was mid-June, 1994 when I walked in the door of my office to be greeted by my always-cheery receptionist who said, “Good morning.  What do you think about O.J.?”   I believe I responded, “Well, it’s a work day so we can’t add vodka to it and, besides, it tends to make my stomach a little sour.  Tomato juice would be better.”

She looked at me as though I were from Mars and said, “No, about O. J. Simpson’s wife and friend being murdered.”  As I hadn’t caught the evening news or seen a newspaper headline that morning, this was all truly news to me.  Little did I realize that she was asking me about what would be the largest media circus and most talked about piece of television broadcasting that would grip the country for many months to come.

I have never understood why people are so intrigued by other peoples’ misfortunes.  If it were up to me, there would be no audience for soap operas whether fictional or factual.  We all have enough dirty laundry of our own to fill several hampers to the full.  But I guess that’s how many of us elevate ourselves – taking comfort in the downfall of others thus diverting ourselves away from how we might improve our own lives.

Well, within just a day or so of the news release about the murders, I can honestly say that virtually every friend and acquaintance had formulated an opinion about whether Mr. Simpson were guilty or innocent.  They had not heard a single word of testimony nor been presented with a piece of evidence – but they had formulated their opinion.  This is what is known as “prejudice” – something most of us say is abhorrent yet something in which we actually often engage.

With J. P. Morgan Chase’s CEO Jamie Dimon’s announcement that the financial firm had suffered a $2 Billion trading loss in the most recent quarter to be reported, it didn’t surprise me that this story took on some of the same qualities as the one involving the murders of Nicole Simpson and Ronald Goldman.

People who think the banks are predatory (and that is many) began wagging their fingers and saying, “See, these SOB’s need more regulation.  Here we go again with ‘too big to fail’.”  But the fact is that – well, we don’t know the facts – and any judgment that any of us makes at this point is simply prejudice speaking.  Since I have actively supported a capitalistic viewpoint of economics, it is not a surprise that I heard from a number of people who hold an alternate view.

By way of full disclosure, I do not have any financial relationship with J. P. Morgan Chase.  I neither own nor am short their stock or bonds; I do not have a checking, savings, money market or credit card account with the firm; I do not have any personal loans a mortgage or IRA’s with them.  In other words I have absolutely no personal interest (other than as it may affect the overall financial system) with the company.  Having said that, I believe I am in a position to view this loss in an unbiased manner.

It is the nature of trading financial instruments whether those are stocks, bonds, commodities, currencies, options or any other sort of derivatives to take losses on a regular basis.  Obviously, if you don’t also take profits which are greater than the losses, you ultimately go out of business.  As it turns out, the $2 Billion which Chase took represented a reduction of their quarterly profit by about twenty-five percent.  In other words, the company earned $8 Billion after the loss.

Why this came to everyone’s attention was not that it was a loss but because it was an extremely large loss.  If this had been a $2 Billion profitable trade, none of us would ever have heard about it – it would simply have been included in the company’s earnings statement and we would have to find some other scandal to which we could turn our attention.

But step back from the world of finance for a minute since many of you may not be acquainted with its inner workings – and look at a different form of trading to which we can all relate.  In this case I offer the example of women’s apparel.

A buyer for a major department store chain decides that “hot pink ladies tank-tops” are going to be all the rage this summer season.  So she purchases an overly-large quantity of these, trading the store’s dollars for merchandise.  Sadly, lime green not hot pink is the sensational color this year and the merchandise she has purchased sits unsold within the store’s outlets.  In order to recoup the firm’s investment she authorizes markdowns in the hot pink tops – first twenty percent then forty percent then half off – but she still has an extensive inventory and finally sells the remaining inventory to a discounter – suffering a loss on this unfortunate purchase.

Now in the case of the buyer, there is no Federal regulator overseeing the transaction – only the upper echelon hierarchy of her store – who will, no doubt have a conversation with her about this purchase.   If I were in her boss’ position, before I engaged in that conversation I would look at her overall track record with the store and gauge her performance not solely based on this one event but on her overall skills.  I would examine the facts before reaching a conclusion.

Mr. Dimon has a reputation for a certain feistiness – and I’m sure has a fairly good-sized ego.  I have no doubt that having to make the statement about this loss was a significant embarrassment for him and the firm is internally looking at the circumstances surrounding it.  Clearly, if they had better internal controls and risk management systems, it might not have happened at all.  But it did – and as I can think of nobody who enjoys taking a $2 Billion loss, I am sure that even as I write this the firm is addressing the problem.  But is that enough?  Or is this just an example of why the banks need to be further regulated?

There is no question that certain regulations are good.  I frequently refer in these posts to laws governing our use of motor vehicles because this is something to which we can all relate.  Does it make sense to reduce the speed limit in areas where our children are on their way to school?  It makes sense to me.  Does it make sense to require that we come to a complete halt at a Stop sign.  Sure.  But as good as these provisions are, they are meaningless unless they are enforced.

It is just the same in the world of regulating financial institutions.  We might write the most efficient regulations that can be conceived – but if they are not enforced they have absolutely no value.  And to whom does this responsibility fall?  The answer is that the SEC is responsible for this oversight.  So let’s look at the job they are doing.

Let’s go back to 2009 and Bernie Madoff – do you remember him?  He created the largest Ponzi scheme in the history of the world – ultimately costing his investors an estimated $18 Billion dollars – nine times the trading loss at Chase.  Mr. Madoff’s activities were subject to the scrutiny of the SEC.

Despite the fact that they had received complaints from Mr. Harry Markopolos among others as much as ten years earlier, the SEC found nothing wrong in the way Mr. Madoff conducted business.  In fact, Mr. Madoff came to justice not because of the SEC’s efforts – but because he openly admitted to his deception and turned himself in.  He is currently serving a one hundred fifty year sentence.

