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Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk
bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, inventory management, job-hopping, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, shareholder value, sovereign wealth fund, the payments system, too big to fail
Traders at a range of investment and megabanks were found to have manipulated crucial interest rates and foreign currency rates, resulting in the Libor and FX affairs. In spite of all the internal controls and risk limits, another rogue trader at the London headquarters of the Swiss bank UBS managed to lose his bank billions of pounds. The megabank HSBC was caught laundering drugs money while several banks were fined for ignoring sanctions against Iran and Sudan. In 2012, a trader known as the London Whale lost over $6 billion at JP Morgan. And for years now across Europe, small and medium-sized companies, pension funds, utilities, municipalities and other public institutions have been discovering that the complex financial products they bought from London-based investment bankers have turned ‘toxic’. The list of scandals gets longer with every passing year, and who knows what else has been kept under wraps?
My granddad was a diligent milkman and my dad a diligent policeman. I was just being diligent in an industry that throws its money around.’ Complexity vastly increases the scope for misuse and even abuse. Whether the crash of 2008 was ultimately down to that or to a huge misunderstanding – Dr No or Dr Nitwit – is still the subject of heated discussion. But no such controversy exists surrounding the scandal caused by the trader known now as ‘the London Whale’. In the spring of 2012, a trader at the London offices of JP Morgan by the name of Bruno Iksil managed with his small team to run up a $6.2 billion loss. The nickname refers to Iksil’s humongous positions – in other words he had put a vast amount of the bank’s capital at risk. Iksil was based in the City but JP Morgan is an American bank so the Senate’s Permanent Subcommittee on Investigations began to dig into this ‘monster loss’.
His answer was simple: ‘Sell the forward spread and buy protection on the tightening move, use indices and add to existing position, go long risk on some belly tranches especially where defaults may realise, buy protection on HY and Xover in rallies and turn the position over to monetise volatility.’ Could you tell us what this means? the committee members asked the JP Morgan risk managers. Nobody was able to do so. JP Morgan is considered the bank with possibly the best risk management in the world. In the year before his whale-like loss, Iksil’s pay came to $7 million. Iksil didn’t break any laws and has never been prosecuted. The London Whale cost JP Morgan a lot of money but banks can also use complexity as a deliberate tool for their own purposes. I spoke to a restructurer who advises small companies in financial difficulty so that they can meet their debt obligations to his bank. He often felt overwhelmed by the complexity of the products and instruments his bank had sold to ‘his’ companies. ‘Sometimes it looks like witchcraft to me,’ he said.
Geek Sublime: The Beauty of Code, the Code of Beauty by Vikram Chandra
Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Apple II, barriers to entry, Berlin Wall, British Empire, business process, conceptual framework, create, read, update, delete, crowdsourcing, East Village, European colonialism, finite state, Firefox, Flash crash, glass ceiling, Grace Hopper, haute couture, iterative process, Jaron Lanier, John von Neumann, land reform, London Whale, Paul Graham, pink-collar, revision control, Silicon Valley, Silicon Valley ideology, Skype, Steve Jobs, Steve Wozniak, theory of mind, Therac-25, Turing machine, wikimedia commons, women in the workforce
Sebastopol, CA: O’Reilly Media, 2007. Kindle edition. Scheffer, Lou. “Programming in Malbolge.” Accessed June 11, 2013. http://www.lscheffer.com/malbolge.shtml. Schelling, Andrew. The Cane Groves of Narmada River: Erotic Poems from Old India. San Francisco: City Lights Books, 1998. Schlesinger, Jill. “JPMorgan Chase Earnings: ‘London Whale’ Cost $5.8 Billion.” CBS Money Watch, July 13, 2012. http://www.cbsnews.com/8301-505123_162-57471697/jpmorgan-chase-earnings-london-whale-cost-$5.8-billion/. Scott, Alec. “Lessons from Canada’s Silicon Valley Diaspora.” The Globe and Mail, February 23, 2012. http://www.theglobeandmail.com/report-on-business/rob-magazine/lessons-from-canadas-silicon-valley-diaspora/article535544/?service=print. Shulman, David. “The Buzz of God and the Click of Delight.” In Aesthetics in Performance: Formations of Symbolic Construction and Experience, edited by Angela Hobart and Bruce Kapferer, 43–63.
