May 23, 2012 archive

Cross posted from The Stars Hollow Gazette

That $2 billion failed London Whale has burgeoned up to a hefty $7 billion:

The crisis at JP Morgan escalated yesterday as it emerged its trading losses in London could rise to as much as $7bn (£4.5bn) and the US bank cancelled a share buyback. Fears were growing that the losses could spiral from an initial $2bn, which was declared on 10 May, as JP Morgan struggles to unwind the massive bets made by the so-called “London Whale” trader Bruno Iksil. [..]

The main index on which Mr Iksil’s credit default swaps trades were based has calmed down in recent days, which suggests that JP Morgan has decided to trade out of its positions gradually rather than take one massive hit. Mr Dimon originally said the bank would deal with the positions to “maximise economic value”. But there is a danger in taking the long view. Mr Iksil was betting on the credit-worthiness of corporate America and if that starts to fall JP Morgan’s losses could mount further.

But in the meantime, Dimon decided to suspend the $15 billion stock buy back:

Two months after announcing a $15 billion share buyback program, JPMorgan Chase reversed course on Monday, saying it was halting the repurchases after the bank’s multibillion-dollar trading loss. [..]

Mr. Dimon said the bank intended to keep its dividend of 30 cents a quarter unchanged. Bank officials have repeatedly emphasized that the company has no plans to reduce it despite the trading loss. Initially estimated by the bank at $2 billion, the trading loss on credit derivatives now stands at more than $3 billion, according to traders and regulators. [..]

The decision to halt the repurchases – a move the company said it made on its own, not at the behest of regulators – sent JPMorgan’s shares sliding again Monday, closing at their lowest level since late last year.

As the losses from London Whale increase and Dimon’s reputation as the “saviour” of JP Morgan is tarnished, the calls for better and tighter regulations for banking increase. That’s the problem faced by the Senate Banking Committee as they consider the “Volker Rule”. As David Dayen pointed out today the rule should not so complex that it just creates more loopholes:

The Fail Whale trades showed that massive, as-yet unregulated risk still exists in our financial system, with the potential to bring down the economy once again and trigger massive taxpayer bailouts. Since the Administration already passed a law that was supposed to deal with that, they’re scrambling to restore what little of value existed in those laws. [..]

The article intimates that independent regulators have authority over writing things like the Volcker rule, and that the White House and the Treasury Department have limited ability to ensure that the rule properly follows from the legislative mandate. Given that a senior Administration official told reporters just yesterday that the losses at JPMorgan Chase would “inform… how the ultimate contours of the Volcker ruler come out-make sure that it is strong,” it’s clear that not even the Administration believes that. They appointed the regulators, and Treasury has plenty of control over almost everything related to Dodd-Frank. If they want a stronger Volcker rule, they’ll get it.

But will the Banking Committee come out with strong, simple rules regulating the gambling that banks are doing with depositor funds? There is a lot of doubt considering that not only are the Senators on the banking committee “financed” by the banks and lobbied heavily, a former lobbyist for JP Morgan Chase, Dwight Fettig is the staff director for the Senate Banking Committee. As our friend watertiger at Dependable Renegade observed “Well, isn’t that conVEEEEENient”:

The Senate Banking Committee is responding to outrage over the news that J.P. Morgan lost some $3 billion in customer money because of a risky trading strategy. The committee is preparing for two hearings with regulators, and Senator Tim Johnson (D-SD), chair of the committee, is hoping that Jamie Dimon will testify in the near future. “Our due diligence has made it clear that the Banking Committee should hear directly from JPMorgan Chase’s CEO Jamie Dimon,” Johnson said in a statement last week.

Luckily for Dimon, the professional staff in charge of managing the banking committee will be quite familiar to him and his team of lobbyists. That’s because the staff director for the Senate Banking Committee is none other than a former J.P. Morgan lobbyist, Dwight Fettig.

