The American Dilemma and How We Can Fix It

Archive for the ‘banking’ Category

ECONOMIC JIHAD

The FBI has nabbed a small coterie of perpetrators who have been making money the old fashioned way – they steal it.  Apparently, they stole quite a lot – about $200 Million by creating false identities, creating fake credit scores and have socked it to the credit card-issuing banks.  While this number pales in comparison to the amount that our Federal Reserve adds to our national credit card, nevertheless, it is not an insignificant sum by almost anyone’s standards.

Given the way that we bend over backward to accommodate our Muslim citizens – that is if Babar Qureshi and Muhammad Shafiq are both Muslims and citizens – I’m merely inferring their religion from their names – I must confess that I’m a little surprised that they were arrested in their resident New Jersey.  The unlikelihood of their engaging in such an activity flies directly in the face of their faith.

As you know, credit card issuers stipulate an interest rate on unpaid balances.  That rate of interest is carefully detailed in the little enclosures that come with your credit card and for which you need an electron microscope to be able to read all the terms and conditions.  What you may not know is that it is forbidden in Islam to engage in a transaction at a specific, fixed rate of interest.

Of course, it is another tenet of Islam that is is perfectly acceptable to lie, steal from, cheat or otherwise engage in any activity against the infidel – including murder – if it supports the advancement of the cause of Islam.  So, since apparently these thieves had no intention of actually paying for anything that they purchased or the cash advances they received, I suppose the second tenet overrides that vexatious fixed interest rate thing.

I am sure there will be those of the OWS mindless-set who applaud anything that hurts the profits of big banking – while at the same time they are writing an elegy to the impoverished, oppressed and misunderstood of our Muslim neighbors.  Well, buckaroos and members of the Peanut Gallery, the people who ultimately feel the impact of this type of rip off are not the banks but their credit card customers.

It’s simple economics.  Those banks which suffered the injury will pass along the costs to their cad holders through higher interest charges and other penalties.  They will also write off the loss immediately, resulting in lower corporate taxes collected by the Treasury – at a time where we have President Obama and the Dems complaining that we need more revenues.

The events of 9/11/01 were devastating.  But with economic jihad we’re not talking about taking the lives of a few thousand people.  Economic jihadists are directly affecting the life-styles of millions of Americans  In a left-handed complimentary way, let me say that this is far more effective than crashing airplanes into buildings.  But, of course, it is far less sensational and for that reason will probably not get the attention it deserves as a part of the master plan of jihad.

That plan is simply this.  By whatever means necessary, to supplant Western civilization with its own world view; to bring the entire world under the yoke of the political philosophy of Islam; to establish Sharia law in all lands; to take no prisoners.

Those in Europe are learning, perhaps too late, that the Muslim infestation is reaching the same critical mass that in the United States we have reached with our permanent underclass.  It’s more than overdue that our politicians on this side of the pond stopped being accommodative and started being proactive while there is still time.  The sand in the hour glass is running very low.

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FOR LOVE OR MONEY

With the recent story that a Georgia banker has apparently absconded with $17 Million of the money he raised from about 100 investors and is now being hunted by the FBI, I couldn’t help but think of one of my favorite movies.  It’s entitled, “The Steel Trap” and starred Joseph Cotten and Teresa Wright.

Cotten had an impressive career with 67 movies to his credit – but is most fondly remembered for his first movie appearance as Jedediah Leland in, “Citizen Kane.”  While he normally was cast in the role of the “good guy” his portrayal of the banker, Jim Osborne in “The Steel Trap” revealed another side of his acting abilities.

In the movie, Osborne is tired of his routine life at the bank.  Although he is making progress and has received several promotions he wants it now and he wants all of it.  And he realizes there is a way to get it – by stealing it from the bank’s vault – the mighty sum of $1 Million.  (This movie was released in 1952 and that amount would have enabled a person to live in luxury at that time).

So he begins crafting his plan.  Essential to it is finding a country which does not have an extradition treaty with the United States – and he discovers that Brazil is such a country.   So he tells his wife that he has an important assignment on bank business in Brazil and he would like her and their daughter to accompany him.  While his wife questions why he, rather than one of the higher ups in the bank have been entrusted with this undertaking, he convinces her that the bank is “testing” him for future promotional opportunities.  She believes him.

Tension builds as he tries to get his and his wife’s passports processed through expedited service; then getting their visas from the Brazilian Consulate; scheduling airline flights all of which involve connections and delays; making other connections and finally getting to Brazil where he reveals to his wife that he stole the money.

