As I write this, Bruno Iksil is still riding the Bongo Board. We have all done it, at least those of us of a certain age. We got up on the Bongo Board and we thought we could stay up forever.
One can only imagine the endorphins pumping across the world's trading desks. The king of the hill, JPMorgan, has seen its killer trade -- reputed to entail multiple hundreds of billions of credit default swap notional amount -- go the wrong way, and now they need to reverse out of their position before the stink gets worse. The loss of two billion dollars announced a week ago grew by a billion in a week, and clearly the fire sale is not over.
Faced with a public relations fiasco, Jamie Dimon let his long-time, trusted lieutenant, Ina Drew, take the fall. Meanwhile, Iksil -- the trader that amassed the positions that have been a topic online since early April -- cannot be let go because he is the one that understands the billions and billions of complex derivative contracts that now need to be unwound. It must be quite a spectacle on derivatives trading desks around the world. It is get-back time, and in that world no one takes any prisoners.
As the hedge funds continue to circle in the water, feeding off of JPMorgan's exposed balance sheet, Dimon's friends on Capitol Hill have been quick to come to his defense. House Financial Services Committee Chairman Spencer Bachus (R-AL) was quick to minimize the importance of one loss, whatever its size, while across the aisle President Obama lauded Dimon's bona fides and JPMorgan as "one of the best-managed banks there is."
Politicians jumping to Jamie Dimon's defense are missing the point. This is not about a single trade or one loss. Iksil, whose nicknames "Voldemort" and the "White Whale" (think Ahab's nemesis, not a fat Frenchman) should give a hint as to his industry reputation, and now that the hedge funds have tasted blood JP cannot get out until the counterparties are good and ready. That the loss is still growing simply means that they are not ready to let go.
But if JP's counterparties have Bruno by the balls, so too does Dimon have a firm grip on the nation's political leadership. Last week on Meet the Press, Jamie Dimon described himself as still a Democrat, but just barely. Once a prominent Obama supporter, Dimon is one of many across the finance community who feel that they have been unfairly tarred for cratering the global economy.
To put a finer point on it, despite the media feeding frenzy surrounding Voldemort's personal Black Swan event (Nicholas Taleeb's now-famous phrase for things that can't go wrong, until they do) comments from our nation's capital remain measured, almost fawning. Democrats and Republicans have fallen over each other to praise Dimon as America's Greatest Risk Manager notwithstanding JPMorgan's contretemps. Dimon's reputation grew out of the ease with which JPMorgan navigated the financial crisis, though some have suggested that Dimon's predecessor as CEO, Bill Harrison, deserves a fair share of the credit. Harrison, apparently, minimized the bank's exposure to exotic mortgage derivatives and handed Dimon a pretty clean balance sheet when Dimon arrived on the scene as CEO in 2006.
While some of the adulation garnered by Dimon may well be warranted, it is likely that most of the politicians uttering the hosannas have no idea what risk management is. It may be that what we are actually watching is a not very subtle food fight between our two political parties for campaign cash. Simply stated, this is not about Dimon's management skills, rather it is about his wallet.
Over the past two decades, the financial services sector has been the most generous source of political money, and that money has been up for grabs. For decades, the Republican Party was the party of Wall Street. That singular identity ended during the Clinton administration, which was determined to lure Wall Street's lucre across the aisle. While Clinton and the Democrats grabbed the golden ring, the price for the nation was steep: the Financial Services Modernization Act of 1999 and the ensuing Commodity Futures Modernization Act of 2000 that together laid the groundwork for the financial services world as we know it, and as the world came to experience it in the global financial meltdown of 2008. During the last presidential cycle, according to OpenSecrets.org, the financial sector remained far and away the largest source of political contributions, with 54 percent going to Democrats, while this time around -- in the wake of industry anger over Dodd-Frank reforms -- the tide has turned and 77 percent of that money is gracing Republican coffers.
Could it be that Chairman Bachus was quick to rise to the defense of JPMorgan because that bank has been the leading source of contributions to his campaigns over the course of his career? Could it be that President Obama is treading lightly on the issue because to date he appears to have lost his edge with two of his largest financial supporters from 2008 -- Goldman Sachs and JPMorgan -- who according to OpenSecrets.org are the two largest sources of contributions to the Romney campaign?
It is getting boring reading about how the events of the past week -- to say nothing of the past decade -- suggest why our banks should be smaller or risk trading functions separated from traditional commercial banking. Democrats that continue to believe that we can regulate our way out of this either don't want to give up their share of the money or simply lack imagination. Banks should be smaller so they can fail with the regularity with which small banks do fail. JP's oft-repeated argument that their nearly one hundred trillion dollars derivatives book is book-matched and therefore does not constitute a systemic risk to the financial system is disingenuous at best and simply dishonest at worst.
Lost in the endless -- and endlessly self-serving -- arguments is the fact that commercial banking is essential to the economy, and thus is supported by numerous institutions including the FDIC and the Fed -- and that the integration of investment banking and commercial banking (a brainchild of Dimon's mentor Sandy Weill) has brought little to no demonstrable value to commercial banking's core societal function, while bringing much to the investment banking world -- massive bonuses, a bottomless supply of free capital and the socialization of trading risk.
Both Jamie Dimon and our nation's political leaders face the same fundamental problem: As risky as the status quo might be, no one can afford to give it up. For Jamie Dimon, derivatives trading is a gravy train that has underpinned JPMorgan's profitability, regardless of the larger threat it may entail, while for our political leaders major contributors are an irreplaceable constituency always for sale to the highest bidder.
But don't worry about Bruno Iksil. Whether Jamie Dimon finds he has to let him go, or figures out a way to keep him, he will be fine. There will always be a market for a proven derivatives trader, particularly one with the moniker of the true master of the universe. He will not be tainted by this trade, no matter what the final damage turns out to be, or at least not for long. After all, take a look at his new boss who took over from Ina Drew. He was formerly a trader at Long-term Capital Management.
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