The trouble is that in Excel there is no way to trace where your data come from, there’s no audit trail (so you can overtype numbers and not know it), and there’s no easy way to test spreadsheets … The biggest problem is that anyone can create Excel spreadsheets—badly. Because it’s so easy to use, the creation of even important spreadsheets is not restricted to people who understand programming and do it in a methodical, well-documented way.27 Sloppy Excel-wrangling can lead to some very bad decisions, as in the “London Whale” trading disaster of 2012, which caused the financial services firm JPMorgan Chase a loss of approximately six billion dollars; the company’s internal investigation listed as one of the contributing factors a financial modeling process which required cutting and pasting data through a series of spreadsheets. One of these spreadsheets contained a formula dividing by the sum of some numbers instead of their average.28 The day that millions will dash off beautiful programs—as easily as with a pencil—still remains distant.
“Hype Cycle Research Methodology.” 21. “GitFaq—Git SCM Wiki.” 22. Wolfcore [pseud.], comment on “Git Is Simpler Than You Think.” 23. “Whatever Happened to Programming?” 24. Campbell, “Where Does One Go to Find the Current ‘Good’ Books to Read? (Or Blogs?)” 25. Ensmenger, The Computer Boys Take Over, 88. 26. Kwak, “The Importance of Excel.” 27. Ibid. 28. Ibid.; Schlesinger, “JPMorgan Chase Earnings: ‘London Whale’ Cost $5.8 Billion.” 29. Oliver, “Why I Still Love CQRS (and Messaging and Event Sourcing).” 30. Ibid. 31. Zihotki, “Raven & Event sourcing.” 32. Chakrabarti, “Arguing from Synthesis to the Self: Utpaldeva and Abhinavagupta Respond to Buddhist No-Selfism,” 203. 33. Ibid., 209. 34. Ibid., 211. Chapter 7: The Code of Beauty: Abhinavagupta 1. Gnoli and Abhinavagupta, The Aesthetic Experience According to Abhinavagupta, 55. 2.
Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, asset-backed security, Atul Gawande, bank run, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, cloud computing, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks
Murky accounting lets a mountain of leverage and misallocated capital accumulate. These dynamics persist. Consider, for instance, JP Morgan Chase’s “London Whale” trades, which lost the bank billions of dollars. In 2012, the bank’s Chief Investment Office (CIO) had about $350 billion in excess deposits to manage, and devoted some to a very risky synthetic credit portfolio (SCP). The CIO asserted that it had “five key metrics and limits to gauge and control the risks associated with its trading activities.” But when several of those metrics indicated unacceptable losses, managers decided to change the metrics.105 The Senate Report on the London Whale helpfully encapsulates just how suspect this practice was: The head of the CIO’s London office . . . once compared managing the Synthetic Credit Portfolio, with its massive, complex, moving parts, to flying an airplane.
Note, however, political scientist Daniel Carpenter’s contention that “there is value in studying a singular process not because it stands in for so many others, but because it influences so many others.”165 Given how wealthy the boom years made so many in finance, and how unscathed the bust has left them, few aspiring traders and bankers would think of them as a cautionary FINANCE’S ALGORITHMS 137 tale. And trades like the London Whale indicate that years after the crisis, critical models are just as manipulable (and regulators as feckless) as they were in the bubble years. Until fi nance practices in general are routinely as scrutinized as those prevalent in the bubble years, we have little reason to think matters have changed all that much. Indeed, they may even be getting worse. Moreover, it’s hard to credit demands for representativeness in a field as opaque as contemporary fi nance.
