Zeno Swijtink
01-07-2013, 03:36 PM
This is an in-depth explanation of how the banking system may not understand itself anymore. - Zeno
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https://img402.imageshack.us/img402/4760/atlanticlogo.png (https://www.theatlantic.com/)
Monday, January 07, 2013
What’s Inside America’s Banks?
https://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/
FRANK PARTNOY and JESSE EISINGER - The Atlantic
I confess I don't believe a word the American mega-banks tell the world about themselves. Apparently, I am not alone. The utter failure of the Bush Administration I think is pretty clear to everyone. I'm not so sure that people fully appreciate the fact that the Obama Administration also bears part of the weight of this mess, not least their determination not to hold the perpetrators accountable.
The financial crisis had many causes-too much borrowing, foolish investments, misguided regulation-but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode.
For the past four years, the nation’s political leaders and bankers have made enormous-in some cases unprecedented-efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.
Consider JPMorgan’s widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. Jamie Dimon, the firm’s charismatic CEO, had kept his institution upright throughout the financial crisis, and by early 2012, it appeared as stable and healthy as ever.
One reason was that the firm’s huge commercial bank-the unit responsible for the old-line business of lending-looked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the bank’s condition.
The loss emanated from a little-known corner of the bank called the Chief Investment Office. This unit had been considered boring and unremarkable; it was designed to reduce the bank’s risks and manage its spare cash. According to JPMorgan, the division invested in conservative, low-risk securities, such as U.S. government bonds. And the bank reported that in 95 percent of likely scenarios, the maximum amount the Chief Investment Office’s positions would lose in one day was just $67 million. (This widely used statistical measure is known as 'value at risk.”) When analysts questioned Dimon in the spring about reports that the group had lost much more than that-before the size of the loss became publicly known-he dismissed the issue as a 'tempest in a teapot.”
Six billion dollars is not the kind of sum that can take down JPMorgan, but it’s a lot to lose. The bank’s stock lost a third of its value in two months, as investors processed reports of the trading debacle. On May 11, 2012, alone, the day after JPMorgan first confirmed the losses, its stock plunged roughly 9 percent.
The incident was about much more than money, however. Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk, without providing a clear reason. Moreover, in acknowledging the losses, JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation.
It gets worse. Federal prosecutors are now investigating...
Continues at https://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/
***
https://img402.imageshack.us/img402/4760/atlanticlogo.png (https://www.theatlantic.com/)
Monday, January 07, 2013
What’s Inside America’s Banks?
https://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/
FRANK PARTNOY and JESSE EISINGER - The Atlantic
I confess I don't believe a word the American mega-banks tell the world about themselves. Apparently, I am not alone. The utter failure of the Bush Administration I think is pretty clear to everyone. I'm not so sure that people fully appreciate the fact that the Obama Administration also bears part of the weight of this mess, not least their determination not to hold the perpetrators accountable.
The financial crisis had many causes-too much borrowing, foolish investments, misguided regulation-but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode.
For the past four years, the nation’s political leaders and bankers have made enormous-in some cases unprecedented-efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.
Consider JPMorgan’s widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. Jamie Dimon, the firm’s charismatic CEO, had kept his institution upright throughout the financial crisis, and by early 2012, it appeared as stable and healthy as ever.
One reason was that the firm’s huge commercial bank-the unit responsible for the old-line business of lending-looked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the bank’s condition.
The loss emanated from a little-known corner of the bank called the Chief Investment Office. This unit had been considered boring and unremarkable; it was designed to reduce the bank’s risks and manage its spare cash. According to JPMorgan, the division invested in conservative, low-risk securities, such as U.S. government bonds. And the bank reported that in 95 percent of likely scenarios, the maximum amount the Chief Investment Office’s positions would lose in one day was just $67 million. (This widely used statistical measure is known as 'value at risk.”) When analysts questioned Dimon in the spring about reports that the group had lost much more than that-before the size of the loss became publicly known-he dismissed the issue as a 'tempest in a teapot.”
Six billion dollars is not the kind of sum that can take down JPMorgan, but it’s a lot to lose. The bank’s stock lost a third of its value in two months, as investors processed reports of the trading debacle. On May 11, 2012, alone, the day after JPMorgan first confirmed the losses, its stock plunged roughly 9 percent.
The incident was about much more than money, however. Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk, without providing a clear reason. Moreover, in acknowledging the losses, JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation.
It gets worse. Federal prosecutors are now investigating...
Continues at https://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/