In 2009, Fettig was a registered lobbyist for J.P. Morgan. His disclosures show that he was hired to work on “financial services regulatory reform” and the “Restoring American Financial Stability Act of 2009″ on behalf of the investment bank. Now, as staff director for the Senate Banking Committee, he will be overseeing the hearings on J.P. Morgan’s risky proprietary trading.

I agree with Yves Smith in her NYT op-ed opinion that “for starters, reinstate Glass – Steagall”:

Preventing blow-ups like the JPMorgan “hedge” that bears no resemblance to any known hedge isn’t difficult. What makes preventing it difficult is that banks that exist only by virtue of state-granted charters – and more recently, huge transfers from the public – have persuaded public officials and regulators that they have a God-granted right not just to high levels of profit but also high levels of employee and executive compensation. [..]

Maybe it’s time to recognize that these firms are too big and in too many complex businesses to be managed. Jamie Dimon was touted as a star who could supervise a sprawling firm running huge risks, and he fell short because no one can do the job adequately. A less disaster-prone financial system requires more simplicity and redundancy. Re-instituting Glass-Steagall or other variants on the narrow banking theme isn’t a full solution, but it would make for a good start.

Cross posted from The Stars Hollow Gazette

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

May 23 is the 143rd day of the year (144th in leap years) in the Gregorian calendar. There are 222 days remaining until the end of the year.

Click on images to enlarge

On this day in 1873, the Canadian Parliament establishes the North West Mounted Police, the forerunner of the Royal Canadian Mounted Police.

North-West Mounted Police

The RCMP has its beginnings in the North-West Mounted Police (NWMP). The police was established by an act of legislation from the Temporary North-West Council the first territorial government of the Northwest Territories. The Act was approved by the Government of Canada and established on May 23, 1873, by Queen Victoria, on the advice of her Canadian Prime Minister, John A. Macdonald, with the intent of bringing law and order to, and asserting sovereignty over, the Northwest Territories. The need was particularly urgent given reports of American whiskey traders, in particular those of Fort Whoop-Up, causing trouble in the region, culminating in the Cypress Hills Massacre. The new force was initially to be called the North West Mounted Rifles, but this proposal was rejected as sounding too militaristic in nature, which Macdonald feared would antagonize both aboriginals and Americans; however, the force was organized along the lines of a cavalry regiment in the British Army, and was to wear red uniforms.

The NWMP was modelled directly on the Royal Irish Constabulary, a civilian paramilitary armed police force with both mounted and foot elements under the authority of what was then the United Kingdom of Great Britain and Ireland. First NWMP commissioner, Colonel George Arthur French visited Ireland to learn its methods.

The initial force, commanded by Commissioner French, was assembled at Fort Dufferin, Manitoba. They departed on July 8, 1874, on a march to what is now Alberta.

The group comprised 22 officers, 287 men – called constables and sub-constables – 310 horses, 67 wagons, 114 ox-carts, 18 yoke of oxen, 50 cows and 40 calves. A pictorial account of the journey was recorded in the diary of Henri Julien, an artist from the Canadian Illustrated News, who accompanied the expedition.

Their destination was Fort Whoop-Up, a notorious whiskey trading post located at the junction of the Belly and Oldman Rivers. Upon arrival at Whoop-Up and finding it abandoned the troop continued a few miles west and established headquarters on an island in the Oldman, naming it Fort MacLeod.

Historians have theorized that failure of the 1874 March West would not have completely ended the Canadian federal government’s vision of settling the country’s western plains, but could have delayed it for many years. It could also have encouraged the Canadian Pacific Railway to seek a more northerly route for its transcontinental railway that went through the well-mapped and partially settled valley of the North Saskatchewan River, touching on Prince Albert, Battleford and Edmonton, and through the Yellowhead Pass, as originally proposed by Sandford Fleming. This would have offered no economic justification for the existence of cities like Brandon, Regina, Moose Jaw, Swift Current, Medicine Hat, and Calgary, which could, in turn, have tempted American expansionists to make a play for the flat, empty southern regions of the Canadian prairies.

