This from Yves Smith on The New York Times online opinion pages - "Room for Debate" - please follow link to original.
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http://www.nytimes.com/roomfordebate/2012/05/21/what-could-have-prevented-the-jpmorgan-chase-disaster/for-starters-reinstate-glass-steagall
Preventing blow-ups like the JPMorgan “hedge” that bears no resemblance
to any known hedge isn’t difficult. What makes preventing it difficult
is that banks that exist only by virtue of state-granted charters -- and
more recently, huge transfers from the public -- have persuaded public
officials and regulators that they have a God-granted right not just to
high levels of profit but also high levels of employee and executive
compensation.
Banks enjoy state support because they provide essential services,
like a payments system and a repository for deposits. One proposal to
limit them to these vital services is “narrow banking,” or requiring
that deposits be invested in only safe and liquid instruments. This
idea was put forward by Irving Fisher and Henry Simons in the 1930s, and has been championed by the right (Milton Friedman), the left (James Tobin) and banking experts (Lowell Bryan of McKinsey).
A less radical idea would be to eliminate credit default swaps over
time (they are too embedded in current practice to ban them; banks need
to be weaned off them). There are no socially valuable uses for the
product. Contrary to defenders’ claims, they aren’t a good way to short
bonds (not only does it deal with only one attribute of bond risk, it
does so badly: payouts in actual credit events on credit default swaps
vary considerably, and are generally less than payouts to holders of
real bonds). These swaps were the driver of the crisis. They were the
mechanism that allowed real economy exposures to risky subprime bonds to
be multiplied well beyond the number of actual borrowers and thus cause
vastly more damage.
Another route would be to implement the Volcker Rule as Paul Volcker envisaged, meaning without the portfolio hedging exemption that JPMorgan relied on. Or officials could enforce Sarbanes Oxley,
which has the chief executive officer certify the adequacy of internal
controls, which for a major financial firm includes risk controls. Had
any chief executives been targeted for Sarbanes Oxley violations for the
massive risk management failures during the financial crisis, it’s
pretty likely that Jamie Dimon,
head of JPMorgan, would have thought twice before giving the chief
investment officer both the mandate and the rope to enter into risky
trades.
Maybe it's time to recognize that these firms are too big and in too
many complex businesses to be managed. Jamie Dimon was touted as a star
who could supervise a sprawling firm running huge risks, and he fell
short because no one can do the job adequately. A less disaster-prone
financial system requires more simplicity and redundancy. Re-instituting
Glass-Steagall or other variants on the narrow banking theme isn't a full solution, but it would make for a good start.
Tuesday: Case-Shiller House Prices, New Home Sales, FOMC Minutes and More
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[image: Mortgage Rates] From Matthew Graham at Mortgage News Daily: Mortgage
Rates Near Lowest Levels in a Month
Last Monday, mortgage rates were near the ...
10 hours ago
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