When a CEO can step up to the witness stand and disclaim understanding of core actions of his own firm on the grounds of their complexity, it’s hard to imagine how basic legal principles of responsibility and fiduciary duty can endure. Some finance experts argue that the modeling of transactions has become so complex that disingenuous managers can always field a 174 THE BLACK BOX SOCIETY phalanx of quants to hide deals’ dangers. Moreover, algorithmic “control” systems, which are supposed to deter manipulation of risk models automatically, may be easier to manipulate than human experts— recall how JP Morgan Chase’s London Whale traders moved the goalposts to buy time for their risky strategies.125 But without actually reviewing the fine details of transactions, we’ll never even be able to have a coherent argument about such issues. Judge Rakoff actually tried to force such a review in one case. In 2011, he refused to accept a $285 million settlement proposed between Citigroup and the SEC regarding the bank’s role in promoting suspect securities.
How to Kick Ass on Wall Street by Andy Kessler
Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk
This is why firms put trading limits on traders or cumulatively trading desks. There is a firm-wide limit, known as VaR or Value at Risk – the most a firm could lose on any given day. The better you get trading, the higher your personal limit and the bigger chunk of the firm’s capital you get to play with and turn into more money (or end up as a smoking hole in the ground, see Nick Leeson and JP Morgan’s London Whale.) Bond trading is a little different, but not much. Again, trading government bonds and munis and corporate debt is mostly facilitating trades for clients. But there is no exchange. These are negotiated transactions. It’s you against the client, even though you are providing a service for the client. Your job is to get the best price for your firm. Some view this as screwing the client. Very confusing for outsiders.
Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland
Albert Einstein, algorithmic trading, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, conceptual framework, corporate governance, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, stem cell, Steve Jobs, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy
Rules are only as good as the supervisors who enforce them, and good supervisors look beyond the letter of the rules to their spirit.” Eight months later, Dimon inadvertently bolstered Carney’s case. On May 10, 2012, JPMorgan revealed that a trader known as the London Whale had made a bet on credit derivatives that went sour, leading to a loss of at least $2 billion, and which analysts close to the bank believed could rise to $6 billion. Wall Street, led by Dimon, had spent the previous three years warning that Washington’s regulatory overreach was stifling the financial system. The London Whale’s trades suggested that the real danger was still too much risk. As Congressman Barney Frank put it, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today
., 86, 93 Levchin, Max, 183 Levy, Frank, 17 Levy, Gus, 286–87 Lewis, Michael, 69, 129 Li, Stella, 32–33 Libya, 215 Lightyear Capital, 142 Lin, Alfred, 233–34 Lin, Jeremy, 140 Lincoln, Abraham, 39 Lincoln, William, 98 Linden, Greg, 24–26 Lindert, Peter, 12, 16, 43 Lindsay, Michael, 43 LinkedIn, 141, 183–85 LinkExchange, 234 Li Peng, 208 Lithuania, 149 Li Xiaolin, 208 Li Xiaopeng, 208 LLC Smart Group, 191 Lloyd W. Dinkelspiel Award, 181 lobbying, 222–24, 247, 260–62, 273 Loeb, Dan, 242 London, City of, 211, 214, 217, 218, 219, 227 London School of Economics, 227 London Whale, 260 Long Depression, 7, 9, 41 long tail, 100, 126–27 López-Calva, Luis-Felipe, 197 Lora, Eduardo, 31 Los Angeles Times, 76 lucky job club, 175–76 Luddites, 12–13, 96–97 Ludicorp, 172 Lu Guanqiu, 204 Lumière, Louis and Auguste, 98 Luxos, 46 luxury goods and services, 102, 104, 106 Mac 400 electrocardiograph, 157–58 Macpherson, Elle, 74 Maddison, Angus, 8–9, 16 Madonna, 107 Magna Carta, 148 Mail.ru, 66, 