Let’s get the bad jokes out of the way first. The JPMorgan Chase employee who did the trades that cost his bank at least $2 billion was nicknamed “Voldemort.” And we thought George W. Bush was the only “He who must not be named,” running around….
Steven Pearlstein, writing in The Washington Post on May 19, has an interesting take on the whole JPM-C mess. He considers it a blessing for a simple reason. It might help Americans understand all the hows and whys of what has happened in the economy in the past decade or so.
The worst part of the whole economic collapse is how none of it made sense to ordinary people. In our minds, Wall Street was a place where people traded shares in real companies that made real products or provided real services. In our minds, banks were where we deposited money and drew interest on it, and where we arranged loans and lines of credit and paid interest on those things. Trying to understand derivatives and credit default swaps, well, none of that made sense, particularly the part about the derivatives market containing more money that actually exists in the whole world.
The global economy went into freefall because Wall Street and banks stopped dealing in realities and starting believing the old adage that one must spend money to make money. Only, they twisted it into using money to make money.
In 1955, dramatist Thornton Wilder wrote, “Money is like manure; it’s not worth a thing unless it’s spread around encouraging young things to grow.” That was the distillation of the “spend money to make money” philosophy. A good company would take profits and reinvest them in the company, buying new equipment, expanding markets, retraining workers. A superb company, like the Swiss Army Knife Company, would also take profits from really good years and put them into the bank, to use in short years to prevent lay-offs. A person would invest in a new company simply by hiring them for a job, thereby encouraging a young thing to grow.
Back in the 1950s, the managers of several New York City department stores “invested” in a man with a weird idea. Instead of them each having a couple of guys on payroll who would be pulled out of the shipping department a few times a week to go to a customer’s home and assemble a new bicycle, the stores could contract this man’s company to do the assemblies. The guys on payroll at the stores did not lose their jobs, but were simply shifted to new responsibilities. It was a win-win. The stores got people who could not only assemble the new bicycles, but repair older ones, and do the same with lawnmowers, yard furniture, baby furniture, and eventually health equipment companies and hospitals contracting for wheelchairs. The man with the plan was my father. He operated under the principle of providing the highest quality service for the money. It was all very simple, and very understandable for any person, even junior high school drop-outs like my father.
Mortgages bought homes. The person who wanted to buy a home had to meet certain credit-worthiness requirements (or have the backing of the GI Bill). Mortgages were written at set rates of interest for set periods of time. The homeowner paid interest on the mortgage. It was all clean and simple.
Voldemort at JPMorgan Chase was played for a sucker by hedge fund managers. That’s the simple explanation of how he lost the bank $2 billion plus dollars. Voldie made these deals while experts were saying there was an unacceptable risk. But the upside is that he proved that all the proposed regulations, including the Volker rule, are worthless in the face of soulless greed.
Small fact…when Fobes magazine started compiling their Forbes 400 list of the wealthiest Americans, there were almost no money managers or hedge fund managers on it. In 2011, 104 of them had broken into the list, where the poorest person was worth a cool billion. (I haven’t finished analyzing the 2012 list yet, but so far, only one person in 60 lost asset value in the past year. Everyone else increased their wealth.)
The JPMorgan Chase loss disproves the idea that business suffers from stifling over-regulation. Real businesses, like meat packing plants and furniture manufacturers and assisted living facilities do need an honest reassessment of regulations. The regulations often are too old to reflect changes in the industry or don’t really cover new industries properly. Those are the regulations we should be concerned with. Are all environmental regulations “job killers”? The state of Vermont has some of the toughest environmental regulations in America, and the largest iron foundry in the country was built after those regulations were created.
But when Republicans talk about over-regulation, they are not talking about the corner deli and the health department. They are talking about massive international corporations that use loopholes in our tax code to avoid paying taxes in any country. They are talking about the financial services industry which employee armies of attorneys to find ways to get around regulations and lobbyists who push congress to water down regulations and create new loopholes. They are talking about protecting oil companies, not the men who work the rigs. The are talking about protecting the Forbes 400, less than a quarter of whom believe in the principle of noblesse oblige – with great fortune comes great responsibility.
So the loopholes were in place and the lobbyists did their job, and JPMorgan Chase lost at least $2 billion and we can point at them and say “They will do it again, and again, and again.”
The “explanation” for the whole derivatives market is that it lowers the cost of borrowing for corporations and households. The excusers of derivatives say that the derivatives and credit default swaps “hedge” the risks, making investors more willing to buy bonds and banks more willing to extend credit. Ain’t seen none of that, have we? Banks are hoarding money, refusing to give loans and refusing to fully participate in refinancing home mortgages. And trillions of dollars are being held in these “money making money” situations and not being used to “encourage young things to grow.” The money is not financing new businesses or helping companies upgrade or retrain. It is not being used to finance research and development. It is not being used to pay decent wages and provide decent benefit packages to employees. It’s just riding the merry-go-round of money making money making money while the world falls further and further behind the extremely wealthy people playing these games.
There is also a human cost, beyond the obvious. The financial services industry is a waste of human beings. Yeah, they make big bucks figuring out how to screw everyone else in the world, but these are supposedly some of the brightest minds on the planet. At least that’s the explanation given for why they should be paid such exorbitant salaries and bonuses. Why aren’t they using those brains to better use?
Steven Pearlstein summed it up this way: ” For this pundit, the lesson to be drawn from JPMorgan’s trading blunder is not that banks have become too big to manage or even too big to hedge. It is that banking and finance have become too detached from the real economy they were meant to serve.” Amen.