Wednesday, May 16, 2012

Who Do These Clowns Think They Are?

Anyone who's been paying attention to the news over the last week is probably aware that, once again, some of the supposed experts on Wall Street really blew it again - especially at the massive Wall Street banking and investment firm of JP Morgan Chase.

What few Americans seem to understand is exactly what "it" these supposed finance wizards blew up - which is why we went directly to one of the people who understands the "it" of Wall Street finance, former Chief Economist to Vice President Joe Biden, Jared Bernstein.

As Mr. Bernstein explained it to us earlier this week, it helps to think of Wall Street as a giant casino - a concept we've used ourselves, previously. If you think of it that way, what Dimon and the clowns at JP Morgan did is both disgustingly simple and completely insane. In short, they made too many high risk bets - and stacked the deck against themselves.

To start with, Dimon and company made some giant bets on how corporate bonds were going to do, based on our recently improving economy. Then, to cover - or "hedge" - those bets, Dimon and company made another set of bets, in the opposite direction. So if the original bets they made were correct, JP Morgan Chase would win. But if the original bet went sour, the firm would still win, because of the hedged bets they'd made.

Think of it like betting on your favorite sports team. If your team wins, you win. Of course, if you also hedge your initial bets with secondary bets against your team, even if your team loses, you still win.

The initial problem JP Morgan had, as Mr. Bernstein explained it to us, is that after the first two series of bets, the idiots at JP Morgan set up one more level of bets - and that third set of bets, on top of the other two, is what cost them several billion dollars.

After all - if you've bet in both directions, you don't double down on only one of them. Which is, in an oversimplified way, what Dimon's company did.

The good - but somewhat scary - news is that even if JP Morgan Chase loses between two and four billion dollars, to them, it's not that much money. As several experts have pointed out, JP Morgan made $19 billion in profits in 2011. So if they lose a few billion here or there, to them, it's not that big a deal.

The big deal is that JP Morgan Chase isn't just an investment firm. It's also a bank - which means, as a bank, American taxpayers insure a massive amount of JP Morgan's money, through the FDIC. That is exactly the problem that Jared Bernstein, the Obama Administration, and Congressional Democrats tried to prevent by re-regulating Wall Street, through the Dodd-Frank reform law.

Not surprisingly, Wall Street's lobbyists have flooded Washington over the last two years, since Dodd-Frank was signed. They've overwhelmingly used Republican members of Congress to obstruct fully putting the law to work - which means that massive firms like JP Morgan are still putting American taxpayers at high risk of having to cover massively bad bets of these hybrid investment firms/banks.

There are those like Elizabeth Warren who have called for another version of the Depression-era Glass-Steagall law, which kept the regular deposit banks on one side of the law, and the Wall Street investment firms on the other. Under Glass-Steagall, the banks couldn't gamble with your money  - but the investment firms could. They had to use their own money - and they couldn't ask for a bailout.

Dodd-Frank, while not as strong as Glass-Steagall, would have nearly the same effect, if only Congressional Republicans and the Wall Street lobbyists would let the law take effect, like it's supposed to.

Right now, Dodd-Frank is like a manhole cover that isn't covering the hole. To blame the manhole cover for not doing its job would be dishonest and stupid - but that's exactly what the clowns on Wall Street, and their friends in the Republican Party, are doing.

As President Obama pointed out on The View yesterday, Dimon may be one of the smartest guys on Wall Street, but Dimon is still capable of making mistakes - including the big ones like we found out about this week. If we don't protect ourselves from the clowns on Wall Street, we can't be surprised at the outcome.

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