On hearing this his wife tells him that she is going to return to the U.S. and will raise their daughter by herself.  The thought of losing the family that he adores is more than Osborne can take – and he snaps back to reality.  He takes the suitcase containing his haul, closes it and they return to Los Angeles where he is able to sneak the money back into the vault undetected.  And his life as a banker and family man go on.

This is one of the more suspenseful movies I have seen.  And it carries that out without violence or lewdness or dramatic visual effects.  It relies on the cast to convince us of the reality of their acting.  It does so very successfully as did so many movies that were produced at that time.

Our movie banker made a choice – to go with love or with money.  I think he made the right decision.

THE CITIZEN’S ARREST

It was a wonderful crisp day in early October, 1985.  A glorious day.

After struggling through the Recession of 1982 I had finally made the last payment to the bank on our line of credit.  It took three years but finally that $250,000 Sword of Damocles had gone away.   Of course, this was back when banks leant money – if you could make a good case for why you needed it.  In our situation, that reason was that we needed it to survive.

With the loan came an obligation.  Of course, repaying the money to the bank was their primary concern and my primary obligation.   But to make them feel more secure, they requested that we prepare a monthly financial statement so that they could see how things were going.  In 1982 things weren’t going at all well.

The bank handed me a packet of forms on which my accountant would prepare the monthly statements.  I took one look at them and realized that the bank with which I had an account for six years didn’t have a clue about my business.  I was in executive search, a service business and these forms were appropriate for a manufacturing company.

Not to bore you with accounting but the first item on the form read, “Cost of Raw Material.”  I remembered reading somewhere that if you took apart a human being you would wind up with approximately ninety-eight cents worth of chemicals.  So I thought I would count the number of applicants we had and multiply this number by ninety-eight cents and use that as a starting point.  And then I decided I would let my accountant figure the whole thing out.

Well, that was all in the past.  Three years later was my day of emancipation and as it happened it was Friday, I was going up to the Gold Coast to have a celebratory dinner with a few friends.  We planned to eat later as I had first to get home and walk and feed the puppies and change out of my business attire into something more casual.

I had taken care of business at home and was driving north on State Street, just past the Chicago River.  Traffic was surprisingly light for a Friday night.  Perhaps all those who ate dinner earlier had already settled into their favorite restaurants.

But as I was enjoying the cool air flowing over me from the open driver’s side window I was shocked to see that the Cadillac in front of me suddenly rolled down the passenger’s rear window and a huge bag of KFC debris was hurled out onto the middle of the street.  On impact it spilled all over State Street that Great Street.

I knew there was a Police Station a few blocks north so I duly noted the car’s license plate, repeating it to myself over and over as I didn’t have anything on which to write – and I noted that the tags had expired one and one half years earlier.  I was determined to provide this information to the police and would be willing to testify if they needed me to do so.

The Cadillac continued north on State Street when I arrived at the Police Station.  There was no parking to be found on that block so I turned the corner, repeating the license plate to myself.  Nothing there either – or the next block or the next.  So I went back to the station hoping something had opened up while I was cruising the neighborhood.

There were seven spots in front of the station marked “Police Cars Only” but four of them were vacant.  So I pulled into one and turned on my flashers hoping to explain my infraction once I had spoken with someone inside.  This was my first and only time in a Police Station and I didn’t know what to expect other than what I had seen on sitcoms on television.

The sitcoms were pretty accurate.   I saw two policemen, one the Desk Sergeant who was entering the name of the individual who had been handcuffed by the apprehending Officer.

The Officer proceeded to explain that he was bringing in this person on a – then he gave a number which was police lingo for trying to steal a car – but I shut it out because I didn’t want to confuse myself with the number of the license plate on the car which I had come to report.

I repeated the license plate number again.

I thought they would never finish with this guy and I glanced at my watch to see how late it was getting.  I didn’t want to keep my friends waiting – but this was important.  As I looked at my watch there were more numbers.   I turned away from my watch and kept repeating the license plate to myself.

When I was done with my report I would find a pay phone and call the restaurant to let them know I was on my way.

Well, the alleged car thief finally got booked.  The Desk Sergeant let me know how important he was by keeping me waiting another five minutes and after he had finished writing all that he needed to conclude his previous work he turned to me and invitingly said, “Well?”

I explained to him why I was there and before I forgot it asked him to write down the number of the license plate on to which I was holding with only the tiniest thread.  There had been so many numbers since I first saw it.

I went on to explain that I didn’t know if what I had come in to do was make a “citizen’s arrest” or whether the CPD would merely need my testimony when they apprehended this individual and he or she went to trial.

