Honestly, we pundits probably couldn’t have made up a better story than this one:
A secretive trading operation whose ostensible purpose is to hedge risks that actually makes a quarter of the giant bank’s total profits doing just the opposite.
A cocky London derivatives trader with the nickname of Voldemort who overplays his hand and finds himself squeezed by a couple of hedge fund sharks who pocket tens of millions of dollars profiting from his miscalculation.
Risk management models that were flawed and risk managers who were ignored.
Press warnings that were dismissed as a “tempest in a teapot” by a celebrity chief executive who seems to have been unaware of the risk in a $100 billion trading position.
And all of it going on right there under the noses of resident bank examiners desperate to show they won’t let it happen again.
So much for the idea that the greatest threat to the financial system is overzealous government regulation.
Aside from the embarrassment and the short-term financial hit, the real damage to JPMorgan is that it exposed how the big Wall Street banks were planning to get around the new Volcker rule, by which Congress meant to prevent the too-big-to-fail banks from taking hedge-fund-like risks with their own capital or borrowed money. Rather than running these trades through their old “proprietary trading desks,” which used to generate a majority of their profits, the Volcker work-around plan would disguise such trading as part of the bank’s normal hedging operations.