Last week, the House Agriculture Committee voted to cut regulation of derivative transactions, and to insure that derivative transactions could take place inside FDIC insured banks. Six Democrats voted for the bill according to Gaius Publius at AmericaBlog, including Ann Kuster NH-2, one of those true progressives supported by the likes of EMILY’s List. It certainly is discouraging to see the party that claims to represent the interests of everyday Americans holding hands with the banksters.
One of the bills deletes a provision of Dodd-Frank that requires banks to put their derivative business into a separate corporation with its own capital base. That way the derivatives won’t pose a risk to the FDIC insured bank affiliate. Jim Hines, D-Goldman Sachs supported this bill. Zach Carter at HuffPo gives a good description of the money behind the vote here, which, by the way, was 31-14. In other words, this bill was so rotten that eight Republicans couldn’t stomach it.
This preposterous legislation comes the week after Senator Carl Levin ripped JPMorgan Chase and the Office of the Comptroller of the Currency to shreds over the billions of dollars lost by the London whale traders. New York Times writer Floyd Norris reminds us of one of my favorite parts of the Report issued by the Senate Permanent Subcommittee on Investigations. Bruno Iksil, the whale himself, made a presentation to senior management on January 26, 2012, offering a strategy to deal with the losses in the portfolio which at the time were about $400 million.
Mr. Iksil’s presentation then proposed executing “the trades that make sense.”
“The trades that make sense:
Specifically, it proposed:
• sell the forward spread and buy protection on the tightening move
o Use indices and add to existing position
o Go long risk on some belly tranches especially where defaults may realize
o Buy protection on HY and Xover in rallies and turn the position over to monetize volatility”
This proposal encompassed multiple, complex credit trading strategies, using jargon that even the relevant actors and regulators could not understand. Because the traders themselves declined the Subcommittee’s request for interviews and were outside of the Subcommittee’s subpoena authority, the Subcommittee asked other current and former CIO personnel to explain the proposal. Ina Drew, CIO head, told the Subcommittee that the presentation was unclear, and she could not explain exactly what it meant. Irvin Goldman, then the CIO’s Chief Risk Officer, told the Subcommittee that the presentation did not provide enough information to clarify its meaning. Peter Weiland, the CIO Market Risk Officer, offered the explanation that Mr. Iksil was basically describing a strategy of buying low and selling high. Report at 74, footnotes omitted.
Norris says he didn’t understand it either. His conclusion is that these people are out of control, their banks are too big to manage, and that they should be broken into small units that don’t threaten us all with financial annihilation. He points out that fraud flourishes when management doesn’t understand what the help is doing. I think he misses an important point. Often the help has no clue either.
In fact, one big problem is that the skills it takes to advance in management rarely have anything to do with the technical skills it takes to run a business. Can you imagine the head of an IT department writing trading algorithms? Or the head quant managing a portfolio of failed small business loans? The people who climb the greasy pole to the C-Suite have a set of skills visible in alpha males and females in baboon tribes: a drive to dominate and unwavering confidence in their intelligence. Trot one of these people out in front of a Congressional Committee consisting of beta males and females and watch the betas bow and scrape. Of course, it doesn’t hurt to have a set of cufflinks with the Presidential Seal on them.
So, our beta Congressionals of both parties, those who lust after bankster money, like Democrat David Scott, GA-13, who has raised more than $1.7 million from the financial sector; or like Jim Himes, completely unable to separate his own background from his public duties; or just ideological slugs; they are all happy to help their Alpha brethren, enthusiastic, even to put the taxpayer on the hook for bank derivative gambling habits.
Floyd Norris quotes Nick Leeson whose reckless trades caused the bankruptcy of Barings Bank:
“Luckily for my fraud, there were too many chiefs who would chat about it at arm’s length but never go further,” Mr. Leeson wrote in his memoir. “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”
I would love to have seen Levin ask Dimon what the heck Iksil was talking about. Not that it would have made any difference to the slavish Uniparty Congressional Betas. Read the rest of this entry →