The NWMP’s early activities included containing the whiskey trade and enforcing agreements with the First Nations peoples; to that end, the commanding officer of the force arranged to be sworn in as a justice of the peace, which allowed for magisterial authority within the Mounties’ jurisdiction. In the early years, the force’s dedication to enforcing the law on behalf of the First Nations peoples impressed the latter enough to encourage good relations between them and the Crown. In the summer of 1876, Sitting Bull and thousands of Sioux fled from the US Army towards what is now southern Saskatchewan, and James Morrow Walsh of the NWMP was charged with maintaining control in the large Sioux settlement at Wood Mountain. Walsh and Sitting Bull became good friends, and the peace at Wood Mountain was maintained. In 1885, the NWMP helped to quell the North-West Rebellion led by Louis Riel. They suffered particularly heavy losses during the Battle of Duck Lake, but saw little other active combat.

Cross posted from The Stars Hollow Gazette

The economic crisis in Europe and the austerity response to it which has spread from Greece to other countries in Europe has dominated the news now for weeks. This past weekend the leaders of the G-8 met at Camp David where it was the main topic for discussion. While President Obama’s statement that encourages stimulus and growth as solutions to the EU problem, he did not discount austerity as one of the driving policies that has extended the downturn and caused social upheaval in Greece and now Spain. The reporting in the traditional mainstream media has been particularly lacking ion balanced analysis and, in some cases, some pretty sloppy and biased reporting.

William K. Black, an associate professor of economics and law at the University of Missouri-Kansas City, former litigation director for the Federal Home Loan Bank Board and a white-collar criminologist, takes reporters at the New York Times task for their profound ignorance on covering Europe’s financial, social, and political crises. He explains why they are so wrong:

Economists have known for roughly 75 years that adopting austerity in response to recession or depression will make the economic crisis grow and last far longer.  Austerity is to economics as bleeding was to medicine. [..]

The NYT article focuses on Alexis Tsipras, the Greek political leader whose party rose to prominence by promising to reject the loan-for-austerity program that the disgraced former Greek government agreed to at Berlin’s diktat. The article’s theme is that Tsipras is endangering all of Europe by demanding an end to austerity being imposed on Greece.  The reporters write, as if it were undisputed fact, that Tsipras has started “a high-stakes game of chicken with Europe’s leaders.”  But that reverses the facts.

The game that Berlin designed required the Greek to agree (1) to drive their economy off a cliff into a deepening Great Depression through increased austerity, (2) to force an enormous reduction in working class wages, (3) to sell Greek islands to private parties, and (4) to give up other aspects of sovereignty so that hostile, foreign, and private entities such as the IMF and the ECB could monitor its governmental actions.  The Greeks are now refusing to commit economic, political, and social suicide.  The Germans are demanding that they drive off the cliff because “a deal is a deal.”

If Greece were to drive off the cliff by adopting greater austerity it would likely destroy the EU.  Austerity would force Greece into a deepening depression, eventually lead to a default on Greek sovereign debt, and tear Greece apart.  Austerity has already generated a substantial neo-Nazi party in Greece.  Few Americans recall the Greek civil war between the right and the left that began in World War II and continued for several years after the war or the post-war coup.  Greeks recall the civil war and the coup and fear their resumption.  Proponents of the Berlin Consensus already have blood on their hands because of the suicides engendered by mass unemployment, small business failures, and hopelessness.  If the Berlin Consensus sparks a civil war or coup it could be fatal to the EU.

The EU crisis was also the topic of a heady discussion on this Sunday’s Up with Chris Hayes. Prof. Black was joined on the “Uppers” panel by Betsey Stevenson, former chief economist for the Obama Labor Department, Karl Smith, assistant professor of economics and government at the University of North Carolina at Chapel Hill; and MSNBC policy analyst Ezra Klein.