163 Maira, Arun, 201 Major, John, 148 Malaysia, 149 managerial class, 131–36, 138 Mankiw, Greg, 268 Manning, Alan, 24 Manny, The (Peterson), 1–2 Mantle, Mickey, 108–9 Maples, Mike, 165 Marron, Donald, 142 Marshall, Alfred, 50, 95–97, 99, 101, 105, 108–12, 116, 118–19, 123, 131 Marshall, George C., 181 Marshall Scholarship, 181–82 Martin, Bradley, 6–7, 8, 14, 36, 37, 114 Martin, Cornelia, 6–7 Martin, Paul, 216–17, 250–51 Martin, Roger, 116–17, 123, 135 Marx, Elisabeth, 63 Marx, Karl, 42, 75, 89, 118, 284 Marxism, 14 material power index (MPI), 81 Matthew, Saint, 122–23 Matthew effect, 123, 126, 127–28 Mazumdar-Shaw, Kiran, 33 McCartney, Paul, 109 McFaul, Mike, 144 McKinsey, 52, 60, 121 Bloomberg/Schumer report by, 211–15, 227 Global Institute, 165–66 Means, Gardiner, 131–34, 138 Mediaite, 164 Mellin, Joe, 172 Merrill Lynch, 102, 119, 214–16 Merton, Robert, 50, 123–24, 127, 175 Mexico, 193–98 Slim and, 195–96 Meyer, Christopher, 222 Microsoft, 171, 176, 191, 234, 280, 282, 283 middle class, 240–41, 285 Midler, Bette, 127–28 Milanovic, Branko, ix–x, 16, 26, 194–96 Mill, John Stuart, 43 Miller, Steve, 27 Milner, Yuri, 52, 163–64, 171 Mindich, Eric, 271 minimum wage, 17, 91 Mir Osman Ali Khan, 191 Mishra, Prachi, 222, 223 Missner, Marshall, 124 Mittal, Aditya, 59, 161–62 Mittal, Lakshmi, 161, 192 Mittal Steel, 161, 191–92 Mokyr, Joel, 16–17 Monaco, 63 Moneyball (Lewis), 129 Monitor Group, 222, 227 Morgan, J.
The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi
banking crisis, Bernie Madoff, butterfly effect, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty
Thus despite the existence of a nationwide epidemic of fraud and white-collar crime that could have and should have been investigated by powerful federal regulators like the OCC, the OTS, the Federal Reserve, the SEC, the CFTC, and other bodies, the first and only prosecution of a bank to take place in America came out of a simple report filed in a common city police station. Why Abacus? Why not, say, JPMorgan Chase? Jamie Dimon’s megabank was caught up in dozens of scandals during the same period covered by the Abacus investigation—everything from money laundering to energy price manipulation to mismanaging customer funds to robo-signing to antitrust violations to charging excess overdraft fees to hiding billions of dollars of losses in the infamous “London Whale” episode, in which the bank hid the fact that one of its lunatic traders in Europe had nearly destroyed the firm by doubling and tripling down on exotic bets on corporate credit. All told, in just the three years since Vera Sung stumbled into Ken Yu’s real estate closing, Chase—again, a Covington & Burling client—had paid out more than $16 billion in regulatory settlements. The $16 billion represented an incredible 12 percent of its net revenue during that time period.
Because, thanks to all these various factors, executives from giant multinationals simply don’t end up in the prison population, law enforcement soon starts to operate on the reverse principle, that those huge companies are not the places where jailable crimes take place. So even white-collar investigators start to look for targets elsewhere, like at smaller businesses. A commissioner for the SEC, Daniel Gallagher, even talked about this out loud, in April 2012, when he gave a speech in Denver, Colorado. This was right in the middle of the Chase “London Whale” story and just before the LIBOR story, the HSBC story, and a half-dozen other financial scandals of various degrees of horribleness blew up. Despite all this, Gallagher came out with an interesting take on where to look for white-collar crime. “It is critically important that our enforcement program be extremely efficient,” Gallagher said. “Recognizing that it is unrealistic to imagine we will ever achieve a one-to-one correspondence between incidents of misfeasance and SEC Enforcement staff, we’d better plan to do everything we can to increase our hit-rate per investigation opened, and should commit our staff resources carefully, which is to say, consciously.”
