… or so I am led to believe, having read Felix Salmon’s post “Jamie Dimon’s Failure” at his Reuters blog. I do not have a good grasp of the Ferengi mindset — that’s why I read Salmon, who I count on to explain Modern High Finance in terms where I can at least hope to grasp the general outline. Obviously you should read Salmon’s whole post, but as I understand the saga so far, today’s scapegoat Ina Drew was being paid an “eight-figure salary” because her department (the Chief Investment Office) was so successful at turning the “liability” of cash deposits into gold for JPMorgan:
…With lots of deposits coming in, and little corporate demand for loans, it was easy for all that money to find its way to the Chief Investment Office, which could take any amount of liabilities (deposits are liabilities, for a bank) and turn them into assets generating billions of dollars in profits.
But the CIO does much more than just provide profits for JP Morgan. In contrast to the bank’s lending book, the CIO is nimble. Loans, as a rule, have to be held to maturity: that’s the essence of relationship banking. Investments, by contrast, can be sold at any time. Of course, an investment which can be sold at any time has another name: it’s a trade. Thus did the CIO become home to big traders, making huge bets and huge bonuses.
In the past couple of years, of course, that raised its own set of problems: how could this group of traders possibly be Volcker-compliant? The answer lay in Drew’s love of crises: her incredibly valuable ability to prevent losses and even make profits when the world is falling apart. In that sense, the CIO was one big hedge, and in a narrower sense the CIO was the go-to office whenever JP Morgan saw a risk which needed hedging….
So, basically, Drew and her subordinates were very, very good — and for a long time also very, very lucky — at swapping chips from red to black and black to red one jump ahead of the other players on the roulette wheel that is today’s global financial market. And maybe some of those chips were bought with dollars that were, or should’ve been, marked NOT FOR USE IN THE CASINO, but as long as the CIO stayed lucky the fish wouldn’t notice the float until those dollars had been replaced. It was an excellent living, while JPMorgan was just one of many market raptors bulking up in the rich capitalist jungles of the Bush-era global finance bubble.
But then the meteorite(s) came. Yesterday’s dense jungle is today’s parched sahel, littered with craters and the bones of former giants, and the remaining superpredators are exposed and vulnerable. According to the smart people paid to peer through the cloudy casino windows and interpret these things, JPMorgan “worried [like everyone else] about a Europe-induced financial crisis at the end of 2011”, and made massive bets to protect themselves. When the crisis didn’t happen, Ina Drew was left scrambling to cover those bets (that maybe, under a strict understanding of the rules, were made with money that shouldn’t have been used for betting in the first place), and that’s where Bruno “the London Whale” Iksil enters the story. But whale-sized predators are vulnerable precisely because their size makes them hard to hide; Iksil’s two billion dollar trade was visible not just to every other large financial predator, but to all the market tipsters and reporters who survive by broadcasting the movements of large predators. Salmon concludes:
How did Iksil’s trade go so horribly, massively, wrong? Partly it’s because his position was so big and so public. When hedge funds worked out what he was doing, they managed to get the word out, using stories in Bloomberg and the WSJ. And then it was just a matter of watching the market do what it always does, when it smells blood: I’m told that Boaz Weinstein’s Saba, for one, made a lot of money taking the other side of Iksil’s trade.
Taking a much bigger-picture view, however, what was really going on here was that JP Morgan had hundreds of billions of dollars in excess deposits, thanks to its too-big-to-fail status. And rather than lending out that money and boosting the economy, Jamie Dimon decided to simply play with it in financial markets, just as a hedge fund would…
It’s always dangerous when a CEO suggests positions for an internal hedge fund to take, because the CEO by definition has no risk manager with enough authority to effectively constrain him. Dimon is powerful and secure enough that he’s not going to lose his job over this. But he probably should. Partly because the bank’s risk-management procedures were so weak that a $2 billion loss could suddenly appear out of nowhere. Partly because Dimon became too cocky, and started thinking that his job was to trade the bank’s billions for profit. But mainly because he’s lost sight of what JP Morgan has to be, in a post-crisis world.
Those excess deposits weren’t gifted to Dimon on a plate so that he could gamble them on the CDX NA IG 9. Rather, Dimon’s job is to take those deposits and lend them productively into the real economy. Every extra dollar in the CIO is a sign of his failure to do that. And the $2 billion loss is really just a symptom of what happens when banks get too much money, and don’t really know what to do with it all.
My emphasis. Can those of you who do understand
Ferengi finance further explicate, or at least explain where I’ve gone wrong here?