Friday, 11 May 2012

Oh no; Not again

This blogger is rather vain about his English. And yet he was completely flummoxed when he spotted the headline "JP Morgan loses $2bn in egregious error" . He has to sheepishly admit that he did not know the meaning of the word "egregious" and had to look it up in a dictionary :( Trust a banker to come up with an unintelligible world - at least unintelligible to one "master" of English :). It sums up the problem neatly. The financial world has gone so bonkers in dreaming up structures of incredible and ununderstandable complexity that we cannot sit by and watch this go on anymore.

JP Morgan is a well respected bank. Its governance is top class. It should be one of the models of all that is good about the financial sector. In  Jamie Dimon, it has one of the finest Chief Executives in the world. It has superb risk management systems, strengthened even more in the wake of the financial crisis of 3 years ago. And what happens - it manages to lose $2bn in  one quarter on credit derivatives trading. An "egregious error".

This casino has gone gone berserk and has to stop. Enough is enough. Here is this blogger's remedy which is an extreme extension of the Volcker Rule.

  • Commercial banking must be made a boring business. No proprietary trading. List of what they can do is made boringly small and strictly regulated by a super Ramamritham. All bankers have to come to work wearing only a panchakacham (man) or madisar (woman) - the logic being that anybody dressed like this can't be a punter.
  • Commercial banks continue to enjoy the implicit sovereign guarantee. They are not allowed to become too big. After a certain size, they have to break up into two; somewhat like an amoeba.
  • This is a free world. So the downright crazy casino is allowed; but at only two places in the world - Las Vegas and Macau. If Europe makes too much noise, Monaco can also be let in.
  • Any idiot who enters any of these three places is required to sign a pledge that he clearly understands that he is committing suicide. Before he starts punting, he has to get a license, which will only be granted after he spends one night in the ward meant for the dangerously criminally insane.
  • No bail outs for the punters in these three cities. If they lose their shirt , or something worse, it is their funeral. The state may helpfully construct a 100 floor tower with a fast lift to the top so that those who want jump off are easily facilitated.
Period. No more discussions or engagement with the financial community.

PS : If you are still wondering what "egregious" means, defines it as " extraordinary in some bad way; glaring; flagrant"


Appu said...

I think Dimon has conducted himself well by accepting the mistakes. Considering he has admitted egg on face and would not comment on individuals and hasnt changed his stand against the so called volcker rule
and still i strongly believe no system is fool proof and there will be a smart individual to beat the system or game it ;)

Ramesh said...

@Zeno - True ; he did do a good job of delivering the bad news. But the problem is that this sort of a disaster can happen even in a well run bank. Therefore this sector is completely unworthy of the implicit sovereign guarantee that it enjoys. We have to restrict the sovereign guarantee to only a very small portion of banking and make it extra safe.

J said...

Has the couple featured in your blog received a job offer from JP Morgan yet?

You'd think these guys would know better! I cant believe how two-faced Jamie Dimon is. Even when the story initially broke in April
they didnt come clean. This tells me they do not really care about risk management as long as they can do proprietary trading using instruments that may be arguably used as hedges. The banking industry makes me sick. It is not relevant whether the position could make money in the future, the issue is that it could lose a lot too. They need to be more transparent about what is truly a hedge (in which case there would be offsetting gains) and when they are just doing proprietary trading.

Ramesh said...

@J - Yes the fig leaf of hedging vs speculation is the issue in implementing the Volcker rule. Given the regularity with which banks are taking insane risks, governments must simply enforce an unfair and draconian rule to those who have an implicit sovereign guarantee. Others are free to do what they want, but must state a statutory warning in bold letters that anybody who loses his shirt punting cannot go crying to the government. This is the only instance where I would actually encourage Pranab/Ramamrtitham behaviour.

Sandhya Sriram said...

