The Icing And The Cake-Jamie Dimon And Edward Conard
You may have heard that JPMorgan Chase has suffered a large loss-the
preliminary reports are at least $2 Billion, and the number may eventually rise
to twice that
It might occur to you to ask what Chase, with its army of
dark suited French-blue shirted souls smilingly collecting deposits that pay no
interest, could possibly do to lose $2 Billion.
I remember, as a child, taking a locked heavy-duty canvas bag with the
night deposit from my Dad’s pharmacy, walking a couple of blocks, and dropping
it down the bronze chute to some unseen all-night teller. It took a lot of pills and lipsticks and deodorants
and boxes of Barton’s candies to make a $1,000 deposit, so I imagine that my
Dad would be very upset if the bank lost that bag. A quick back-of-the-envelope calculation
tells me that $2 Billion is actually two million Canvas Bags, which might make
for an interesting Two Million Bag March on Wall Street. Since each of those bags were roughly 8’’ by
11”, that would imply a line of bags forty feet wide stretching the length of
Manhattan. Quite the motorcade.
So, how does one lose that many bags? Fortunately, that’s a question lesser minds
(like mine) can explore. Chase lost
their bags through something called a hedge.
Some of us think “hedge” sounds either horticultural or very sleek and
exotic, like “hedge fund”, where highly trained quants divine subtle signs in
mathematical tea leaves to bet stupendous amounts of money and win untold
quantities of bags (and other baubles).
Rich people can invest in hedge funds-perhaps because they have a better
affinity for numbers. Rank and file folk like me aren’t “Qualified Investors”
and are pretty much relegated to putting our bags in a bank, like Chase.
Chase’s leader, Jamie Dimon, has been out there on the
Sunday talk show circuit, manfully pronouncing mea culpa (actually, it’s more
like a “someone else was culpa,” as three other heads have rolled.)
What Mr. Dimon has owned up to is that traders in the London
office (I promised it was sleek and exotic) working on behalf of the bank’s
chief investment office were engaging in hedging activities, and these hedging
activities went a tad awry. How does one
go awry in hedging bags? Isn’t the very
act of hedging supposed to be a limitation of risk, like a bookie laying off
bets so he can make his money on the vigorish?
Isn’t that what a bank’s chief investment office supposed to do, manage
risk? Well, yes, and no. Chase’s chief investment office wanted to
manage risk, but it also wanted to be a profit center, and as the saying goes,
“no risk, no reward”. So, in search of
the reward, known in Chase by the very descriptive term, the “Icing”, they took
the risk.
Ok, so let’s just sum up for a moment. A bank collects bags from people like my Dad
and lends money out at higher rates, providing capital for people to grow their
business, buy houses, etc. So far, so
good, and that’s what banks did (usually quite prudently) for decades after the
Great Depression. The FDIC insured, so
if ignorant people like myself were suddenly seized with irrational fear and
tried to grab back those bags all at once, the rest of the bank’s depositors
would be sure to get theirs back.
Unfortunately, we are talking about low-tech locked canvas
bags, producing merely moderate vast wealth.
Not enough glamour, and not enough Icing. So, the banks went to their friends in
Congress (from both parties), managed to get “regulatory relief” and the
in-house pastry chefs really began to bake.
You may recall a minor economic global catastrophe back in
2008, where the bag collectors had a bit of a sugar high. Fortunately, we bag depositors were there to
bail them out with our tax dollars, an irony which seems to have been lost on
many of them. An effort to balance the
risk going forward led to Dodd-Frank and Volcker Rule, the intent of which is to
curtail some of the more gymnastic impulses of those banks with the bags. These reforms, supported by Mr. Obama, have
been vociferously objected to by Wall Street, with Mr. Dimon at the forefront,
and the entire Republican Party. No Wall
Street cash for Donkey this election cycle.
The Chase mini-disaster might be just another news blip if
it weren’t so artfully juxtaposed with the upcoming release of former Bain (and
Romney) partner Edward Conard’s book, “Unintended Consequences: Why Everything
You’ve Been Told About the Economy Is Wrong”.
Mr. Conard was interviewed for the May 1, 2012 Times Sunday Magazine by
Adam Davidson, and the article has to be read-I can’t do it justice.
Mr. Conard’s point of view, in short, is that income disparity
is good, and huge income disparity is better.
The wealthy know how to invest capital for growth and innovation, while
the unwashed merely spend it on consumables (like food). Therefore, government
policies need, for the good of all of us, to enhance the opportunities of the
wealthy to become even more so. Conard
blames the little meltdown in 2008 on ignorant bag-holders who made a run on
the banks, not those Icing-seeking types.
Conard likes government insurance-in fact he wants an even bigger fund
to be created using taxpayer money. He doesn’t like any other type of government
regulation. And he has a special disdain
for Warren Buffett. Buffett is failing
society by giving billions to charity when he (Buffett) could invest it so much
better.
Davidson’s article is hard to digest, because Conard can
come off like a smoking jacket garbed Marie Antoinette-his disdain for the less
successful is palpable, and his ideas appear to socialize risk while
privatizing profit. But they should been
taken seriously, if not to the extreme he does.
There is an association between capital formation and innovation, albeit
not Conard’s conflating Bain’s extractive financial engineering with Apple’s
incredible contributions to productivity and pleasure.
It’s the kind of discussion our political leadership should
be having when they look at how we regulate, who we tax, and how much we take
away in entitlement reforms. And stark though they may be, Conard's views may be representative of many in the GOP, and their nominee.
Who takes the risk, who gets the Icing, and who gets the
cake? Are there any leftovers?
Food for thought?
Food for thought?
MM