Mr Hayes’ assessment of the political situation in Greece was challenged by a commenter at his blog. Carol P Christ wrote with regards to the political and social responses to the crisis:

Since you are a member of the Progressive Left, you might reconsider calling Syriza the ‘far” Left in comparison to ‘far’ right Golden Dawn. There is no comparison between the 2. Syriza is a coaliton of parties to the left of centrist PASOk and to the “right” of KKE the Communist Party. You might be voting for them if you were in Greece, but you surely would NOT be voting for Golden Dawn. There is NO “comparison” between the 2. Continuing to compare the 2 parties makes it seem that all Greeks are irrational. There is nothing irrational about voting for Syriza. [..]

The “austerity” programs of the EU and banking systems have already destroyed our economy. To blame immigrants as Golden Dawn does is illogical. To ask voters to reject the terms of the second austerity package which is leading to massive unemployment and daily failures of small businesses is by no means irrational.

The Green Party is also against the austerity packages. And we are not “irrational” either.

The dualistic thinking of the west (ironically a legacy of Plato) leads to the demonization of the “other” as irrational. Unfortunately Greece has been portrayed as the “irrational” other within Europe for some time now.

Greece does need to change, but punishing the poor and middle classes is not a “rational” policy. [..]

Let me add that the European union and the Euro should not be confused. The Euro has only been in existence for 11 years. England with one of the largest economies in Europe is not a member of the Euro, nor is Sweden. They are still part of Europe and the European Union.

In Greece the Euro led to a massive rise in prices (a cup of coffee from $1 to $3-5, etc.) without a concomitant rise in wages. For example a tour bus driver makes E700 a month and a radiologist E1400, wages that are near poverty level in the US. depending on family size. Yet the cost of living is as high or higher than in the US, thanks to the price rises that the Euro brought. Gasoline is over $10 a gallon. Sales tax is 23%.

The European Union is a good thing, but the Euro was driven more by market forces and the desire to sell goods freely in Europe, than by a concern for world peace, the environmental protection, or any of the other good things the European Union is working on.

The Euro has not been a good thing for Greece, in my opinion.

(I have taken the liberty of posting most of Ms. Christ’s comments because I think they go straight to the heart of the misrepresentation that is taking place in the traditional news media.)

In another article at the New Economic Perspective, Prof. Black reports that the former head of the European Central Bank (ECB), Jean-Claude Trichet, thinks that by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy it would salvage the euro. To quote Prof. Black, “austerians have decided that since democracy is the problem, imperialism is the answer.”

Nor are fixing the problems of the euro a solution for the austerians:

Trichet, however, says that answer is impossible:  “For the European Union, a fully fledged United States of Europe where nation states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said.”  Democracy remains the stumbling block, but Trichet has an answer to that problem – crush democracy.  He proposes that the EU:

   “[T]ake a country into receivership when its political leaders or its parliament cannot implement sound budgetary policies approved by the EU. The action would have democratic accountability if it were approved by the European Council of EU heads of states and the elected European Parliament, he said.”

Of course, the “sound budgetary policies” he means are the suicidal, and failed policies of trying to balance the budget during a Great Recession.  He does not understand even now that a nation in a severe recession cannot simply decide to run a budget surplus.  It can try to do so, by cutting spending or raising taxes, but those policies are likely to reduce already sharply inadequate public and private sector demand, which increases unemployment, increases demand for public services, and reduces government revenue – all factors likely to increase the budget deficit.  I am sure that the Greeks will consider the loss of their sovereignty at the hands of hostile foreign powers who openly sneer at the Greek people to represent the epitome of “democratic accountability.”

And what was the reaction of Berlin to Trichet’s policy to force suicidal austerity on the Greeks and bleed their economy while removing their sovereignty and right to democratic rule?  You know the answer.

As Prof Black so aptly noted that that austerity is “a policy where you’re handed a gun and told to shoot yourself. Eventually people say, ‘Now exactly why should I do that?’. [..]

Whether Greece is the good or the bad, the policy is stupid.”

The United States is not Greece. It has its own sovereign currency and a bond market which it controls. We do not need to follow the EU and shoot ourselves with austerity.