(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
(Reuters) – Never mind that our largest banks are too big to be allowed to fail, they show every sign of being too big for investors.
By now anyone committing capital to the largest banks must do so with the understanding that they aren’t just risky and volatile, but often badly managed and highly likely to produce further scandals in which insiders gain at the expense of everyone else in the capital structure.
For bondholders, the largest banks at least come with an implied backstop from governments, but shareholders have no-one else to blame for their woes but themselves.
Exhibit A is JP Morgan, which on Friday revealed that losing trades in its chief investment office had ballooned in size and would now cost it at least $5.8 billion. Even worse, JP Morgan suggested that traders had been trying to hide losses. That’s not surprising, but the fact that they were able to get away with it for a time raises grave questions about the bank’s controls.
Combine this with the LIBOR scandal – thus far confined mostly to Barclays but likely to spread – and you have ample evidence that you cannot expect our largest banks to be managed effectively in shareholders’ interests.