Holder also talked about raising the statute of limitations on Wall Street cases, to give themselves another shot at all the crimes they ignored in the last five years, warning that those who committed crimes are “not out of the woods yet.” Hedge fund villain Stevie Cohen is being put out of business. As this book goes to press, criminal cases are reportedly coming against the megabank Chase for the “London Whale” episode and perhaps other misdeeds, including some related to its status as Bernie Madoff’s banker. At the very least, on the federal level, officials seem to recognize the political necessity of saying these things out loud, and this has to be in very large part due to the public outrage over the lack of Wall Street prosecutions. Decisions like the HSBC settlement were blunt bureaucratic calculations, where the risk of losing and/or disrupting the economy was weighed against the benefit of receiving $1.9 billion in settlement money.
The Best Business Writing 2013 by Dean Starkman
Asperger Syndrome, bank run, Basel III, call centre, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Exxon Valdez, factory automation, full employment, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, income inequality, jimmy wales, job automation, late fees, London Whale, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, price stability, Ray Kurzweil, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Steve Jobs, Stuxnet, the payments system, too big to fail, Vanguard fund, wage slave, Y2K
The Tale of a Whale of a Fail Dealbreaker Certain things just can’t be explained in the mass-market press, and the London Whale trade that caused billions of dollars in losses for JP Morgan is one of them. For one thing, JP Morgan refused to offer any details about what its trading desk did—and for another, what its trading desk did was so mind-bendingly complex that few journalists could even understand it, and none could explain it in a way that the average newspaper reader could comprehend. This is where the blogosphere comes in. Matt Levine, an equity-derivatives geek turned blogger, understands complex concepts and can talk about them in a conversational and even funny way. This stuff isn’t easy. But for people who wanted to really get up to speed on a hugely important story, there was only one place to turn. Hi! Would you like to talk about the London Whale? Sure you would. The amount of misunderstanding of our poor beleaguered beluga is staggering, so I figured we could try to embark on a voyage of discovery together.
Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative ﬁnance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War
The house of Morgan, broken up by Congress in 1935, was once again a business spanning retail, commercial and investment banking activities. Dimon successfully steered his organisation away from the worst excesses of the years to 2007 and emerged with a reputation unparalleled in the industry. But in 2012 Dimon’s image would be tarnished when his bank was forced to disclose large losses on so-called hedging activities. Bruno Iksil, the ‘London whale’, had made huge and unsuccessful bets in derivative markets. Barclays’ Diamond would be engulfed by a scandal invoking false disclosure of his bank’s cost of funds – the LIBOR scandal – and the Bank of England enforced his resignation. Politicians and public began to suspect that the recurrent crises of the finance sector were not simply the result of unexpected and unpredictable events, but symptomatic of deep-seated problems with the culture of the financial services industry.
The term came into popular language after Nick Leeson, a 28-year-old employee in the Singapore office of the venerable London investment bank of Barings, vanished overnight from his desk. The losses he had incurred led to the bankruptcy of the bank, and jail for Leeson. More recent ‘rogue traders’ include Jérôme Kerviel, that former employee of the French bank Société Générale (now in jail), who was ordered to repay €4.9 billion, and J.P. Morgan’s ‘London whale’ (Bruno Iksil), whose irregular trading was said to have lost the US bank $6 billion. Perhaps the largest of such excesses were those reported by ‘Howie’ Hubler, a once respected trader at Morgan Stanley, whose activities in 2007 were reported to have resulted in losses of $9 billion.23 A rogue trader is one who has run out of money, or scared his employer, before his number came up. Hubler, like the other rogue traders, had followed a martingale strategy: he increased the size of his bets on collateralised debt obligations based on mortgage-backed securities in a collapsing market.
