Why is everyone getting so outraged about JPMorgan Chase losing two billion bucks? It’s a bank. Isn’t losing money what modern banking is all about—you take in deposits from normal folk and then invest those hard earned funds in completely ludicrous schemes: subprime mortgage companies, credit card loans for people who aren’t creditworthy, Greece. In the current fiasco, some clever Chase traders in London figured they would hedge the company’s asset portfolio by pouring massive amounts of bank money into a single instrument. The instrument was a credit default swap derived from the price of an index of corporate bonds. It’s a derivative in other words, a synthetic asset. No, I can’t really explain it—and neither can Chase— but as one trader friend emailed, “synthetic = fake.” The point is, whether we’re talking about a CDS or gold, taking such a large position in a single trade could hardly be called hedging. Chase might as well have bet on the price of bananas during hurricane season.
Still, I certainly can share Chase CEO Jamie Dimon’s pain about losing money. For instance, I lost $80 last week. Well, I didn’t actually lose it, I just left my walking-around money in a pair of pants I had been wearing. The next day, wearing a different pair, I realized I had no dough but was reasonably sure it was somewhere around the house. But if I were a bank, my response would be to hedge against the lost cash by selling the pair of pants I was wearing. I’d have new cash, but no pants on. This is the way bankers think.
So now the FBI is now investigating the tragic derivatives trade, wondering whether the company criminally misled investors about the losses. I doubt it, but it’s sort of fitting, in that if you stick up a federally chartered bank, it’s the FBI that comes after you. Chase says it staged a foul-up rather than a holdup, yet the G-men are on their way anyway. In the U.S. in 2010 there were about 5,500 bank heists, netting $43 million, or an average loss of about $7,800 per job, according to the FBI. That is an awful lot of risk for such little return on investment, given that the Bureau clears more than 60% of the cases. The rough math says U.S. banks lost about $164,000 per working day to robbers. Chase was losing $200,000,000 per working day due to its own employees. That’s nothing if not efficient.