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Understanding JPMorgan and $2 Billion Loss

by John on 05/11/2012

Here’s a good piece that tries to explain what happened with JP Morgan and its $2 Billion derivative loss.

Don’t feel bad if you don’t get it.  I worked in the financial field and it is still murky to me.  Furthermore, this stuff is way over the heads of the CEOs of these companies.  We heard that during Congressional testimony and in interviews right after the financial crisis.

Here’s how Felix Salmon concludes his piece that loads up on the need for more financial regulation:

Of course, this loss only goes to show how weak the Volcker Rule is: Dimon is adamant, and probably correct, in saying that Iksil’s bets were Volcker-compliant, despite the fact that they clearly violate the spirit of the rule. Now that we’ve entered election season, Congress isn’t going to step in to tighten things up — but maybe the SEC will pay more attention to Occupy’s letter, now. JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.

I agree with Salmon. 

My biases need to be exposed here.  I am for uber transparency in the financial markets.  I want to know exactly how a financial product works.  Your credit card bill, to me, is the best example.  Do you have time to read it?  No, it’s way too long and complicated; you’re busy working, raising kids, caring for elderly parents, and living.  Do you understand it?  Maybe, but probably not.  It’s all CYA legalese — designed to protect the credit card company (bank) and not you.

Another bias is my belief in the future of technology that will create, not only jobs, but new businesses.  Yes, it is chaotic and full of failures.  But the trend is moving to home-based businesses.  We have the tools now: Internet, computers with fairly easy software, Skype to talk around the world face-to-face, and thanks to social networking, an endless worldwide market to sell to.  What’s missing are these things: credit since too many of us are upside down financially; incentive since the laws and special interests skew toward the corporations that are, reasonably I might add, cutting jobs to be efficient, and the unions that are keeping us beholden to employers.

The GOP is missing a big opportunity here to use the spirit of Reagan who, more than anything else, encouraged and spurred entrepreneurship in America in the 1980s.  Think of how many companies started in garages back then: Apple, Microsoft.   Again, most of the laws and tax-breaks are geared for big corporations with the lobbying and financial clout — not the entrepreneur or start-up.  However, it appears that many in the GOP are seeing the benefit of simplifying the tax code for a fairer playing field — but probably won’t act on it until 2013 after the elections.

Here’s a bias on top of my bias: I am working on a start-up that could give you your own TV network online affordably.  Stay tuned.

The Informed Not Inflamed Take:

I would argue that there needs to be more financial regulation — not less.  When I hear people like CNBC’s Rick Santelli blame the JPMorgan loss on the Fed for keeping rates so low, I am suspicious. 

Still, we need to be careful here about financial regulation.  We need to have the majority of us in the business community to understand the financial tools.  But we also need some of these complex products to help ease rough patches in the economy and create more wealth espcially as our society retires and faces old age.

Samon, in his piece, also mentions Occupy SEC.  Here’s the site.  These are wonky folks who have done in-depth work on financial regulation.  They have done a nice job of deciphering the complexities and deceptions from the financial industry. 

You have to do this yourself, folks.  Have you heard either campaign talk about the Volcker Rule?  You won’t.

So, let me put the word out: help me find a website or an expert I can interview to help us try to make more sense of all this.

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