Tuesday, May 15, 2012

JP Morgan Chase's $2 billion trading loss: Gambling with other people's money, was not in the best interest of the shareholders

A partial transcript from Nightly Business Report on Monday:

GHARIB: Now in light of JPMorgan’s big trading loss that we’ve been talking about, the issue of boosting bank regulation is back. Tonight’s commentator believes the banks themselves could do more to help restore faith in Wall Street. Here’s Simon Constable. He’s columnist at “The Wall Street Journal.”

SIMON CONSTABLE, COLUMNIST, THE WALL STREET JOURNAL: By now I’m sure you’ve heard about JPMorgan’s $2 billion trading loss and the screams of outrage and the calls for more banking regulation. Maybe regulation is part of the problem but not all of it. What you may not know is that at least part of the problem comes from what economists call agency cost, the cost of having someone run the business who doesn’t own it. The owners, JPMorgan (NYSE:JPM) shareholders, have goals that are vastly different from those of the employees, in this case the traders. Employees want big bonuses. Shareholders want steady profits.

The fact is the people at JPMorgan (NYSE:JPM) who made the bad bets and lost all that money were gambling with someone else’s money and were doing so in a way that was not in the best interest of the shareholders.
If the trades do well, they get huge bonuses. If the trades go bad, the shareholders suffer and maybe, just maybe, the traders lose their jobs. If the traders were the owners or were heavily supervised by the owners then in all likelihood, crazy bets wont get made.
In fact decades ago that’s how it was on Wall Street. Brokerage houses were partnerships. If you were trading, you were doing so with your boss’s money. You bet he or she was keeping a close eye on the situation.

1 comment:

Anonymous said...

Why do you say that the bank was "gambling with other people's money"? Are you referring to the depositors? If so, that's not really an accurate description of what happened.

The bank has over $2 trillion of assets and about $1 trillion of deposits. They didn't dip into their deposits to fund the trading. That's not how banks are set up. They use the over $1 trillion of wholesale-funded assets to fund this. There's no taxpayer dollars involved.