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This Is What A Volcker Rule Loophole Looks Like
Submitted by Daniel Drew via Dark-Bid.com,
After the carnage of the 2008 crash, former Federal Reserve Chairman Paul Volcker proposed a rule that would prevent banks from making short-term proprietary trades with financial instruments. In other words, no gambling allowed. This rule would become known as The Volcker Rule, and it went into partial effect on April 1, 2014. Full compliance is required by July 21, 2015. Of course, the bank lobbyists were hard at work, and numerous exceptions and loopholes were created. The definition of "financial instruments" did not include currencies, despite the fact that currencies are the basis of the modern financial system and should be considered the ultimate financial instrument. Also, banks were allowed to "hedge" their risks. As JPMorgan demonstrated in 2012, apparently, it is possible to lose $6 billion while hedging risks with credit derivatives.
JPMorgan is at it again - this time, with the Swiss franc. On January 15 of this year, the Swiss Central Bank sent shockwaves around the financial world when they abruptly abandoned the 1.20 EURCHF floor.
The Wall Street Journal reported that JPMorgan made up to $300 million in the ensuing trading chaos. With the FX market facing a severe shortage of liquidity, JPMorgan stepped in. However, as with any illiquid market, the dealers call the shots. Bid/ask spreads can explode, creating enormous transaction costs for anyone who has to trade. These parties included desperate retail FX brokers and small clients who were bankrupted by the Swiss central bankers. As the WSJ reported,
J.P. Morgan filled client orders at a certain rate, allowing them to quickly assess their position and continue trading when liquidity dried up in the market, this person said. The bank told clients it would fill orders at 1.02 francs per euro while the Swiss currency grew from 1.20 francs per euro to nearly .85 on Jan. 15, the person said. It is unclear how long the bank offered this rate to clients.
By setting the fill 15% away from the last price, JPMorgan was able to lock in any gains from a long franc position instantly. It also gave the firm's traders an anchor so they knew where they were at. What if the clients could get a more advantageous rate at another bank? It didn't matter. 1.02 was the price. If JPMorgan's traders saw a better rate elsewhere, they could trade with that third party and effectively arbitrage the market against their own clients. Of course, it was all transparent. You knew you were getting 1.02, but if your bankrupt broker is margin calling you at any price, there's not much you can do. It was JPMorgan's market.
The chaos of the Swiss bank bluff showed up in JPMorgan's first quarter report. In the trading section that reports the firm's value at risk, January 15 stands out like LeBron James in his 5th grade class picture.
With free reign to trade currencies and under the guise of "market making," JPMorgan raped the accounts of retail FX brokers and small clients who never could have imagined that the Swiss Central Bank would turn the stable franc into one of the most volatile currencies of the decade. It also appears that The Wall Street Journal overstated the $300 million headline number. According to JPMorgan, they made about $200 million that day.
The fact that JPMorgan still takes value at risk (VAR) seriously is another irony. Wall Street anti-hero Nassim Taleb has made multiple fortunes betting on improbable events via out-of-the-money put options, and he remains one of the most steadfast critics of VAR. Taleb has an arcane style of communication, but the summary of his criticism is that VAR is based on the normal distribution, which underestimates the effects of extreme price moves. Furthermore, the very idea that wild events can be predicted by any model is an arrogant assumption, according to Taleb. A white paper by the Chicago Board Options Exchange (CBOE) verifies Taleb's assertions.
The chart shows the type of statistical distribution that Taleb described as "Extremistan" in his popular book "The Black Swan." The frequency is heavy in the middle and higher than expected in the "tails," or the far extremes of the distribution. What this means is that wild events like the Swiss Central Bank bluffing the entire world happen more frequently than risk models suggest.
