Wall Street — Wake-up call…again?

May 15, 2012

Can it be called a wake-up call if the parties involved go right back to sleep?  

Last week it was made public that JPMorgan Chase had lost $2 billion of its own money in trading of derivatives. The bank is the largest assets and wealth management in the world and the largest U.S. bank with more than 270,000 employees and more than $ 1.4 trillion under management. Since the announcement, it lost 10% of its share value.  The Wall Street journal estimates that the real loss could possibly be of more than $ 4 billion. Jamie Dimon, the CEO said: “In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.”

There have been a number of so-called “wake-up calls” for the financial industry these past few years. Let me mention just a few:

• The collapse of Lehman in 2008 that provoked a crisis that nearly toppled the U.S. economy and provoked the largest economic downturn in this country since the Great Depression.
• MF Global “lost $1.6 billion of customer’s money, 75 % of its share value, last year which led the company into bankruptcy.
• UBS suffered a trading loss of $2.3 billion dollars in 2011 as well.

The New York Times editorial dated Saturday May 12, 2012 entitled JPMorgan Chase’s $2 Billion Loss-The lesson is that the banks haven’t learned their lesson and neither have the politicians. The editorial calls for the adoption of the Volcker rule that would “curtail risky and speculative trading with a bank’s own capital.” and against a repeal or weakening of the Dodd-Frank Act.  It concludes by saying “Now politicians and regulators need to stand up to the banks.”

It seems to me that Wall Street has been engaged in continued reckless behavior apparently refusing to learn from past mistakes. (Although I would be surprised if those engaged with what we consider in hindsight reckless behavior thought of their actions as being reckless. The might have honestly believed that there were just risk-takers.)

Gretchen Morgenson, the New York Times Pulitzer Prize-winning columnist documented that behavior in her book Reckless Endangerment-How Outsized Ambition, Greed and Corruption led to Economic Armageddon published in 2011. In her article entitled JPMorgan’s Ghost of Dinner Parties Past, published last Saturday about the JPMorgan loss she wrote that “the hypocrisy is that our nation’s big financial institutions protected by implied taxpayer guarantees oppose regulation on the grounds that it would increase their costs and reduce their profit.” She quotes Mr. Greenberger a law professor at the University of Maryland and an expert on derivative. He said: “These regulations are not just protecting the United States taxpayers, they protect the bank themselves. The best friend of these banks would be laws that prevent them from shooting themselves in the foot. The fact is, they can’t do it themselves.” And Ms. Morgenson adds “as if we had to hear that lesson again.”   

Learning from our mistakes is not easy but can be vital. To learn from our mistakes we must first embrace them, own them; analyze them and then change behavior because there is always the risk of that fatal mistake you can never learn from.

Dale E. Turner, author of Words of Wisdom wrote: “It is the highest form of self-respect to admit our errors and mistakes and make amends for them. To make a mistake is only an error in judgment, but to adhere to it when it is discovered shows infirmity of character.”

I am afraid he just described Wall Street.

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