I'd Rather Ask Paris

I had a whole thesis-length Pulitzer-worthy post laid out trying to follow up with the more recent speculation/guesstimation/made-up theories? regarding what JP Morgan’s Volcker-impure “London whale” trade is for, then I noticed that my like-minded but funnier/more widely-read alter ego Matt Levine at Dealbreaker had already written two posts on the subject. Which launched me into a deep existential depression because, what’s the point of me then? Anyway just go read them if you care about the details of the discussion cuz he more or less says everything I would have said and nothing I wouldn’t have said. We clearly think along the same lines, just with different sarcasm-approach-vectors. Me and him made friends, I like the way he talks and he likes the way I talk. Or something.

I did have one point to expand upon though (sorry you’re not off the hook yet). To follow along with below all you really need to know is (1) JP Morgan has put on some large trade (and – this is a key point because it doesn’t usually happen – it got publicized), (2) certain people in the press and blogosphere and whatnot are complaining and wondering if they should be allowed to do that, in particular because (3) they think it might violate new financial regulations meant to control risk (the Volcker Rule). But to make that case, in part because the Volcker Rule is a stupid-ass rule, they have to (4) analyze and theorize (and make stuff up) about what they think might be the purpose and intent of the trade. So that’s what everyone’s doing.

Much to my annoyance.

Why? Because: If I had to draw up a list of people I’d want to consult to understand the purpose of that trade and determine whether it made sense, as all this Volcker Rule stuff seems to force us to do, it would look something like – in order –

• The guy putting on the trade (whose name has been publicized in the news, Bruno Iksil). You know, the trader.
• His supervisor/boss/whatever. Also probably gets what they’re doing.
• His junior guy(s). They’d know the nuts and bolts.
• …[skipping a few]
• Maybe some sharp middle office guy who books his trades and understands what’s going on.
• …
• His sharpest ‘risk manager’ or ‘product controller’
• …
• The CEO of JP Morgan.
• …
• Felix Salmon the “econoblogger”
• …
• Paris Hilton*
• …
• John Carney of CNBC
• …
• My childhood best friend who’s now a forest-firefighter in Sonoma. Or am I thinking of the kid whose dad knew Sammy Hagar for some reason? Wait neither of those sound right. Anyway, that guy.
• …
• [insert any random regulator here]
• [insert any random non-Maxine Waters Congressman here]
• An inanimate carbon rod
• Maxine Waters.

The point is that if I concede (which I don’t!) that Figuring Out Whether JP Morgan’s Trade Is Kosher is something we all should be busily engaged in doing, well maybe that’s fine, but it necessarily involves analyzing the risks of JP Morgan’s books, understanding the financial instruments in question, ideally knowing something about the market dynamics and flows in that space, and having sound judgments about which risks stand out as needing hedging so as not to take undue risk, and so forth. Guess what! As it happens JP Morgan already has a guy on staff whose job it is to do that, it’s even an actual job function there – and that job is called: ‘trader’.

Now, could that guy be doing a poor job, making bad decisions? Of course. But (a) we have no particular indication of that (sorry, ‘hedge funds are complaining’ doesn’t count), and (b) if you (or Senator Merkley of Oregon, or whoever), think you know better which undue risks JP Morgan has taken on and whether they make sense and whether alterations need to be made to its position, I’d invite and encourage you to go ahead and send your resume on over JP Morgan’s HR department; you’re making your case to the wrong people.

Some will retort ‘but moral hazard!’ because after all, why should the banking system be allowed to pay some guy for taking risks with money that was (essentially) printed up by and in the name of The People and then loaned to that guy, with a capped downside, for him to play with, with no input from anyone else? Two answers. (1) It’s not true that he has no input or control from anyone else, JP Morgan like all other banks is already (Volcker or no Volcker) massively regulated and capital-constrained and inspected in what they can do by the Fed and FSA and whatever other regulators apply to it, and they also have internal risk controls and manager types who (hard as it is to believe, and yes I’m aware this didn’t prevent 2008) don’t want JP Morgan to lose money. (2) More broadly, while I understand the moral-hazard concern in theory, sort of, the problem is that if you’re genuinely freaked out about ‘individuals at private institutions taking risks with Fed-printed/FDIC-guaranteed money in a way that leads to their personal gain if it works out well’, I’m afraid you’re going to need to go ahead and ban fractional-reserve banking with a central-bank lender of last resort and an FDIC, because friend, I’m sorry to break this to you, but that’s what it is.

So unless they plan on banning modern banking, people should ideally make their peace with the idea. Loans are risky; get used to it.

*I have always suspected Ms. Hilton is underestimated.

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