It's a story that's taken me a while to wrap my brain around. After all, I don't often pay close attention to the whirlings of Wall Street. The talking heads talk about who's up and who's down on the Street, and I quickly change the channel to the latest transactions in the world of sports.
But over the weekend, one of those Wall Street stories pierced even my deliberate shield of ignorace. It seems that JP Morgan Chase - the bank that survived the 2008 meltdown - managed to lose some $2 billion on a bad bet. Actually, it was a hedge, one of those transactions designed to reduce risk and yet seemingly keep exploding all over the big bankers. Paul Krugman explains:
What did JPMorgan actually do? As far as we can tell, it used the market for derivatives — complex financial instruments — to make a huge bet on the safety of corporate debt, something like the bets that insurer AIG made on housing debt a few years ago. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.
As Krugman noted, bankers making bad bets aren't the problem. The problem arises when those same bankers rely on all of us to shore them up when things go sideways.
And that's the point that Senator Jeff Merkley stressed in the aftermath. From The Hill:
"What yesterday’s announcement makes abundantly clear is that even JP Morgan, supposedly the best risk manager on Wall Street, can make bets that go spectacularly wrong. This is exactly why the banks that our businesses and families depend [on] for loans should not be in the hedge fund business," Sen. Jeff Merkley (D-Ore.) said in a statement on Friday. "Moreover, it is essential that bank regulators issue rules that do not permit hedge fund investments by Wall Street banks to be disguised as ‘market making’ or ‘risk mitigation,’ as this case so dramatically demonstrates." ...
"I ask, once again, that regulators implement without delay a Volcker Rule as intended by Congress, with a clear, effective firewall between hedge fund-like trading and traditional banking."
Which is why Washington Post reporter Brad Plumer tweeted last week:
Between filibuster reform and the Volcker rule this is basically "Jeff Merkley was right about everything" day: wapo.st/K7TOyt— brad plumer (@bradplumer) May 11, 2012
Yup, sounds about right to me.