The American Dilemma and How We Can Fix It

Posts tagged ‘Jamie Dimon’

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.”

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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