The good Sergeant put his right hand under his chin, emulating Rodin’s “The Thinker” and after he had thought for a moment said , “So let me get this straight.  You’re here to report a case of littering.”

Well, I thought to myself there’s “littering” and – well, isn’t their some category for really, really “flagrant littering.”  Surely this case deserved to be classified in the most extreme manner.

I started to respond when he stopped me.

“Let me explain something to you.  We’ve got car thefts – as you just saw while you were standing there.  We’ve got home invasions; we’ve got domestic violence; we’ve got rapes; we’ve got homicides; are you getting the point?  What we don’t have is time to arrest people for littering.  Have a good evening.”

And he put his head down and I knew that I had been dismissed.

Well, it might not have been important to the Sergeant but it was important to me.  As I walked toward the door of the station I was determined to get this story out to the world.  I was going to write a letter to “The Chicago Tribune”.

But as I reached my car I found a new venue for my grievance.  Sitting on the windshield of my car was a parking ticket for “Unauthorized Parking in a Police Parking Space.”  The citation carried a one hundred dollar fine.  Okay.  I would have my day in court and tell my story to the judge and to the world.

Four weeks later I appeared in the Chicago Traffic Court building, room 102 as instructed on the ticket.  This was my first time in Traffic Court and I didn’t quite know what to expect.  But I soon discovered that the CPD’s Traffic Officers were on the job writing tickets galore for moving violations.  Those were the cases that were heard first by the judge.

The court time on my ticket was for 10:00 a.m.  I sat in the room wondering when we would be done with moving violations and get on to the business for which I had come.  I had replayed the events from the month before so many times in my mind that I was sure when I had my chance to address the court I would give a speech worthy of Clarence Darrow.

It was now noon.  All of the moving violations had been adjudicated – finally.  The judge looked up from his bench and said, “All of you who are here about parking violations, rise.”  All fifteen of us who were still in the courtroom rose.

“There are reasons that the City has rules regarding parking.  Those rules are designed to protect and provide access for all motorists.  Ladies and gentlemen, please keep that in mind in the future.  But since it’s lunchtime I’m going to give you a break.  All your tickets are dismissed.”

Fourteen people gleefully left the courtroom.  I thought about going up to the bench and venting my frustration but the judge apparently had a luncheon date as no sooner had he pronounced our dismissal, he disappeared through a door into his chambers.

That was the first, last and only time I ever tried to make a citizen’s arrest.

ON LEADERSHIP

When I had established my own office while trading, I had a large sign put up in three different locations so that all my traders could see it.  The sign read:

“MISTAKES COST MONEY.”

Our goal was 100% perfection – avoiding any and all mistakes.  But we were human and they happened.  Fortunately, the percentage of errors we made were probably less than one hundredth of one percent.

Realizing that even the most meticulous person could make a mistake, I had a very simple rule for remedying it.  Once the error was observed, the trade had to be closed immediately, win, lose or draw.  I allowed no exceptions to this rule.

This was the second most important rule in trading and I mention it because today Jamie Dimon testified before the Senate Banking Committee about a really, really big mistake – one I could never have come near to committing in my rather minor career.  I had nowhere near the capital or resources of J. P. Morgan Chase.

In my view as a trader, I believe that when the mistake was discovered, Chase’s traders did the right thing – that is they “unwound” the trade as quickly as they could without completely destroying the market and making the loss even worse.  I give them credit for that.

Perhaps if I have a criticism of this event it is that I believe they may have overlooked the most important and first rule of trading:  Never add to a losing position.  During a number of years as a trader I must have seen at least several hundred people come and go (usually fairly quickly) because they violated that rule.

Now if you’ve followed me for a short while, you know that I believe common sense and logic are essential if we are to address and resolve most of the challenges we confront.  So let me explain this for those of you who are perhaps not familiar with trading and markets.

Whether you are a long-term investor or a trader, it’s pretty much the same thing.  You purchase a stock, commodity or security because you believe that it is going to appreciate in value and you will have more money when you sell it than you are investing today.

But you buy your 100 shares of XYZ corporation at $50 per share and it promptly declines to $48.  So you decide to invest an additional $4800 in XYZ by buying another 100 shares, lowering your average price to $49.  But XYZ continues to go down and is now at $46 so you plunk down another $4600.  You have reduced your average cost to $48 a share.

Why have you broken the cardinal rule of trading?  Let’s think back to your motive in making the original investment.  You thought the stock would go up from your original $50 purchase price.  Did it?  No.  You were wrong in your analysis.  And now you have compounded your error not once but twice.  Why?  Because of your ego.  You decided that you were bigger and more important than the market (none of us is) and that for the simple act of your taking the position you did, you were deserving of earning a profit.  (No one is).

