One would think after the fiasco of the 2007-2008 financial crisis, the too-big-to-fail (“TBTF”) banks would have learned a lesson about risk management — but, no, here we are again with JP Morgan Chase losing $2+ billion of their “own” money — and under the leadership of CEO Dimon who is one of those most vocal against limiting the banks’ proprietary trading under proposed legislation.

The shareholders, bondholders and managements of these TBTF banks should pay the price for “mistakes” such as JP Morgan Chase’s recent fiasco. However, the US taxpayer remains on the hook just as in the 2007-2008 financial crisis.

Banks have been granted their “franchises” and given preferential treatment to serve the needs of the general economy and to facilitate the movement of funds between individuals/entities wanting to have a relatively safe haven for their excess liquidity (aka, depositors) and those needing to borrow those resources. Proprietary trading of the TBTF banks’ “own” funds has little place in this economic environment — those funds should be distributed to the shareholders who can then invest in riskier asset classes under their own decision regimen. If a hedge fund investment is what they want, then let them make a conscious decision to invest in a hedge fund, without any Federal guarantee of the investment.

This approach would take much of the burden off US taxpayers to correct the ” sloppy” and “stupid” decisions (CEO Dimon’s own adjectives) that have been made by the TBTF banks in the post-Glass-Steagall era.

For more on the interaction of financial and political decision-making, see http://theviewfromthemiddleoftheroad.blo gspot.com/.

As intended… I can make 30 year mortgage loans to American home buyers and earn a tiny protracted profit. I bundle these loans into “Collateralized Debt Obligations” and sell them to pension funds.

Or… The Bank of Screwya can purchase bonds with these “extremely cheap dollars”. Bonds from sovereign European countries like Anusgreece. The sovereign nation Anusgreece is receiving loans from the European Union (Germany) to remain solvent. So… The bonds issued by Anusgreece have a high rate of return… like 13%, because they are risky.

It’s all about risk management.

As CEO of The Bank of Screwya, my bonus is based on our profit. If The Bank of Screwya makes the virtually guaranteed 2.5% profit (low risk) by making mortgage loans, as intended, my bonus will be about 1 million dollars. If The Bank of Scerwya makes 13% in the Eurozone bond market, my bonus will be 100 million dollars. BUT THIS IS RISKY…………………….. or is it?

My bonus is “contractually guaranteed”. If we go bust, we are “too big to fail”. The federal gov’t of The USA (actually, it’s the US taxpayer) will have to bailout The Bank of Screwya. I will be fired and my career will be over… but I get 100 million in contractually guaranteed bonuses.

If sovereign nations like Anusgreece remain solvent for a couple of years, I can collect my $100 bonus for a couple of years before the house of cards comes down.

As CEO of The Bank of Screwya, what would you do?

No investor takes on such a huge position in a security/market where liquidity doesn’t exist. Liquidity is probably the most important consideration in owning any security since it determines spreads, ability to sell/buy, and ultimately profitability. Everyone knows the JPM is up to their eye teeth in derivatives – and they are still working down this position while we talk.

JPM supposedly hires the best and brightest, yet Dimon said himself it was ‘poorly executed and monitored’. What this says is that no one has enough knowledge and controls to handle these toxic trades. JPM reaped huge benefits from the 2008 crash (basically got Bear Stearns for pennies and handed off the risks to the tax payers). They have been the blue chip standard for all the financial gurus pushing deregulation.

Of course, the big question is who is next?

However, she is guessing calendar basis, not bond/CDS. She doesn’t have any more facts to support her guess than you do, Felix, but she tells a better story. She also makes a good point at the end: if there is enough publicly available information to see that something big and unusual is going on in CDX.NA.IG.9, shouldn’t the regulators be trawling through the DTCC data to see what’s going on? Isn’t that supposed to be its purpose?

He’ll line up a few scapegoats and boot them off the bridge.