Last week, JP Morgan Stanley Chase bank suffered a $2 billion trading loss on credit derivatives that shouldn't have been allowed to happen if financial regulations enacted had been fully implemented.
As it happens, Morgan Stanley and the other too big to fail banks have lobbied endlessly thwarting the full implementation of Dodd/Frank regulations of 2010 that would have seen such a trade as extremely risky and required it be cleared and transparently executed. If Glass/Steagall, the 1933 law had still existed (it was overturned in 1999 by the Graham, Leach, Bliley act permitting the deregulation of the commercial banks and the investment banks activities), this trade would have never come about.
But again, if the Dodd/Frank financial regulations that called for transparency and a clearing house for derivatives trading had been fully implemented and in place (they haven't because of intense lobbying by the big banks to water down and delay implementation) such losing trades would have incurred a margin call and additional capital required to cover them by the clearing house which would have effectively short circuited additional trading and protected the institution from incurring further mounting losses (ironically something Jamie Dimon, the CEO of Morgan Stanley seems loathe to admit).
Let's not forget, derivatives, credit default swaps and the packaging of sub prime mortgages into securities and sold to unsuspecting large investors, institutions, pension funds and the like were at the heart of the financial meltdown in the fall of 2008, when the bubble burst that nearly brought the whole financial system down, required the massive hundreds of billions bailout and precipitated the great recession.
So here we are almost four years later having the same type financial transactions being carried out as if the financial meltdown in 2008 never happened.
But this what happens when the too big to fail banks know they won't be effectively regulated and if their excesses result in massive losses, they ultimately have the U.S. Treasury and the Federal Reserve to come to their rescue and bail them out when (not if) the next real financial crisis they create comes about.
Thus far, JP Morgan's latest $2 billion loss in credit derivatives trading is the only one that's been made public. Are there others, by other big banks, about to hit the fan? If not are we to believe this latest faux pas by Morgan Stanley is just a blip, a minor aberration or consider it the latest wake up call that requires real regulation and re-instituting Glass Steagall as the remedy called for.
From here I wouldn't hold my breath and expect this Congress to act responsibly or Barack Obama to transform himself into Franklin Roosevelt and push for the tough regulations FDR had implemented that effectively corralled the excesses of the financial industry that brought about the great depression. Obama's too busy implementing his vision of a national security state and getting re-elected.
Be that as it may, I recommend reading Gretchen Morgenson's article, "At JP Morgan, the Ghost of Dinner Parties Past" in yesterday's Sunday Business section of the New York Times. Her take on this latest Morgan Stanley debacle is right on the mark.