I apologize if some of my readers got a little bored with the math of this whole thing, but math is what trading is all about.  And if I were to offer a criticism of the traders at J. P. Morgan Chase it is that they may have well violated this rule and the trade got out of their control to handle.

I listened to Mr. Dimon’s testimony today.  I have to say the guy has guts and is one of the few people roaming planet earth who accepts accountability.  We need more leaders like that in this world.  He admitted that it happened on his watch and that he accepted blame for allowing it to happen.  He promised that as a result of this trade, J. P. Morgan Chase was instituting new and tighter controls.  Let me tell you from personal experience, no one in the business of trading likes to take a loss – let alone one for $2 Billion.  It is simply good practice and common sense that Mr. Dimon’s firm would be looking internally at ways to avoid a recurrence of this event.

One of the reasons for today’s Senate hearing was to help that august body decide if we need newer and tighter controls over the banking industry.  That is why Mr. Dimon was called on the carpet – and I must say, the man was far cooler then I could imagine myself having been if I were in his hot seat.

But in viewing this, I like to put things in perspective.

First, I agree that it is important that we have sensible regulations to control what might turn out to be a financial fiasco.  But it is important to recognize that it was not any Federal regulator or regulation which put an end to this abysmal trade.  It was Chase which made the discovery and unwound their position.  They did the right thing, albeit somewhat too late.

Second, I would like to take the rare opportunity to compliment the members of the Senate hearing.  Frankly, I had expected this hearing to have been conducted in more of a “witch hunt” mentality.  That was comparatively negligible and many of the Senators asked questions which were both thoughtful and provocative.  Some of them actually did their homework.  My hat is off to them.

Third, getting back to the question of leadership, the Senate is a body which is refusing to consider any sort of budget and has not allowed one to come forward now for several years.  That is their responsibility to you and me and I am embarrassed that the leader of that body represents my state.  Senate Majority Leader, Harry Reid shame on you for abdicating your responsibility.

Finally, I would turn to the man who is the head of our ship of state, President Obama.  During his administration, we have seen an increase of over $5 Trillion dollars in our acknowledged national debt.  That is 2,500 times the size of the loss that Chase endured (and paid for out of earnings), all of which he lays at the feet of his predecessor.

I sincerely hope that the President tuned in for today’s Senate hearing.  It might prove to be an important lesson for him.

I call it “Leadership 101.”

THE TWO DOLLAR BILL

Yesterday was a very busy one – lots of errands to run and things to do.  I tried to get as many of these done as soon as Gracie and I returned from the dog park in the early morning, before the temperature rose to the near one hundred degrees that was predicted.  But some of them had to be finished in mid-afternoon – including a visit to the bank.

I was in a different part of town and, rather than go to my usual branch, I saw another one that was just a block from where I had other business to conduct so I went there instead.  I didn’t realize that this branch was “under siege” – in other words, it was in the process of being remodeled.

When I walked in I was immediately hit with the smell of plasterboard and paint.  Neither of these convey an aroma that I particularly enjoy.  But my transaction was simple and I didn’t expect to be there very long.  (I did feel sorry for the bank’s employees who had to deal with the smell for an eight hour day).

There were only two teller windows that were open but just one person ahead of me in line.  The customer at one window left almost immediately after I entered and the woman ahead of me went up to the available teller.  I was next.

I could see that the woman who had just moved to the teller’s cage had a number of transactions which seemed rather complicated and I would most likely be helped by the other teller.  I didn’t expect that I would have long to wait as the young woman and man who were at the window had begun their transaction before I entered the bank.  I was wrong.

As I was now in hearing distance, it became clear that the young woman was either the young man’s relative, friend or guardian.  Apparently, he suffered from a mental impairment as she and the teller both tried over and over to get him to endorse the check that he wanted to cash.  He didn’t seem to understand what he had to do and, with slurred speech, kept asking what they wanted of him.

When I realized that this young man had difficulty doing things that you and I take for granted, my rising impatience suddenly was quelled and I decided that it really didn’t matter if I had to spend an extra few minutes.  That was not the reaction from the queue of customers behind me which had grown to five people.  I could hear people behind me complaining about their wait.  Perhaps they didn’t realize that this young man had special challenges.

Finally the young man grasped the idea of endorsing his check and signed his name.  I breathed a sigh of relief.

