Wall Street Traders “Degenerate Gamblers” Continue to Take Excessive Risk

We are almost 4 years passed the beginning of the current financial crisis and little has been done to rein in or regulate derivatives.

JP Morgan Chase just lost at least $2 billion in derivatives trading (credit default swaps).

Now these losses won’t hurt the bank, rather the issue is that this is exactly what got AIG into trouble and then of course the taxpayer had to bail them out to the tune of at least $160 billion.

The larger problem is the swaps market is huge and if a few big players go down one can see cascading failure throughout the global banking system.

Derivatives do not need to exist so action must be taken to gradually wind down the entire market.

Congress needs to enact real reform on Wall Street, and given the JP Morgan loss, it’s pretty clear they haven’t.

Secondly, we need to start seeing some indictments and prosecutions of those responsible for illegal behavior that led to the crisis.

And trust me, the security fraud has been rampant, so the idea that the behavior was unsavory but not illegal is nonsense. Neither party seems to be willing to do much nor does the DOJ.  This is not a partisan issue – time for Congress to do what is right for the country so greedy, undisciplined and selfish financial institutions do not collapse the financial system.

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16 comments to Wall Street Traders “Degenerate Gamblers” Continue to Take Excessive Risk

    • BC

      Itaest:  Thanks for adding the picture and for the articles!  On the first article Romney doesn't know what he is talking about.  For starters it was JP Morgan's own money + depositor money – proprietary trading – not an investment fund.  He's right that the loss isn't the end of the world, but the loss is a symptom of the same behavior that collapsed AIG.  Furthermore, JP Morgan is a depository institution.  In fact they are the largest commercial bank in the US with $1.1 trillion in deposits.
       
      So if they collapse then $1.1 trillion in deposits disappears.  This gets back to Glass-Steagall – depository institutions should not be allowed to do crazy investing.  Keep it to deposits and lending.  Now with a very bad move in the wrong direction JP Morgan or other can lose a ton of money, just like LTCM did in the wake of the Russian Financial crisis in 97 or Lehman in 08.  Bear Stearns collapsed in 08 due to gambling on subprime mortgages (CDOs).
       
      Wall Street and the venture capitalists own the tech boom and bust (along with Congress for not regulating) in the late 90s early 00s.  Selling highly risky securities to unsophisticated investors via IPOs, which is illegal under securities laws.
       
      Go back to the 80s with IPOs, junk bonds, S&L crisis and mergers & acquisitions – Drexel Burnham collapsed in 90 (junk bonds).
       
      The point is there is example after example after example of the inherent problem of too much leverage and thinking via algorithms that one can make insane money without any risk.  Both tech and mortgages were massive Ponzi schemes.  Wall Street has been behind every bubble/bust of the past 30 years.
       
      So more regulation will somehow put a "wet blanket" on the economy?  Rubbish.  What proper regulation will do is stabilize the economy by getting rid of artificial bubbles and their inevitable collapse.  Any time you see rapid sustained growth without any fundamental strength – run.
       
      If you really want to put a wet blanket on the economy then by all means let the 25 year old "derivatives trading wizards" on Wall Street to continue their gambling and when the banking system collapses and all deposits are wiped out  – we'll be back to a barter based economy – wow what a great plan for growth.
       
      The derivatives market and all other excessively risky behaviors and instruments need to be unwound and made illegal and if bankers whine tell them to go work for a company that acutally makes something useful.
       

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    • BC

      Take the following quote from the CNBC article I posted…
       
      When it took over failed consumer bank Washington Mutual in 2008, it picked up $307 billion in assets to manage, and it put billions of dollars into the Chief Investment Office. Since then customers have been making deposits at the bank faster than it can lend the money out, which has left more funds for the CIO to invest.
       
      JP doesn't want to lend as much when they can make more money in trading derivatives or at least until they lose their shirt.  Same nonsense is going on with European banks.  If you want growth then banks have to be willing to lend and this is the whole premise behind a commercial bank – take deposits and lend.
       
       

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    • BC

      As per your second article – Obama is right that more regulation is needed, but between him and Congress – 4 years have passed – where's the regulation?
       
      On top of this both Obama and Romney are raising funds from Wall Street – do you seriously believe either one will take this money and somehow crack down on Wall Street excesses?
       
      As per more regulation it's a question of enforcing laws on the books and then creating new regulations.  SEC should be the primary enforcement agency – we do not need 4-5 new govt. agencies to handle this – Congress and SEC.

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    • BC

      Don't agree that Dodd-Frank should be lessened – Romney should explain exactly why parts or all should be repealed.  I don't think commercial banks should engage in proprietary trading.  If they want to do this open an investment bank or hedge fund with investor not depositor money.

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  • multiculti

    One more: President Barack Obama signed into law the most comprehensive financial regulatory overhaul since the Great Depression, vowing to stop risky behavior on Wall Street that imperiled the U.S. economy.

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    • itaest

      And guess who wanted to vote this Tuesday on a set of bills that would eliminate derivatives regulations?

      According to the Wall Street Journal it's Republican lawmakers.

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      • BC

        Idiots – these clowns don't even know what a derivative is.  From your article…
         
        One of the bills proposed changing part of the law that would require banks to separate trading desks that trade in complex derivatives called “swaps” from the rest of the federally backed bank. Another bill would restrict the international reach of U.S. regulators in the derivatives markets.
         
        On separating derivatives trading from the rest of the bank – not enough – a commercial bank must sell these units.  Furthermore – derivatives need to go away entirely.  Investment banks and hedge funds use lines of credit from commercial banks to support their proprietary trading.  So if there is a big derivatives implosion (and this is coming) then commercial banks will lose the money they lent investment banks and hedge funds under lines of credit  = depositor money.
         