Did the SEC have sufficient regulatory authority to bring Mr. Madoff to justice a decade before he admitted to his crime?  They certainly did.  Did they do their jobs in enforcing those regulations?  They certainly did not.  If they had, countless billions might have been saved those investors who were subsequently defrauded – an amount that would make the Chase trading loss look like small potatoes.

So before we go on a witch hunt and start screaming for yet more regulations to protect us from predatory financial institutions, why don’t we look at those who already have the power to oversee these firms and evaluate the quality of the job they are doing with their present authority.  If they are not enforcing the regulations which are already on the books, what could possibly make us believe they would do any better with new ones?

Perhaps that’s the real answer to financial reform and regulation.

Comments on: "J. P. MORGAN CHASE’S $2 BILLION TRADING LOSS" (16)

  1. This may or may not post, as my computer is printing invisible characters…However, you do realize, do you not, that you are speaking to the same people who vote without bothering to read any of the backup material?

  2. Thanks for your comment. I’m not sure if you’re referring to the general electorate or our Members of Congress (my Congresswoman having voted for Obamacare without reading its contents). In either case, I do realize that most people will vote without understanding or considering the issues involved. There is nothing that anyone can do to inform them since they don’t want to be informed. But I believe that a small portion of the electorate might actually have enough interest and concern that they want to be informed and then come to an intelligent decision. It is my hope that this blog may provide them some insight that they might not get from the mainstream media. Perhaps these few thoughtful people can make a difference in the outcome of our elections.

  3. I think that the only crime being committed here is not the company losing 2 Billion, but the government fooling investors into keeping stock in an unstable company by saying “oh please don’t move your investing from this big corporation that gives me money for reelection to other, smaller corporations that don’t screw you over. Watch i’ll enact some more laws that make it easier for companies like this to defy free market law and make it all better. I promise.”

    The answer being more regulations is one big joke! The only thing that can control massive predatory institutions that screw over the average citizen is free market competition. I think it’s crazy that any rational person could look at our economic system, see these huge corporations in bed with bureaucrats and lawmakers and still think that regulations will get us out of the mess. Well, I suppose that is the problem, there aren’t enough rational people out there. I hope to be a part of a thought revolution in the coming years where millions of Americans decide to educate themselves and truly look at the logic behind the regulation and deregulation of the private sector.

    Sorry for ranting but it’s hard to see my generation’s future crumble before my eyes without giving my two cents! haha

    • Thank you, Kendall for your comments which are always welcome.

      Here’s a simple partial solution to the problem with which I think most of the electorate could agree. “No one running for public office may receive any contributions from any firm in the financial industry, its officers or any employees.”

      If you look at the list of politicians who received funds from Mr. Madoff, it includes Sen. Charles Schumer of NY and the former Sen. Christopher Dodd (of Dodd/Frank fame) who retired rather than lose re-election. Mary Schapiro, the Chairwoman of the SEC was “a good firend” of Mr. Madoff’s as he stated in an interview. This is not to say that all three of these people are not of the highest ethical caliber – but accepting funds or associating on a personal basis with people whom you are empowered to regulate does add the question of impropriety – whether deserved or not.

  4. Wall Street has taken a severe belting these past few years. I don’t believe in over regulation of markets, but it seems there needs to be some tighter controls over speculating as it’s not the management money being played with, it’s our money the banks are playing games with.

    • I don’t believe in inefficient regulation and that is what we currently have. The rules which are already in place are not being enforced by those whose responsibility it is to enforce them. Adding more regulations, while it looks good to the uninformed electorate, does absolutely nothing if those regulations are enforced as inefficiently as the ones which regulators already are ignoring.

  5. Exactly, before we go passing more laws we need to enforce, fairly and vigorously, the one we have, which were sufficient to build the largest economy the world ever knew. What exactly is in these laws that couldn’t be covered just as easily by the terribly old fanshioned criminal fraud statute?

    And a minor point, I admire Mr. Dimon for saying, It happened on my watch, it’s my fault we screwed up. Not many left like that.

    • The SEC, among other governmental agencies, are the poster children for lack of acountability. Madoff is merely one egregious example. If we cut out ten percent of the waste at the Federal level, I think we could come close to balancing the budget (that is if the Congress and President ever get around to passing one).

      And I do agree that Jamie Dimon is a standup person. You’re right, there are few of them around.

      • I agree with that, although I don’t know enough to put numbers to it. My dad used to say, “Be glad you don’t get all the government you pay for.” Which makes sense but if we’re not getting it, why pay for it?

      • Although I’ve used this quote before, Will Rogers’ statement that “I’m less concerned about what government will do for me than what it will do to me,” never loses its relevancy. (I do take some comfort in the fact that they won’t do it very efficiently).

  6. “…prejudice – something most of us say is abhorrent yet something in which we actually often engage.”

    Had to stop here to comment that this is one of the reasons I am a follower of your blog. Your posts inevitably hold up a mirror to the faces of those of us willing to peek in & admit that the reflection mocks our sense of righteousness while also providing a light bulb moment from which to emerge anew…

    • “If they are not enforcing the regulations which are already on the books, what could possibly make us believe they would do any better with new ones?”

      How much more “DU-HH” could one statement be? This is the kind of logic so lacking in politics (to name just one area) overall!

    • I can’t tell you how many times I heard my parents say, “People who live in glass houses shouldn’t throw stones.” It was true then and just as true today.

  7. […] – NebraskaEnergyObserver‘s comment on a juwannadowrite post […]

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