The teller counted out his cash, two hundred forty-two dollars.  I was all set to go to the window when another fly entered the ointment.  The young man wanted a two dollar bill.  The teller didn’t have one in her cash drawer – neither did the other teller.

The young man, much to the embarrassment of his companion began stomping his feet and started shouting, “I want a two dollar bill.  I want a two dollar bill.”  By this time I think that everyone in the line realized the young man’s condition and the grousing about having to wait so long stopped.

Many, many years ago my parents gave me a wallet for my birthday.  Inside the wallet, dad had folded over what was then a brand new crisp two dollar bill.  Dad said, “Keep this in your wallet for luck.”

That wallet eventually wore out and was replaced by another and yet another and many more afterwards.  I always meticulously removed my dad’s two dollar bill and transferred it to the new wallets.  Suddenly, I realized that I had that two dollar bill in my wallet.  So I removed it, excused myself and went up to the teller’s window, holding it in my hand.

The teller handed me two singles and gave the young man my two dollar bill.  He was happy to receive it and he and his companion, who smiled a “thank you” at me, soon left the bank.  The teller thanked me for my help and I quickly completed my transaction and started for home.

On my drive I decided that I would replace the two dollar bill with the two singles I had received at the bank.  I’m not sure if two singles have the same magical lucky power as one two dollar bill.  We’ll just have to see.

But if dad were here, I’m sure he would have approved.  And I hope that two dollar bill brings that young man good luck.

HAVING YOUR CAKE AND EATING IT TOO

After leaving the dog park yesterday morning I realized that I was in dire need of a cup of coffee.  Although I had everything prepared and ready to go at home, I had forgotten to hit the “Brew” button.  So I decided to stop at Starbucks and get a “Venti” drip – which at $2.25 is only moderately over-priced.  As it was only about seven o’clock and still cool I decided to sit outside this Starbucks with Gracie and drink at least part of it before returning home.

We were lucky to find a little table in the shade and Gracie curled herself up under it.  I had baked some dog treats and had brought them with us to the park to give to another of the morning regulars, but she hadn’t showed up that day so I took the container with me and, as I drank my coffee, Gracie got to enjoy several of these.

The two ladies at the next table were engaged in a conversation, but when they saw Gracie they asked if they could pet her.  Of course, Gracie enjoys nothing more than getting attention wherever she can find it, so I told them that she would love that.  So they began to pet her and asked me all the usual questions, how old is she; what breed is she, etc.?   After a few minutes they resumed their conversation and Gracie, now happy with having received attention and dog biscuits returned to her spot under the table.

I couldn’t help but overhear their conversation – which centered around the $2 Billion loss J. P. Morgan Chase had in one very, very bad trade.  I discussed this in a post a few days ago.  I was surprised because this was now already old news – and if there is one thing that I’ve observed, it’s that most of us seem to have a very short attention span.  Perhaps because there is so much “news content” available that we flit from subject to subject quickly to be sure that we don’t miss out on anything.

I had rather expected to hear them say something about the trial of former Democratic Senator and presidential candidate John Edwards which is currently on-going for alleged violations of Election Contribution Laws because yesterday every news source I read had some comment on it.  Furthermore, it is a great source for those who enjoy gossip as the former Senator’s conduct and relationship with his mistress have been reported in the most salacious terms by the reporters covering this trial.

Perhaps because we have gotten so used to politicians getting in trouble over sexual misdeeds, we have just become inured to all of it.  But in any event, Chase was the focus of these two ladies’ conversation.

One of the women said, “You see, it just proves we need more regulation of those SOB big banks.  They’re making wild bets with our money and if the government doesn’t get them under control we’re going to have another financial crisis.”

Her friend nodded in agreement and then said, “And you know, those bastards make so damn much money it makes me sick.”  Her companion nodded her agreement with that statement.  Although I was tempted, I refrained from getting involved in their conversation.

These two ladies continued to chat for a few minutes and then left, saying goodbye to Gracie and me.  After their departure I thought about the incongruity of these two statements – and the fact that neither of these women seemed to realize the inherent conflict between them.

On the one hand, they were critical of Chase for the huge trading loss.  On the other they were upset that big banks made way too much money.  So I began thinking, what is it that the many people in this country who are “anti-big-bank” really want?

Surely, they don’t want the surprise of going to the bank with their paycheck only to discover that because their bank has been losing money on a consistent basis that the doors are closed and the bank has been taken over by the FDIC.

I guess what they really want is something that grandma told me would never happen.  They want to have their cake and they want to eat it too.

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J. P. MORGAN CHASE’S $2 BILLION TRADING LOSS

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.

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