        The same can happen to investor money at a broker-dealer  – MF Global stole segregated money from retail accounts, which is why Corzine needs to be prosecuted.  It needs to be made very clear that this will not be tolerated.
         
        What people need to understand is there are plenty of exchange traded futures and options that enable people/companies to legitimately hedge in the form of equities, debt (financial) and commodities.
         
        An airline for example can use a variety of energy futures and options to hedge against rising jet fuel prices.  Same for people in the agriculture business. 
         
        Derivatives solely exist for Wall Street profits, but what Wall Street will tell you if you get rid of derivatives then somehow an airline or a commodity player will not be able to hedge  – not true.
         
        Given the immense damage derivatives have done to the global economy and banking system – they need to go away – ENTIRELY.
         
        As for the politics – both parties have fully enabled Wall Street's degenerate gambling in the past and continue to do so to this day – I'm not seeing either party as being clean on this, but I will join you in hammering the Repubs that are trying to lessen Dodd-Frank.
         
        And by the way – WHERE ARE THE INDICTMENTS FOR SECURITIES FRAUD THAT CAUSED THE 08 CRASH?  People need to understand that if they violate securities laws they go to jail for a long time.  The only way this will be taken seriously is if people are jailed.
         
        Derivatives and excess leverage have the potential to destabilize and collapse the global economy so as for limiting the international reach of any legislation – bad bad bad.  Global effort needs to occur to shut down this market.
         
        Additionally, off balance sheet financing needs to go away as well so any trading partner can have visibility into the financial health of a trading partner.  AIG is a perfect reason why this must occur.  While Goldman was on the right side of the trades with AIG the did not properly assess their counterparty risk (AIG).  So the tax payer had to bail them out.
         
         
         

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    • BC

      Multi – it's a start, but with JP Morgan still trading derivatives is it being enforced or is it enough?  The legislation put into place after the 29 crash was well done.  Glass-Steagall needs to come back.  Commercial and investment banking activities need to be separated.

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      • diversity_usa

        Republicans will not allow it. That should be clear to you now if you read those links.
        Both parties get money from Wall Street but only one pushes for regulation.

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        • BC

          Diversity:  I am going to have to read up on Dodd-Frank.  Don't think this would have passed with only Dem support.  To the extent that some Repubs want to lessen or get rid of Dodd-Frank then perhaps I have to agree with you.
           
          I think the recent JP Morgan trading losses should serve to stop such Repub effort.  Now if you look at all the bubbles to bust beginning in the 80s and continuing to this day they have been supported bipartisanly.  Both the Senate and House have banking and finance committees equally composed of repubs/dems so I give Congress as a whole an F on financial regulation.
           
          Where I must take issue with Obama and DOJ is an utter lack of indictments, prosecutions and jailing of financial criminals.  Obama needs to explain the lack of action here and Romney needs to explain what he would do.  Again the security fraud was rampant so the issue is not one of inability to prosecute and convict rather an unwillingness to prosecute.
           
          Both Romney and Obama along with Congress raise a lot of money from Wall Street = no surprise.

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  • itaest

    From the multiculti comment link from above:

    JPMorgan Chase & Co Chief Executive Jamie Dimon was one of the few major bank heads not invited, a spokeswoman for the second-largest U.S. bank said.

    Dimon once enjoyed a close relationship with Obama, but he later emerged as a vocal critic of the efforts to reform the U.S. banking industry.

    And the FBI is investigating JP Morgan. If there is enough outrage in the populace, Obama will go after the crooks, but he has to weigh his options. He also wants to be reelcted and many people want him to be reelected, and he has to pick the right time to go after the crooks, so that the Republicans cannot scream : "Look, Obama is taking away the freedom of corporations to run their business in the manner that they deem best." or "Look Obama seeks revenge against financial exceutives at a time when it is important to support business big and large". This in the form of well financed TV, Internetand radio advertisement and Fox News, Rush Limbaugh, etc.

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    • BC

      I greatly disagree with your comments.  It's a matter of law – if people break them they need to be brought to justice.  Why would Obama need outrage to prosecute the greatest amount of security fraud since the 29 crash?
       
      The further you get away from the crime the harder it is to prosecute.
       
      Outside of this people have been livid about no one being held accountable – he would have nothing but support on the matter.   Republicans, Fox News, etc. would do nothing but support it. 
       
      I am unbelievably disappointed in your answer.  He has to "weigh" his options?  Are you kidding me?  Are you suggesting he is waiting for the best time politically to prosecute?
       
      An it's not "revenge" rather prosecuting crimes that have almost led to the collapse of the global financial system and still might – look at Europe – it's unravelling.
       
      By the way the right time to go after these criminals was in 2009.  The truth is that Obama, like most politicians in DC – repubs and dems alike, is bought and paid for by Wall Street.
       
       
       
       
       
       

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      • itaest

        Sorry to tell, but politics doesn't work that way.

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        • BC

          If Obama had gone after these crooks in 09 and prosecuted/jailed some senior offenders then not only would he have had great support it would be something that he could use as "hey I dealt with these crooks" in terms of getting re-elected.
           
          So the question is why didn't he do it?  Why didn't Congress do anything?  Keep in mind he had a majority in both houses when he entered office.
           
          The reason that nothing was done is Wall Street owns both parties. And when both parties raise money from Wall Street to get re-elected it's kind of hard to go after them and then also raise money from them.
           
          Politicians in the US in both parties care more about getting re-elected than what is right for the country and this short-term election cycle thinking is killing the country.

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          • diversity_usa

            Have you heard about the filibuster rule in the Senate? You need 60 votes to pass to even "consider" any legislation. Obama did not have 60 Democrats in the Senate.

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