3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative ﬁnance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund
He added, “or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?”13 Indeed, the Volcker Rule was changed, thanks to the financial lobby, to allow for what’s called “portfolio hedging,” meaning that banks can still do risky trades, as long as they are in the interest of protecting their existing assets rather than making new money. The problem is how to tell the difference. Even the heads of the banks often can’t. Remember the 2012 “London Whale” trading debacle, in which J.P. Morgan suffered a $6 billion loss when synthetic derivatives trades went awry? The write-down represented a major loss of face for Jamie Dimon, who had been nicknamed “the Teflon banker” for his reputation for managing risk and had lobbied hard against reregulation after 2008, particularly against the Volcker Rule. (J.P. Morgan executives and representatives met with federal regulators twenty-seven times on the issue between July 2010 and October 2011.)14 Famous for his command of banking detail, Dimon was forced to eat a huge helping of humble pie following the incident, which he had at first dismissed as no big deal, admitting only later that the offending trade had been “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”
Morgan executives and representatives met with federal regulators twenty-seven times on the issue between July 2010 and October 2011.)14 Famous for his command of banking detail, Dimon was forced to eat a huge helping of humble pie following the incident, which he had at first dismissed as no big deal, admitting only later that the offending trade had been “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” It’s hard to believe that J.P. Morgan’s chief investment office, which made the trades, wasn’t designed to be a profit center, given that its head, who was let go from the bank following the London Whale event, earned $15 million a year. But even if you buy that claim, the case underscores that any kind of portfolio hedging carries what’s known as basis risk. In the case of a huge bank like JPMorgan Chase, which is several times as big as the world’s largest hedge funds, its very size is bound to create a market-moving event when it takes a position large enough to protect itself. “If you are the market,” one risk expert told me, “you can’t hedge it.”15 A MERRY-GO-ROUND FOR THE 1 PERCENT The power of the financial industry within our political system isn’t exerted only through direct and indirect lobbying on the part of bankers and those they employ, but also via regulators and administration officials themselves, many of whom go through the revolving door between Wall Street and Washington multiple times throughout their careers.
bank run, barriers to entry, bash_history, Bernie Madoff, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, prediction markets, price discovery process, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day
Today’s trading algorithms evaluate the risk of a position before the trade is made, while the trade is executing, and every millisecond thereafter. Many firms have multiple redundant systems checking risk at all times. The “traders” are actually risk managers, continually responding to mini alarms that signal the slightest anomaly. There are no hidden positions – like the ones that caused the $6 billion “London Whale” loss for JPMorgan – because all the trades automatically flow into these risk management systems, instantly double-checked against redundant data feeds from the exchanges. Rogue traders have no room to hide risky positions. Unlike banks trading opaque financial instruments that only a few insiders understand, high-frequency firms transact in liquid, well-understood exchange-traded securities.
The Payoff by Jeff Connaughton
algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, short selling, Silicon Valley, too big to fail, two-sided market, young professional
New research suggests that high-frequency trading exacerbates volatility. But whatever the causes of the Dow’s daily rollercoaster ride, millions of Americans are getting off it. Ordinary investors withdrew more than $135 billion from domestic stock mutual funds in 2011. Now, as I write in the spring of 2012, the azaleas and banking scandals are in bloom, including J. P. Morgan for failing to supervise complex derivatives positions by the “London Whale,” one of its traders, leading to billions of dollars in losses. And worse, Barclays and other banks have been exposed for manipulating LIBOR, which sets rates for trillions of dollars of financial instruments, leaving the credibility of the banking community in tatters. In the summer of 2012, the stock markets went haywire again when Knight Capital was battered by its own software glitch and in 45 minutes lost $440 million.
