In the night between 9 and 10 May 2012, news came out that really hurt the markets: JP Morgan, one of the largest and most solid American investment banks, perhaps the one with the best reputation, reveals to the media a loss of around $2 billion on derivatives for a “wrong” hedging transaction.
The reaction of the markets already battered by the agony of the euro is really negative, the loss of capitalization of JP Morgan stock it settles between 10 and 15 billion dollars.
Between ourselves, 2 billion dollars, which will perhaps reach 3 when the operation is definitively closed, "tickle" a bank like JP which, in 2011 alone, reported a net profit of 18 billion euro. However, the news has an effect these days, especially in Europe. As a result of the affair, the usual started financial gossipseasoned with "witch hunt”. The culprit, caught with a smoking gun in his hand, is there and is called Bruno Ixil. He is a trader and in the world he is famous as "Whale" or "Voldemort”, cartoonish and disturbing nicknames: in short, a character; it seems he compared himself to none other than Jesus. This man has made JP Morgan earn several hundred million dollars over the years, making increasingly risky trades and bets and, probably, has put away a few tens of millions for himself through the rich bonuses .
The offender is ultimately punished because "Whaleis fired, as is his powerful boss. In the eyes of the world the disastrous operation is closed and all should be resolved. Why then does JP Morgan lose more than 10 billion in value?
Because the markets aren't stupid and they understand that for a Bruno Iksil today, there will be 10 more like him or like Jerome kerviel tomorrow, if the rules don't change.
President Obama has said that there is a need for immediate and dramatic reform of the financial markets but, frankly, that seems to me to be a bit of a demagogic comment ahead of the elections. Where was Mr. "Yes, we can" when, following the default of Lehman Brothers, he disappointed the world by not completing the desired changes?
When I started working in 1992, right in JP Morgan and as a trader, the Glass-Steagall Act, a law that came into effect after the 1929 crisis with the aim of put an end to speculation and bank failures and, in fact, this way yes it separated traditional banking from investment banking.
Today we talk a lot about Volcker Rule, a rule that should prevent banks from exercising the activity of "proprietary trading", Meaning what trading operations on own account, independent of the interests of the clients. To date, however, the law is not a reality.
I also believe that the implementation of the Volcker Rule or a modern version of the stronger Glass-Steagall Act is highly desirable, but not enough. Such a rule makes sense if and only if:
– It is introduced at the level globally, in order to avoid the movement of assets and capital where the rules are more favourable
– It is accompanied by a serious reform of the economic incentives through which investment bank staff are compensated, otherwise, as I already wrote on the blog of Advise Only, banks will continue to hire excessive risks and many Wall Street CEOs will continue to “pretend not to see".
Plus I think it's really time to act! Especially since, this time, taxpayers would not agree to bear the cost of bankruptcy as a result of mistakes made by yet another unscrupulous manager, moved blindly greed.
If you're not too grossed out and want a dive into the realities of big investment banks, go and see margin Call out in Italian theaters this weekend.
