Tuesday, May 15, 2012

Throw Out The Garbage!

Joe Nocera of the New York Times wants boring banks.  He quotes Sheila Blair, ex-head of the FDIC, as saying "I just want all this garbage out of insured banks,” referring to "hedging trades", "reckless trades", or "wild-ass gun slinging"...call it what you want.  He calls for "deposits" and "lending".

In the earliest days of Volker Rule speculation, I explained how easily banks can transform any speculative trade into a hedge of a customer loan.  I think we can all agree, therefore, no outsider is in a position to judge if a trade is a hedge or speculative.  And, "lending" doesn't reign in anything.

After the fact, you cannot distinguish between "hedges" and "trades".  Arguably, if speculative trades are, on average, making money, (they must, or you wouldn't do it, right?) then hedges, on average, should lose money.  So, the fact that JPM lost a bunch of money should lead you to believe it was a hedge(!) 

But seriously, self interest obscures the truth.  As Nocera also writes "Wall Street executives who make $14 million are not risk managers."  He's referring to Ina Drew's pay package, of course.  Within a bank, no one wants to be viewed as someone who hedges.  You don't get paid to hedge.  When a trade loses money it's a hedge.  When it makes money it's a smart trade.  

At the end of the year, you don't tell your boss "pay me more because I covered so many of that idiot's mistakes!"  You say "I know I rock.  Think how much more we'd make if that idiot understood that our trades are riskless."

But, what about the garbage and boring banks?  What should we throw out of the banks?  How about Sheila Blair's FDIC?  Joes wants banking boring?  Joe don't know boring.  My bank makes his bank look like a flash mob at Burning Man!