More Lessons Learned from J.P. Morgan 

By Shlomo Maital  

  The Wall Street Journal * provides a few more insights into the J.P. Morgan fiasco.

1. Tighter regulation is NOT the solution.  The Office of Comptroller of the Currency, which regulates the JP Morgan unit that made the disastrous trades, “says it has roughly 70 people monitoring the bank’s trading activities”.  Seventy people!  Full-time.  That’s bigger than many investment companies.   On April 13 CFO Douglas Braunstein said all of JP Morgan’s trades done by the “London whale” were “fully transparent to the regulators”.   That was just weeks before the collapse.  Can regulators paid 1/100 of what the traders earn, truly regulate?  No way. 

2.  The essence of great speculative trading is secrecy.  You have to disguise your trades, because if other traders get on to what you’re doing, they’ll do the same, and you’ll lose, or they’ll figure it out and bet heavily against you, and again you lose.  Even within JP Morgan, “the size of its individual positions have been a closely guarded secret”.   That means, by the way, a secret, even to the CEO Jamie Dimon.   In future, other top CEO’s, revered as great risk managers, will crash and burn, because of secret trades disguised by traders and hidden even from the back office. 

3.  The fundamental problem is global (especially European) uncertainty.  What rattled markets, and cost JP Morgan what may be $5 b. in losses, was Europe’s chronic inability to deal with its Grecian urn.  The Europeans, led by German intransigence, are sinking not only Europe and the euro, they are dragging the rest of the world down with them.   At the G8 meetings in Camp David, did Obama say this to the Europeans?  No way.  Is there ANYone who can tell the Europeans to quit dithering and resolve their conflict once and for all?  Let Germany leave the euro. Or let Greece leave the euro.  But take decisive action, deal with the problem, because continuing nervous breakdowns in global capital markets is a disaster. 

* Gregory Zuckerman and Scott Patterson, “JP Morgan Struggles to Unwind Huge Bets”, WSJ, May 10, page 1.