JP Morgan's "Unicorn Hedge" Fairytale Harpoons the London Whale!
Welcome to Capital Account. From Whale Tails to Unicorn Fairytales, this week has ended with a bigger splash then anyone could have expected. The London Whale has officially capsized JP Morgan's balance sheet with a reportedly 2 billion dollar trading loss. Jamie Dimon, the firm's CEO, admitted "egregious mistakes" were made and that he and his colleagues were “stupid.” Fair enough, but why were these mistakes made, and was this trade a legitimate hedge as Jamie Dimon claims, or more of a "unicorn hedge" as our guest Heidi N. Moore called it? Why was this trade put on through the company's CIO, and why was it done so on a portfolio level? That's an awfully broad way to hedge risk on the titanic. What happens with this ship finally tries to make it back to port? JP Morgan now has tremendous exposure on its balance sheet that, if it were to try and unwind, may not find too many friendly buyers.
Also, what does this recent hole on the side of Jamie's ship say about risk management on wall street? JP Morgan and it's captain Jamie Dimon have been the darlings of wall street. His firm weathered the financial crisis in 2008 without so much as a hiccup, using it as an opportunity to buy up rival Bear Sterns for pennies on the dollar. But will this latest torpedo to JP Morgan's balance sheet provide further ammunition to those calling for stricter and tighter regulations of wall street firms that make risky bets with depositors' money? Is this the time for the public to pay closer attention than ever before to legislative efforts like those surrounding the Volcker Rule or are too big to fail banks going to continue to make proprietary bets with our money until all of us go broke? We speak with members of Occupy the SEC, including Alexis Goldstein and Brett Goldberg during the second half of our show. Besides their fantastic work on the Volcker Rule, they have been active in trying to help put some teeth into President Barack Obama's "mortgage financial fraud task force." We speak to them about their efforts in this regard as well.