Alert for May 14, 2012 The "London Whale" is Beached and Grounded

Primary tabs Alert for May 14, 2012 The "London Whale" is Beached and Grounded

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Tuesday, May 15, 2012 - 3:15pm

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OK, let's be honest: Did anyone reading this Alert know who or what "The London Whale" was until last week's headlines?  Market insiders knew who he or she or it was -- and apparently made big bets against The Whale -- costing the largest American bank holding company a "whale of a lot" of money.

Just in case you missed it, on May 10th it was revealed that the "London Whale" (apparently a nickname for JP Morgan/Chase's Bruno Michael Iskil, a trader based in London) accumulated a very large holding of investments that hedge funds began betting against. The initial result was at least a US$2 billion loss for  JP MorganChase  -- but the ramifications of this situation may extend far beyond its London offices and JP MorganChase's bottom line:

Reported Bloomberg News:  "Any progress by financial-industry lobbyists in securing changes to the Dodd-Frank Act’s proprietary-trading ban may have been halted with the May 10 announcement according to Representative Barney Frank, the Massachusetts Democrat who co- wrote the regulatory overhaul.

"Wall Street firms including JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley have lobbied regulators including the Fed, Securities and Exchange Commission and Federal Deposit Insurance Corp. to expand exemptions included in their initial Volcker rule proposal, complaining that the measure is so broad and ill-defined that it will increase risks for clients.

"Now New York-based JPMorgan is facing new scrutiny, with lawmakers calling for hearings, and SEC Chairman Mary Schapiro saying her agency is monitoring the bank. An exemption being sought by the banks would allow them to continue activities that are considered hedging, as well as to serve as market-makers, accepting risk or holding shares of trades to facilitate client orders. [Representative] Frank said he planned to use the bank’s loss to defend the law against efforts to roll back derivatives regulations and force wider exemptions in the Volcker rule." (Source for the complete report: Bloomberg)

For several years the global banking and financial sectors have been in turmoil, thanks to extensive sub-prime lending and the securitization of now-failed mortgages, among other factors. Thanks to excessive risk-taking by senior managements of the major financial services holding companies -- with apparent board consent (or) shareholder-elected directors either ignoring or not understanding the risk -- the damage has also spread far beyond the financial services sector after the 2008 market crash.

During the presidential election campaigns of 2008, and thereafter the spirited and often nasty political and public policy dialogue has revolved around the need to increase financial regulation and oversight -- "banking and financial system reform."  The US Congress, the Obama White House, new cabinet secretaries, investors, issue advocates and activists, media commentators, corporate governance experts, thinks tanks, academics, and others have been busily prescribing this or that financial services and banking regulation remedies. This reflects just how important "financial reform" is (or could be, or is not) in the swirl of issues being debated about the future course of the American economy.

Technically speaking, financial reform is now the Law of the Land, with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010.

Technically speaking -- as evidenced from last week's developments, there are still many parts of the reform law which create interest and controversy. And, some that are not even incorporated in understandable rules-of-the road (as required by the law).

Changing financial regulations is by no means limited to the United States.  In recent years there has been greater collaboration among leading industrial nations focused on banking, brokerage, financial services, financial instruments, and capital markets mechanisms.

We can say that federal level "financial reform" began in earnest after the October 1929 market crash and the onset of the Great Depression in the years that followed.  "Financial reform" is ever since a perennial issue, with banks, financial services firms, investors, regulators, legislators, media, gadflies, activists, and consumer and investor activists lined up on both (and "all") sides of the issues throughout the decades. 

The 2012 election season rhetoric is complicating the issues.  Keep in mind that Senator Chris Dodd and Representative Barney Frank, prime authors of Dodd-Frank will be gone from Capitol Hill in 2013 as the debate over rule-making continues -- with intense lobbying on both sides.

To bring these complex issues into clearer focus, AC created a special Hot Topics Section -- "Changing Financial Regulations." In this Hot Topic section we help you track news, commentary, research and actions taken in the critical areas of financial services reforms in the United States and throughout the world. Here are some recent highlights:

A Shock From JPMorgan Is New Fodder for Reformers
(Source: The New York Times) JPMorgan Chase’s $2 billion trading loss, which was disclosed on Thursday, could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business.

JPMorgan Sought Loophole on Risky Trading
(Source: NY Times)  Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington DC. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.

3 JPMorgan Chase execs may depart as CEO Jamie Dimon acknowledges ‘terrible, egregious mistake’ on trading
(Source: The Washington Post) The embarrassing losses at megabank JPMorgan Chase reverberated in Washington, Wall Street and on the campaign trail Sunday, with JPMorgan Chase chief executive Jamie Dimon acknowledging that the bank “made a terrible, egregious mistake” by dismissing worrisome signs earlier this year about the bank’s trading strategy.

Consumer bureau targets predatory lending
(Source: CNN) The federal government is considering a new set of rules on mortgage origination that it says would make the process simpler and more transparent for borrowers. The new rules will focus on mortgage points and fees, and will also include new standards for officials in charge of mortgage origination.

Spain stocks rebound on bank nationalization plan
(Source: AP) Spanish stocks rebounded last week while the pressure on the country's government bonds eased, as investors reacted positively to the government's confirmation that it will nationalize the country's fourth largest bank.

Lehman Bros. pay report brings calls for reform
(Source: Los Angeles Times) Calls for reforming Wall Street pay packages reverberated across Washington and the financial district following the disclosure that 50 Lehman Brothers employees were awarded nearly $700 million in the year before the investment bank collapsed.

EU talks on tougher bank capital rules go into overtime
(Source: AFP) European Union finance ministers struggled last week to find a common EU position on the Basel III regulation, which will require banks to increase their capital buffers to avoid a repeat of the massive bailouts they received in the 2008 financial crisis.

More Effective Governance At Financial Firms Is Crucial For Greater Financial Stability – New Group Of Thirty Report
(Source: Daily Markets) Further improvements in corporate governance at major financial services firms are crucial to securing greater financial stability, according to a new report issued by the Group of Thirty (G30), the international forum of public and private sector financial leaders.

This is just a sampling of the information in our Alert. Go here for the full text of this alert, and more information on Sustainability, and other Accountability related topics.

Keywords: Events, Media & Communications | Accountability | Accountability-Central | Carbon Footprint | Climate Change / Global Warming | Conservation | Corporate Social Responsibility | Eco Thinking | G&A Institute | Global Warming | Green | Green Business

CONTENT: Newsletter