In their 10-Q filing, JPMorgan boasts that there were no VAR band breaks. Translation: They never had a 1-day loss that exceeded their estimates of about $50 million - although they did come uncomfortably close in March. Just like a typical swashbuckling bank that throws around billions of depositors' FDIC-insured money on convoluted derivative bets, JPMorgan is only concerned about downside volatility while ignoring upside volatility. Yes, they didn't have any downside VAR breaks, but anyone can look at the chart and see there were multiple instances where they made more than $50 million in a single day, with the Swiss bank debacle being the most notable one. Veteran traders know that this kind of wild upside can be just as great of a risk as unexpected downside. If you can make $200 million in a single day, you can also lose the same amount - especially when the P/L comes from linear non-derivative sources like the spot currency market. In this case, JPMorgan happened to be on the right side of the tidal wave. However, Citigroup, Deutsche Bank, and Barclays got caught in the crossfire, and they lost a combined $400 million on the franc. Just another day in casino capitalism.
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Another day, another dollar.
That incompetent POS Paul Volker wrecked the U.S. economy in 1978 when he ratcheted the prime rate up, topping it out at over 21%. Volcker was using monetary policy to correct inflation that was triggered by the "oil shock," when the OPEC price of oil went from about $5 a barrel to about $20 a barrel in the aftermath of the Mideast war between Egypt and Israel. A war we now know was engineered by Bilderberg luminary Henry Kissinger. No doubt the same person behind getting Nixon canned when he started to wonder about Kissinger's allegiance.
The Volcker Rule is a joke, you cannot reign in bank prop desks when you have ZIRP and the money center banks need to raise funds any way they can to cover the cost of shakedown lawsuits for billions of dollars from prosecutors/pimps like Loretta Lynch. Cutting bank costs by canning tens of thousands of employees can only go so far.
The Volcker Rule will turn out to be as effective as the FTC national "Do Not Call" registry. On other words, useless.
Paul Volcker "I certainly was a major proponent of suspending gold convertibility, in fact the principal planner."
http://www.safehaven.com/article/35156/golden-yuan-world-reserve-currency-after-volcker-dooms-the-dollar
Now, as the dollar collapses, Volcker wants to save us with some trading rules.
Commodity traders have been getting raped this same way for a very long time.
A 'swing carousel' of Bankers.
50 metres midair , hanging by the neck, 16 at a time, 30 minute show intervals, next 16, lined up, walking into a fully charged arena/stadium.
Front row tickets in a lottery to push the button to start the carousel.
This i expect to surpass the Revenue and Pay Per View Record of ' Money Mayweather v Manny Pacquiao '
GreenSpam, Bernanke , Geithner, Lagarde, Blankfiend, Dimon and Carney the Star Attractions and interviewed live, in a holding cell over a period of one month.
One Pardon for the Best Bullshitter if they participate, confessing their Crimes with direct questions from The Public.
anybody just see the flash in sp futures??
If jsp doesn't withdraw money from his own checking account just right he's guilty of "structuring".
This is all voodoo.
God's Work
Well when you have "law makers" asking Jamie Dimon if he thinks regulations are too tight when they are supposed to be grilling him about the London whale fiasco, you know who has captured the regulatory process.
Edit: I don't know how I ended up using so much real estate on this post.
$200 million in one day and they're still in the red.
Don't try this at home.
" I had the most absurd nightmare. I was poor and no one liked me. I lost my job, I lost my house, Penelope hated me and it was all because of this terrible, awful Negro."
New normal trading.
' Retail FX Brokers and BigEsmall investors ' Could you be more precise? Who got ass-raped, culled, scalped? A lot left unsaid and the MerryGoRound continues unabated.
Pensions bet? State, Junk or Education Bonds/Funds.
Maybe search for suicides in that period. Seriously who's still in the Honey Trap?
IT'S NOT FREE REIGN, IT'S FREE REIN!!!!
And yes, I'm shouting. For crap's sake, LEARN the difference between rein and reign.
DavidC
Why stock markets will never be open 24 by 7.
http://michaelekelley.com/2014/11/12/why-stock-markets-and-forex-are-not-24-by-7/
Here is the starting point for the next recession.
http://michaelekelley.com/2015/04/28/next-recession-will-start-with-this-country/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!