China Sums Up US Financial Innovation: "Smart Kids Picking People's Pockets Is Not Very Good"
When fringe-blogs highlight the reality of the US banking system and its financial engineering as nothing but overly complex three-card-Monte, it can be shrugged off; but when the head of China's sovereign wealth fund (yes the same one that will bail the world out) notes that the JPMorgan loss highlights a system that has become too complex, perhaps some should listen. As Bloomberg BusinessWeek reports, Gao Xiqing of CIC stated that "I think we do need to slow down a little bit instead of rushing up to all these fancy derivatives." The fact that the 'whale' loss was not a rogue trader but a systemic decision gone wrong on weak risk management of an overly-complex position was "the single most revealing thing" to Gao as he expressed concern about a society in which "all the best engineers are engineering financial products." Summing up the entire ethos of US financial innovation he concluded: "You have all the smartest kids to design these products, the only purpose of which is to get money out of other people’s pockets, that is not very good."
JPMorgan Chase & Co. (JPM)’s $5.8 billion trading loss this year showed that the financial system is getting too complicated for even respected institutions, the president of China’s sovereign-wealth fund said.
“You are creating a system that very few people understand, much less the regulators because the regulators haven’t the incentives like the bankers,” Gao Xiqing, president of China Investment Corp., said today at a lunch hosted by the Economic Club of New York. “As a former regulator I think we do need to slow down a little bit instead of rushing up to all those fancy derivatives.”
Gao, who said he was speaking in a personal capacity and not in his role at the CIC, said the loss attributed to a trader known as the London Whale was especially instructive because it happened at a bank he holds in high regard and wasn’t the result of a rogue employee. New York-based JPMorgan, the biggest U.S. bank by assets, lost the money because of derivatives held by its chief investment office.
“That single thing was most revealing to me at least because I respect this institution JPMorgan very much,” he said. “We believe in their risk management, we believe in the fact that they’re being cautious.”
He expressed concern about a society in which “all the best engineers are engineering financial products.”
“You have all the smartest kids to design these products, the only purpose of which is to get money out of other people’s pockets,” he said. “That is not very good.”
Gao said he tries to avoid relying on financial models in his own investments because he doesn’t trust them.
CIC is an investor in Morgan Stanley (MS), the sixth-biggest U.S. bank, which competes with JPMorgan.