During the past week, the nation has learnt of the huge loss by the Wall-Street biggest bank, JP Morgan-Chase. Many Americans wondered if banks learnt anything from the 2008 melt down of the nation's financial sector due to poor decisions and judgment regarding derivatives.
The ripple effect of trading in derivatives and the consequential impact of poor banking decisions at the nation’s biggest Wall-Street Bank are continuing to evolve; and, many Americans are wondering if it made sense to have jettisoned Glass Steagall Act. What is the Glass-Steagall Act? Glass-Steagall Act separated investment and commercial banking activities consequent to the 1929 stock market crash; a crash associated with improper banking activities just before the great depression. Unscrupulous financial banking activities that moved into stock market trading bemoaned the 1929 depression. In somewhat of a similar experience with the great depression, overzealous bankers forayed into risky derivatives trading at JP Morgan-Chase, an experience that once undermined the credibility of America’s financial sector in 2008.
The dynamics of hedging risks, or what investors are terming, gambling with investor's money, remain as confusing to investors just as it is to the public. Hedging risks while trading on derivatives looks a familiar strategy or practice to bankers and insurance brokerages; however, the average investor still sees this more of a mambo-jumbo; or magic. The excessive loss of a ginormous or humongous amount, simply referred to as a normal order of doing business in investment banking, is just too breath-taking. To appropriately quote Jamie Dimons, the loss of two billion investors' dollars in derivative trading is a "tempest in a tea port." Yet the apprehensive investors and public are wondering if the Chairman of JP Morgan-Chase appreciates the weight of his assessment or characterization. Many critics insist that, though JP. Morgan Chase is a trillion dollar corporation, two billion dollars loss, is still huge; and, characterizing this loss as just another order of doing business, is a painful underestimation of the real risk of bank derivatives trading; and one more good reason, why extensive regulations are necessary to dissuade risky trading in derivatives; an objective of Dodd-Frank Financial Reform law.
In as much as banks are expecting to face some risks, a reckless disregard for the weight of potential loss, are matter of concern to investors, and an issue that must be addressed and not underestimated. Hence, it is imperative that some tools and guidelines are in place to ameliorate risky behavior of bankers that may lead to excessive loss of investors’ money. In addition, there is the need to address other issues that are antecedent to derivative trading, which may seem very little, but can really undermine the whole investment banking sector and possibly, the whole economy. The concept of too big to fail is a reality for at least six of the biggest banks on Wall Street; and this reality, call for responsible regulations not deregulation as sought by some bankers. The pattern of losses or failures associated with investment banking tells the whole industry that there is something missing that even well seasoned bankers can trip over, leading to huge losses of investor's money.
The financial industry and their lobbyists in congress, out of the desire to continue to engage in somewhat of an unsavory banking behavior, continue to ask for many exemptions, since the insitution of the financial reform law of 2010. Immediately Dodd Frank was signed into law by Obama's Administration, many critics began to bemoan many of the provisions or safeguards in the law that would have prevented the type of failure at JP Morgan-Chase; and the loss of as much money as two billions dollars in a swap. Few critics indicated that the provisions in the law are stifling commerce and some regulatory goalposts in the law are unworkable. Dodd Frank Financial Reform Law, which is expected to reform trading in derivatives, was being questioned for over-regulations by the same financial gurus who were caught with their pants down in the Chase Bank loss. The Volker rule that could have put some restraints in the way banks trade in derivatives, which had not come upstream, was until recently being bad-mouthed by the same Jamie Dimon, the Chairman of JP. Morgan-Chase Bank.
While many objective minds, including some in the financial sector, insisted that we adhere to our initial game plan, that we hold fast to the reform that were recommended in Dodd-Frank, a few of the bankers advised that we better let the horses run wild on the plains. If we had not kept our eyes away from the ball, we as in investors, wouldn’t have been burnt badly, when investment bankers at JP Morgan Chase let their guards down and lost a huge some of money. Frankly, playing with fire burns badly; and as long as banks executives are not ready to take necessary precautions as recommended by Dodd-Frank, the investors and the public will continue to suffer loss and potential humiliation from wrongful investment decisions of investment bankers in derivatives. Like Grandma said: fool me once, shame on you; fool me twice, shame on me!