Who Should Stay At The Graybar Hotel?

A question of fairness.

Whether the financial crisis of 2008 ate a chunk of your liquidity or a goodly portion of the value of your 401(k), or even if you came away relatively unscathed, chances are you’ve been waiting ever since for justice to be served. With the trillions of dollars of wealth that disappeared, with the shady dealings of mortgage-backed securities and bundled sub-prime amortizations, surely there’s a guilty party somewhere who must be made to pay.

Four years later...and we’re still waiting. No major criminal cases have been filed, few fines have been paid, none but a handful of mid-level executives lost their jobs. If there’s a scale somewhere representing this vision of justice, then someone’s thumb must be firmly planted on one side.

So you might take heart to learn that the New York Attorney General’s office, with the blessings of the Justice Department and several other states, has filed a civil fraud suit against JPMorgan Chase & Company, alleging misrepresentation of the values of mortgage securities sold in 2006 and 2007. The case won’t result in anyone spending time in the ol’ Graybar Hotel, but it’s a start, right?

Actually, no.

Looking closer at the suit, we see that JPMorgan isn’t actually accused of any wrongdoing (nor is Chase, for that matter). Who sold the fraudulent securities? That would be the now-defunct investment bank Bear Stearns, which JPMorgan acquired at fire sale prices — $2 per share — in 2008.

But fair is fair. When you buy a company you also buy its liabilities, including responsibility for its criminal wrongdoings. That’s clearly why JPMorgan is on the hook here.

Maybe so. But as long as we’re introducing the concept of fairness, let’s give JPMorgan a fair shake. If you cast your mind back to those dark days of March 2008, you’ll recall the impending failure of Bear Stearns was sending shockwaves throughout the entire financial system, bringing it to the very precipice of collapse. JPMorgan certainly wasn’t looking for acquisitions just then; they were pressured into it by the Federal Reserve and the Treasury Department, with the argument (which still holds up in hindsight), that the economy just might depend on it.

We want justice too, and if justice is served by criminal and/or civil prosecution of the Big Banks, then we’re all for it. We just don’t think justice — or even common sense — is served by going after JPMorgan in this case. Because all JPMorgan is guilty of, in this case at least, is saving our collective necks.

The C4:

1. The financial collapse of 2008, which has been convincingly tied to the housing bubble and the introduction of sub-prime mortgage-backed securities, has to date resulted in very little in the way of criminal prosecutions or civil liability.
2. This has led to an understandable, yet not-always-rational yearning for justice. We get that. We’d also like to see the guilty punished. We just want to make sure the innocent aren’t swept up as well.
3. Is that what’s going on with the civil fraud case against JPMorgan? The suit alleges fraud committed by Bear Stearns, which JPMorgan acquired after the fact. The law is clear: a company is liable for the transgressions of any entities it acquires.
4. But sometimes fairness is more important than the law. Our nation’s financial regulators begged JPMorgan to buy Bear Stearns, and when JPMorgan did, they just might have saved our economy. Should they be punished for it? We don’t think so, but we’d love to hear your opinion. Please log in and let us know.

Beware of Greeks Bearing Debt

A symptom of a flawed attempt to unify.

Casual investors, beware: your world has been turned upside-down.

Stocks have become the relatively safe parts of your portfolio. Bonds, which used to be your hedges of first resort, have changed entirely.

Top-rated bonds are all but useless for growth, and will pay practically zero interest for the foreseeable future. Sovereign-debt bonds, a sterling investment just a few years ago, are now almost too risky to contemplate.

What’s changed? It’s easy to oversimplify, but we’ll forge ahead: Greece. Greece has changed everything.

We’re not blaming that incubator of modern democracy, only pointing to it as a symptom. Greece is demonstrating all the perils of the Eurozone, an unprecedented experiment in a multinational currency. Greece is showing how difficult it is for 17 nations to share monetary policy while maintaining economic independence.

There are no easy choices for the Greeks. If they stay in the Eurozone, they embrace another generation of fiscal austerity — strangling any chance of economic growth. If they revert to the drachma they’ll almost certainly default on their national debt.

You say you own no Greek debt? Hold tight anyway. A Greek default, managed in the best possible fashion, will only encourage other teetering European economies to follow suit. Spain, Portugal, Italy, maybe even France, are all at high risk. This scenario, which is unfortunately one of the better possible ones and probably the most likely, means the bottom is going to fall out of the sovereign-bond market.

Forewarned is fore-armed. Think seriously about adjusting your portfolio accordingly. And spare the kindest possible thoughts for our friends and allies across the pond, who are guilty of nothing except a flawed attempt to unite their continent.

The C4:

1. The Greek debt crisis is demonstrating the vulnerabilities of the Eurozone, and pointing to a grim future of cascading defaults.
2. That likely result, coupled with already historically low interest rates on “safe” bonds, means we can no longer rely on the bond market as our hedge against other investment losses.
3. Casual investors (all investors, in fact) need to rethink their strategy. This is a slow-motion crisis that’s giving us time to adjust. Use it or wallow in regret.
4. But don’t blame the Greeks, nor the rest of the Eurozone. They tried. Economic unification is simply an idea ahead of its time.

Dimon In The Rough

$2 billion loss wakes people up early in the Morgan.

Over at J.P. Morgan, it feels like 2008 all over again.

Three weeks after CEO Jamie Dimon said “tempest in a teapot” when asked about the company’s renewed interest in credit derivative swaps, J.P. Morgan revealed that such trades resulted in over $2 billion in losses. The market immediately punished J.P. Morgan, by wiping out nearly 10% of its stock value in a single day.

Two facts make this loss all the more stark. First is that J.P. Morgan isn’t just an investment house. In the latter twentieth century J.P. Morgan benefited from deregulation, which allowed almost unlimited horizontal integration within the financial industry. As a result, J.P. Morgan is now the largest bank in the U.S.

“Too big to fail” almost doesn’t do it justice.

Secondly, we now know the lengths to which Dimon and company went in order to weaken the so-called “Volcker Rule,” which is designed to limit the amount of its own capital a bank can risk. It’s clear now that loopholes in the Volcker Rule, which J.P. Morgan lobbied heavily for, permitted precisely the sort of trading that just cost the company $2 billion.

There’s one hopeful glimmer, though. Perhaps heeding the Golden Rule of Public Relations (i.e., own up to your mistakes, immediately), Jamie Dimon is loudly and publicly admitting the company’s error.

“We were dead wrong,” he said on Meet the Press. “We made a terrible, egregious mistake. There’s almost no excuse for it.”

What comes next? Probably a lot less lobbying to weaken financial regulation. J.P. Morgan and others in the industry recognize this incident does far more to damage their credibility than it could ever do to their bottom line. So they probably won’t want to be seen jockeying for more loopholes, at least not in the short term.

And maybe that’ll lead to the ideal outcome: a financial industry governed by rules that quash recklessness while still encouraging growth. That is, after all, exactly what financial regulations are supposed to do.

The C4:

1. J.P. Morgan announced last week that credit-derivative trading has cost the company more than $2 billion over the course of about six weeks.
2. The day after the announcement, shares in JP Morgan lost nearly 10% of their value.
3. CEO Jamie Dimon quickly admitted culpability and promised a thorough investigation.
4. Only a robust system of financial checks and balances, that encourages growth through responsible business practices, can prevent those “too big to fail” from dragging us back into the nightmare of 2008.