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May 14, 2012

'The London Whale'

No one has a picture. They call him Voldemort. His name is Bruno Iksil. Some say he's arrogant. He recently boasted he could walk on water. You know, like Jesus. Others, perhaps circling the wagons, say he's a quiet, unassuming guy. A nice bloke.

Nice blokes don't boast about walking on water.

At any rate, The London Whale is no longer allowed to trade.

JPMorgan credit derivatives trader Bruno Iksil -- who became the so-called "London Whale" back in April for his massive positions -- has been stripped of his trading responsibilities following the disastrous $2 billion trading loss related to derivatives in the bank's chief investment office in London, the Wall Street Journal reports.

The newspaper also reports that Iksil is likely to leave the bank, but his fate isn't entirely clear at this point.

Several others at JP Morgan Chase's London-based Chief Investment Office have been forced out as well. The problem with all this is, as I understand it, Iksil wasn't acting as a rogue trader. Everything was done in the open, as JP Morgan's chief executive, Jamie Dimon, says.

I know next to nothing about high finance, so I'm not in a position to try to identify a bad guy and point a finger like, say, Shepard Smith does all the time (argumentum ad ignoramus). I can point out that some feel nothing untoward or unusual happened--that losses are part of the business cycle. Kevin Williamson at NRO makes this point and argues for restraint.

The odd thing about this is that it is now considered somehow scandalous when a business loses money. It’s a scandal when banks make profits, and it’s a scandal when they make losses. The only thing financial firms do that Democrats do not object to is write checks to Barack Obama. (Nearly a million bundled by Jon Corzine of MF Global? Yep.)

But losses are part of business. Even big losses. Failure, bankruptcy — all part of the normal life cycle.

J. P. Morgan, like any large and complex firm, attempts to mitigate, or “hedge,” certain kinds of risks. This is a normal business practice — but J. P. Morgan did not turn out to be very good at it, at least in this instance. That also is not that unusual: If 2008–09 showed us anything, it is that financial firms are not as good at managing risk as they had supposed. (Which is why stronger leverage limits seem to me the simplest useful regulatory reform.)

Since I have no way of putting all the pieces together, this is going to be a London Whale News Dump. Here is the set up.

Wikipedia on the Volcker Rule.

This is an excellent WSJ video from a month ago. This is when people first started talking about The London Whale, and a lot of what they said here appears to have come true.

Essentially a follow-up report from WSJ.

A video from CBS discusses The London Whale and the Volcker Rule, set to go into effect in July.

A recent video from Bloomberg. A decent panel discussion from CNBC.

I'm not going to argue that all this means government regulation isn't working or that we need more regulation. Kevin D. Williamson's comments above make sense. Losses are part of the business cycle, and restraint may be in order. On the other hand, Senator Carl Levin's comments in the CNBC video linked above also made sense. If financial institutions are so big they can single-handedly warp the market, maybe they shouldn't be betting truckloads of their own money on the direction of the economy like that. I don't know the answer. Maybe some of our business morons can take a crack at all this information and tell us what it means.

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posted by rdbrewer at 02:08 PM

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