JP Morgan and Big Scary Numbers
The financial news of the week/month seems to be JP Morgan’s $2 billion trading loss. TWO BILLION DOLLARS! ”Down with Wall Street!” “Down with Wall Street!” “Down with Wall Street!”
Who cares? This is a classic example of media-induced hysteria. Already, politicians and liberal bloggers are calling for more regulation! Stronger regulation! Elizabeth Warren! HELP US, LIZZY!
Two bil may be a lot to you and me, but it’s not a big deal. Don’t be afraid of the big numbers! They need context. For instance, it’s not a “big deal” when the Pentagon “lost” - as in COULDN’T FIND - $2.6 billion because, well, we’re $15 trillion in the hole - so who cares??? But let’s not focus on reforming government! Nothing to see here…move along, idiots!
JP Morgan might have lost $2 billion on trades, but they make a lot of money on other trades. See, in finance there’s this thing called “risk.” The idea is to minimize it and maximize profit. But there’s always risk. The risk of loss. JP Morgan had some losses. That’s how this works. So, for fun, let’s check in with the king of knee-jerk reactions:
Excuse me?
We need “reform” to prevent losses? Think about that. They want to enact rules that will make it impossible for investment banks to lose money? To end risk? And that’s the favored position of the populist rockstar Barack Obama?
According to the article….
President Barack Obama discussed JPMorgan Chase’s $2 billion loss on Monday, saying the bank’s massive failure proves why Wall Street reform is necessary.
…
According to the president, if even a bank as well-managed as JPMorgan could make an error this glaring, other banks are susceptible to similar blunders.
“You could have a bank that isn’t as strong, isn’t as profitable, managing those same bets and we might have had to step in,” Obama said. “That’s why Wall Street reform is so important.”
Obama’s comments echoed those made by White House press secretary Jay Carney earlier on Monday. Speaking to reporters on Air Force One, Carney said JPMorgan Chase’s loss proved that the reforms put in place after 2008’s financial crisis were necessary.
“This is strong evidence that having these rules of the road in place are essential to making sure that taxpayers don’t get left holding the bag,” Carney said. “We have to remain ever vigilant.”
Huh? What “reform?” Is every trade going to have to be cleared by an SEC risk management team? I don’t know what they are suggesting. They don’t know, either, which is why they don’t get specific. The idea that the government doesn’t want to allow ANY losses in the financial industry is the most hazardous thing possible.
(And, as a side note to Carney, the “rules of the road” are not essential to make sure taxpayers “don’t get left holding the bag.” We’ll only get left holding the bag if you decide to bail them out. What reforms have you put in place regarding ineffective and dangerous government bailouts? None?)
Everyone is upset about JP Morgan losing some money. But that’s because most people don’t know anything about trading. Suddenly, JP Morgan traders are a bunch of irresponsible buffoons who lose “our” money! But are they really? Let’s take a stroll down JP Morgan Trading Record Lane.
Last quarter, they only had ONE day of trading losses.
They also made over $200 million dollars in one day, and averaged $114 million a day in profit.
Let’s take a peek at two consecutive quarters from last year…
So, in the first 6 months of the year, they had two days of losses and one PERFECT quarter with average gains of $112 million a day.
I don’t know about you, but I’m impressed!
Not everyone is, though. Because, even though JP Morgan has done remarkably well in the big picture, some people are still fed up!
The era of self-regulation on Wall Street needs to end now, Elizabeth Warren says.
The Democratic candidate for Massachusetts Senate told CBS News Monday that America has to say “no, the banks cannot regulate themselves.” The comments were made in reference to JPMorgan Chase’s $2 billion trading loss on Thursday.
…
Wall Street should “send a signal to the American people that Wall Street bankers get it and to show that they understand the need for responsibility and accountability,” Warren said in the statement.
Is everyone nuts?
For comparison, here’s a few 10-Q trading histrograms from the bubble years:
Quarter ending 6/30/05
Pitiful! Too bad public hysteria made JP Morgan fire the team with a better trading record.
Eh, but you guys know everything. Obama 2012! More regulation!
Note: I’m not saying there isn’t a BIGGER problem as yet undiscovered. But, based on the information we actually know, people are over-reacting. And, for me, it’s sort of a personal choice, but I like to form my opinions on the information we know.
