JP Morgan has set aside another $1 billion to cover penalties for manipulating the foreign exchange market. The bank has paid out billions over regulatory violations and lawsuits in the last two years from the “London Whale” trading scandal to fraudulent sales of mortgage backed securities.
Meanwhile, Jamie Dimon, Wall Street’s darling, remains firmly in command of the fraud infested bank. It doesn’t seem to bother investors how banks make money, as long as the returns keep rolling in. Fines and penalties are merely a cost of doing business.
Back in the days when people were stigmatized for committing fraud, Dimon would have been out the door years ago. Now he is rewarded with oversize bonuses, stock options, and tons of perks. And the fines that JP Morgan has paid out have not gone to the victims; they have gone to the regulators instead.
Too big to fail has now become too big to jail.
Banks, investment firms and other Wall Street companies no longer worry about risk. Ever since Alan Greenspan, former head of the Federal Reserve, came to the rescue of Long Term Capital, and Hank Paulson, former head of the Treasury, came to the aide of his former company, Goldman Sachs, risk is not an issue. Why?
Because the players have learned that taxpayers will backstop their bad bets. If they bet correctly they win, and if they bet incorrectly the government will foot the bill. So why worry? Today there is more risk exposure on the books of the major players than before the 2008 meltdown. According to the U.S. Office of the Comptroller of the Currency, U.S. banks and savings institutions held $222 trillion worth of derivatives in the second quarter of 2012.
In 2008, derivatives were used to conceal credit risk from third parties while protecting derivative counterparties, which contributed to the financial crisis of 2008. Derivatives are basically bets between companies and banks that are designed, in essence, to be insurance policies. They are unregulated, complex, and should be of concern to world leaders that the notional value of derivatives, worldwide, is 20 times the size of the global economy.
Presently, there is derivative exposure of $1.2 quadrillion in the world. That’s a one followed by 15 zeros, or for those who remember their high school algebra 10 to the 15th power. Put in another way, 1,000 times a trillion. The problem with these multifaceted contracts is that they often involve highly leveraged bets. A small change in the underlying asset or in market conditions can cause an enormous loss.
But don’t fear, when the next crisis comes out of nowhere, as it usually does, we taxpayers will foot the bill for the Wall Street gurus who didn’t see it coming. Until we stop supporting flagrantly speculative, highly leveraged bets by investment firms, the gambling will persist. Unfortunately, the regulators don’t understand these complex contracts and the lawmakers can’t afford to stop taking donations from the bookmakers. Perhaps it will take a crisis, that even the Fed can’t control, to clean up the mess through the natural process of those making foolish bets going out of business.
John Lawrence Allen, a nationally recognized legal expert, represents investors nationwide in securities arbitration. Mr. Allen’s second book, “Make Wall Street Pay You Back,” was just released. For more information visit www.MakeWallStreetPayYouBack.com.
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