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.