Thursday, June 14, 2012

Jamie Dimon, Rock Star

'Cause we all just wanna be big rockstars
Livin' in hilltop houses driving fifteen cars
Rockstar by Nickelback

   On the front page of the New York Times today (June 14) is a photograph of Jamie Dimon looking every bit the rock star on his way into the Congressional hearing about JPMorgan's $2bn (plus) credit derivatives losses in the UK. His testimony was described in awed superlatives by TV presenters.  One wag even said that, in PR terms, Dimon's behavior and delivery would become the template for others who find themselves in his shoes going forward.
   Jamie Dimon is not a rock star. He is the CEO of a very large financial institution which proved that regulation is not only necessary but essential.  What Dimon said in so many words was that his team did not understand the risk involved in the positions they were taking. The chief investment office did not understand the risk? That is tantamount to saying no one in the firm understands risk. One horrified trader told me: "Trading is all about a little bit of analysis, a little luck and a complete understanding of the risk you are taking and its possible repercussions."
   Call it hedging or proprietary trading, the bottom line is that JPMorgan's CIO traders did not understand the complex suite of synthetic derivatives they were playing with. They changed their value at risk (VaR) models in the meantime, inexplicably screwing themselves up further, and then changed them back again revealing the losses.
   If the CIO at JPMorgan did not understand the risk involved in its derivatives positions, can investors and regulators really believe that trading departments and CIO's at other banks understand it? I think not. The Bank of England was so shaken up that Andrew Haldane, executive director for financial stability, hinted strongly that large banks should be monitored for risk, according to Reuters.
   Dimon may look the part of a rock star, but he may have allowed his band to party too long while he was out lobbying against regulation. To paraphrase Nickelback, life hasn't turned out quite the way Dimon wanted it to be.

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