What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson
Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, Flash crash, income inequality, index fund, invisible hand, London Whale, Long Term Capital Management, moral hazard, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks
Consider, for example, the list of major regulatory challenges faced by JP Morgan Chase that were announced in just one month, August 2013. The Federal Housing Finance Agency sued the bank, alleging it fraudulently claimed that the loans behind some $33 billion in mortgage derivatives met underwriting guidelines. The Securities and Exchange Commission and the US Attorney’s Office were prosecuting the bank for its public statements about a $6 billion trading loss fancifully nicknamed “the London whale” after the market heft of the trader who caused the blowup. The SEC also was investigating how the bank came to hire the children of well-connected Chinese in a potential bribery scheme. The US Attorney continued to explore the bank’s potential manipulation of the energy markets, even after the bank paid a $410 million settlement to the US energy regulator, but did not admit or deny criminality in that situation.
asset allocation, Bernie Madoff, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, Mark Zuckerberg, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise
After all, many men are quite conservative with money (I know, I’m married to one of them) while many women are quite capable of engaging in risky investment strategies, being greedy, and committing out-and-out theft. This is something many women’s cheerleaders would rather not acknowledge. But how then to account for Lehman Brothers CFO Erin Callan, who went on television less than a week before the venerable bank crashed to assure investors that all was right with her books; JPMorgan Chase’s Ina Drew, the supervisor of the infamous “London Whale” trader who lost the bank billions of dollars; or alleged Bernard Madoff accomplice Sonja Kohn who, according to a lawsuit filed against her by Madoff bankruptcy trustee Irving Picard, “masterminded a vast illegal scheme”? Embracing theories about women, money, emotion, and risk also ignores women who are good with money in ways traditionally viewed as male, such as Mary Anne and Pamela Aden, two sisters who made their reputation as stars of the commodities trading world with astute but risky calls on gold over a period of decades.
Deep Sea and Foreign Going by Rose George
Admiral Zheng, air freight, Albert Einstein, bank run, cable laying ship, Captain Sullenberger Hudson, Costa Concordia, Edward Lloyd's coffeehouse, Exxon Valdez, failed state, Filipino sailors, global supply chain, Google Earth, intermodal, London Whale, Malacca Straits, Panamax, pattern recognition, profit maximization, Skype, trade route, UNCLOS, UNCLOS, urban planning
List of items accessed December 2012 via http://www. scran.ac.uk/packs/ exhibitions/learning_materials/webs/ 40/articles.htm 5 75 per cent of right whales have been or are entangled Scott D. Kraus and Rosalind M. Rolland, (eds.), The Urban Whale: North Atlantic Right Whales at the Crossroads, Cambridge, MA: Harvard University Press, 2007, p.382. 6 Enormous Carnivores, Microscopic Food Ibid., p.140. 7 A whale sailed through the middle of London Euan Ferguson, ‘After a day of struggles, the London whale dies a lonely death’, Observer, 22 January 2006. – 67 right whale carcasses Kraus and Rolland, op. cit., p.410. 8 A foghorn-like signal Michael Jasny, ‘Sounding the Depths: The rising toll of sonar, shipping, and industrial ocean noise on marine mammals’, Natural Resources Defense Council (NRDC), November 2005, p.3. – 800 species of fish use hearing ‘In 1962,’ Slabbekoorn writes, ‘Rachel Carson wrote about a “silent spring” in the context of the detrimental impact of the use of pesticides on singing birds.
Capitalism: Money, Morals and Markets by John Plender
Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck
In September 2013, Jamie Dimon, chief executive of JPMorgan Chase, America’s biggest bank, sent a memo to staff revealing that the bank had added a whopping 3,000 employees to bolster controls, devoted 500 people to fulfilling the Federal Reserve’s stress tests, and given staff 750,000 hours of training on compliance matters. Whether all this effort will be productive is moot. A failure of internal controls at JP Morgan that led in 2012 to the loss of around $6 billion in a London trading operation – the so-called London whale scandal – demonstrated that neither Jamie Dimon nor his fellow top executives knew what was going on inside the bank. Given that Mr Dimon is generally reckoned to be the most accomplished banker of his generation, there could be no clearer indication that today’s financial behemoths are too big and too complex to manage. At the same time, the revelation in 2013 that JP Morgan had been obliged to put aside a $23 billion reserve for litigation arising from mis-selling mortgages – a euphemism for duping people – underlined the depressing fact that the culture of the banking industry was fundamentally rotten.
Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, moral hazard, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk
Unlike lenders or depositors, shareholders know their investment isn’t safe and they don’t panic if its value declines. The beauty of capital is that it works no matter what causes the loss. Banks’ risk management seeks to protect against adverse movements in financial prices, excessive exposure to particular borrowers, a counterparty reneging on a deal, rogue traders and criminals. Yet it regularly fails. In 2012, J.P. Morgan Chase & Co. learned that a trader nicknamed “the London whale” had taken on huge derivatives positions in what seemed to be a flawed attempt to hedge the bank’s positions. The loss eventually grew to a staggering $6.2 billion. Yet the loss never threatened J.P. Morgan’s survival, thanks to the billions of dollars in capital it already had, some of it raised under pressure by regulators. Capital has, correctly, become the central tool in regulators’ drive to reinforce the financial system against another crisis.
How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester
asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, working poor, yield curve
One of the quick fixes sometimes suggested for the excessive risks in modern banking is to make the banks unlimited liability partnerships. That wouldn’t work for retail banking, where there is a strong social interest in keeping banks lending, but it might be a viable structure for investment banks, and would certainly make their risks more in line with their rewards. The British bank C. Hoare and Co. is unusual in being an unlimited liability bank, wholly owned by one family. London Whale The nickname of Bruno Iksil, the trader at J. P. Morgan’s London branch who was paid $7.32 million in 2010 and $6.76 million in 2011, and then in 2012 lost $6.2 billion betting on credit default swaps. The first response of Jamie Dimon, chairman and CEO of J. P. Morgan, was to describe the affair as “a tempest in a teacup,” until the scale of the losses became apparent. The thing that’s interesting about his nickname is that “whale” is a term from gambling: a whale is a punter who gets free hospitality from casinos because he (usually a he) bets such huge sums.
algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk
Financial interdependence and personal liability—forcing those in the partnership to disproportionately share in fines, settlements, compliance or risk management failures, or certain losses with shareholders—might make risk management and ethical standards a higher priority and reemphasize a social network of trust while creating an environment for dissonance.7 In discussing the ramifications of the personal liability of executives having been limited, a retired Goldman partner rhetorically questioned, why is it that when one person or a handful of senior persons at the firm does something bad that costs the shareholders and possibly puts the public at risk, that one person gets fired (maybe with some clawbacks of compensation) but the managing directors of the entire firm don’t have their compensation significantly affected? Another person I interviewed suggested that if Goldman partners collectively had to disproportionately pay the $550 million settlement with the SEC out of their bonus pool, or if J.P. Morgan had a partnership structure and the partners together had to disproportionately pay the losses from the “London whale,” perhaps they collectively would take stronger action to prevent such behavior. He pointed out that when Goldman paid settlements related to Robert Maxwell, all the partners paid, not just the one responsible for the relationship, and the firm went back retroactively to those who were partners at the time for payments. Enacting individual clawbacks that hold one person accountable has taken away the emphasis on organizational elements of financial interdependence and social networks of trust by which the executives could be holding each other accountable and self-regulating.
Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative ﬁnance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population
To put that in context, he was suggesting that occurrences that his financial model suggested would only happen once in a period of many trillions of lifetimes of the universe, were actually happening every day. The ‘fatal flaw’ of VaR, as Haldane argues, is that it is silent about the tail risk. A trader could be given a so-called 99 per cent VaR limit of $10 million, but VaR would be blind to the trader’s construction of a portfolio that gave a 1 per cent chance of a $1 billion loss. J. P. Morgan itself discovered in May 2012 that the ‘London Whale’ corporate credit portfolio that was assessed with a 95 per cent VaR of $67 million in early 2012 had lost them $2 billion within weeks. In its February 2008 annual results, RBS calculated a 95 per cent VaR on its trading book at £45.7 million. The disastrous purchase of the toxic asset-laden ABN Amro had increased that measure by just £6 million. A footnote did warn: ‘VaR using a 95 per cent confidence level does not reflect the extent of potential losses beyond that percentile.’