I just happened to glance across a hindi tv serial in one of the channels about reality shows.
How the show makers keep the emotions of the participants high, create enemity between participants, making them to do heartless and mean things and just pick and drop candidates on what influences their TRP Best rather that the actually building and giving an opportunity for the talent.

But having said this, even though it was completely unfair, it did make a lives of few people very special and a life of a few people completely devastated for no fault of theirs.

So there are three sets of culprits, the show makers for doing unfair things, the participants for getting carried away, The people who sit and watch the shows and for attracting whose attention, all these unfair things are done.

But actually, this theory of an unfair world has now become a law. you can choose to be part of the world, gain an unfair advantage or a disadvantage and quitely acknowledge whatever happens to you, or not be part of the world at all and be happy with what you have. but its your choice.

sorry for this long philosophical note, but i dont see anything that is going to bail this situation out.

PS: the Madisar of course is not a bad idea. i have worn once to office (of course on ethnic day) and the looks that i got on the lift as i went up definetely mellows one down substantially. so i agree with the theory of Thiru Kung Tzu here.

Ramesh said...

@Sandhya - Lovely philosophical metaphor. Yes it is not a fair world , in more ways than one, as we both know. However there is one big difference. As a viewer, I can switch off the TV. As a tax payer I don't have a choice but bail out these punters. All I am asking is the right not to foot the bill for these crazy gamblers.

Photo Photo :)

Vishal said...

Liquid does have tendency to generate speculation, after all it has got no shape and has a quality to fill wherever it goes. And I do know that banks are rich in liquid and hence, hence shape is not important. I recall that liquids are mostly transparent too. Sometimes, too transparent to be visible.

A dangerous proposition but what to do, it has got the value.

Ramesh said...

@Vishal - Ha Ha Ha. That's a good one. But you should also note that liquids also have the capability to hide certain ingredients that could give a kick !!

Deepa said...

I would not judge by the dress code! There is a formidable army of Rajalaxmis who are into betting (read stock trading) sitting at home at lunch and glued to a business chanel surfing quotes! :D

Ramesh said...

@Deepa - Oh no doubt about that. But not in the dress that I pictured :) I, mean, does anybody wear them anymore .....

sriram khe said...
This comment has been removed by the author.
sriram khe said...

(re-doing the comment because I didn't know how else to edit it!!!)

First, who are the people in the traditional attire?

The following is an excerpt from a wonderful essay in the New Yorker, almost two years ago, by John Cassidy:

The weaker version of the Volcker rule that was passed into law leaves many things, as Volcker says, “in a holding pattern.” Goldman Sachs and Morgan Stanley appear determined to retain their current status and to try to squeeze as much proprietary trading and hedge-fund sponsorship as they can under the new rules. The big commercial banks, such as JPMorgan Chase, could well hold on to their in-house hedge funds and private-equity funds, albeit with smaller ownership stakes.

Volcker may have won the intellectual debate, but, as he readily concedes, the practical challenge lies ahead. Two years from now, when the Volcker rule goes into effect, some firms may well try to skirt it, by, for example, placing big proprietary bets and trying to define them as something else. ... once the next credit boom gets going, leverage ratios will start rising again. ...

“I do not think that anybody can tell me that there is not going to be another financial blowup of some kind,” Volcker said. “I hope we don’t have another big one—at least in my lifetime.”

The complete essay is here.

Ramesh said...

@Sriram - Don't know who - shamelessly plagiarised from the web - the principle being if you flaunt it there, you should be OK with it being reflaunted ! Yes the Volcker rule can be misused, but truly draconian oversight and rules should be made on banks which enjoy sovereign guarantees - just make it so vicious that it becomes unattractive to all punters, who can, as I have suggested, migrate to Las Vegas, etc etc

Reflections said...

Blogging is marvellous I say.....I learnt a new word today;-o

p.s: u guess right...the whole post went over my head;-D

Ramesh said...

@Reflections - :) And of course, it didn't go over your head - stop fibbing !!!

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