Update 2012-05-13 11:38 PDT:
Again, this isn’t news – we’ve heard this before:
“If investment professionals won’t work to correct the flaws of finance, who will?” – Tom Brakke
More from Josh Brown:
And Above the Market:
Update 2012-05-11 20:30 PDT: You just can’t make this stuff up:
“JPMorgan Chase CEO Jamie Dimon says he does not know whether the bank broke any laws in the surprise $2 billion loss by one of its trading groups.”
…
“Dimon says the bank was ‘sloppy’ and ‘stupid’ in its handling of the trades.”
JPMorgan Chase CEO: I Have No Idea Whether We Broke The Law, Huffington Post
This blog post started out as a review of Josh Brown’s Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments. Josh (@reformedbroker) is one of the best financial bloggers / tweeters on the planet. I’m a regular reader of Josh’s blog, so I went by to see what’s new, and discovered this post. Followed by this post. Which led me to this post on Kid Dynamite’s World.
If you follow my Scoop.it profile, you’ll know that I’m curating a topic about Algorithmic Trading and Market Microstructure. I’m trying to capture opinions on both “sides” in the “debate” over whether high-frequency trading is a good thing or not. I haven’t formed an opinion of my own, except to note that the mathematics are sufficiently complex and the stakes sufficiently high that accountability and transparency are vital. That to me is what computational journalism is about – opening up the “black boxes”, or, as the late Mike Wallace put it, “Comforting the afflicted and afflicting the comfortable.”
So when the story broke yesterday that JPMorgan Chase had disclosed $2 billion in trading losses, and I started following links from financial bloggers, I wasn’t exactly shocked by what I was reading. Combining the two notable aspects of contemporary finance – algorithmic high-frequency trading and systemically dangerous institutions like JPMorgan Chase – led me to the conclusion that, as my mother would have put it, “Wall Street is too smart for their own damn good.”
The problem is, though, is that Wall Street is not only too smart for their own good, they’re too smart for your own good too. When the CEO of JPMorgan Chase says things like, “These were egregious mistakes…They were self-inflicted and this is not how we want to run a business”, I don’t see how he can expect me to trust him.
The problem is that we keep hearing this story again and again. I’ve been interested in computational finance and trading systems since 1982. In that time, we’ve had the Crash of 1987, Long-Term Capital Management, rogue traders too numerous to count, the disasters of 2007 – 2008, millions of MF Global funds stolen from customers and lost in bad derivatives bets, banks raising fees and laying off thousands of customer-facing employees, and now this. A chief executive of a major financial institution was forced to admit that supposedly “smart people” working for the bank had lost $2 billion trading derivatives, and that he didn’t know whether that was the full extent of the losses!
My mother had another saying: “If what you’re doing isn’t working, stop doing it!” I know Josh will come up with a much better rant on this subject than I can, but if you’re the CEO of a bank and you don’t even know whether what you’re doing is working or not, that’s an entirely different ball game! That’s plain-old garden variety incompetence. As Susan Scott so eloquenty put it,
“I don’t know about you, but I have not yet witnessed a spontaneous recovery from incompetence.” – Susan Scott, Fierce Conversations.
Am I saying that Jamie Dimon is incompetent? In a word, “Yes”.
