Guest Post: Black Is White, Hedges Are Bets, And Your Money Is Mine

Tyler Durden's picture

Black Is White, Hedges Are Bets, And Your Money Is Mine

From Of Two Minds contributor Zeus Yiamouyiannis

Once again we turn to frequent contributor Zeus Yiamouyiannis for a sharp analysis of why our "profits are private, losses are public" crony-capitalism is self-destructing and what is needed to move forward to a sustainable, adaptable, wealth-generating capitalism.

As we witness the riotous dissolution of corrupted capitalism, we need not wait for the history books to identify the mile markers of self-destruction. If we are to rebuild capitalism, even as it is tearing itself down, then we will need to become street-smart detectives in analyzing the current economic murder-suicide in progress.

Every fall has its tell-tale confirmations and corrupt capitalism is no exception. There arrive key points where a system’s own contradictions become so evident and self-damaging, where motive, means, and opportunity become so clear, that one can mount an informed, effective counter-offensive.

Two notable recent contradictions have surfaced in the ongoing debacle called big banking.

1) Hedges for big banks have evolved into gambling vehicles that increase risk rather than reduce risk.

2) Guaranteed savings deposits in those same big banks are being used as fodder in the high-risk investment casinos of global finance. There are no longer effective firewalls or truly secure funds.

Capitalism now means big banks profit from their so-called successes, and others pay for their failures: “Black is white.” JP Morgan has recently lost $3 billion dand counting on a ‘sure thing’: “Hedges are bets.” Investment banks are now merged with conventional banking and secured by taxpayer and depositor money: “Your money is mine.”

These capitalist tumors grow from assumptions that all gains shall be privatized, all stakes shall be “other people’s money,” and all liabilities will fall upon the patsies formerly known as represented citizens.

Everything for reckless, ill-gotten profit; nothing for prudent management

I felt like I was in the twilight zone when reading a New York Times anatomy of JP Morgan’s recent multi-billion dollar losses on some of its hedge positions.

First, these so-called hedge positions were never designed as buffers against loss. They were driven by greed, risk, and desire for profit. Genuine hedges are supposed to buffer against, rather than accentuate, loss, excess, and unwise decision-making.

“What this hedge morphed into violates our own principles,” said JP Morgan CEO Jamie Dimon, citing their recent multi-billion dollar loss. “Morphed into?” C’mon! You played the market from the start. This was no hedge. It was a gamble, and one that you lost. Capitalism that relies upon sound judgment is apparently a throwback to the time when consequences fell upon the company making bad decisions.

Ironically, the more traders stampede to a “sure profit” in certain hedges, the riskier they get. With the advent of high frequency trading and hyper-speed information access, these stampedes are more likely to occur. Risk is also amplified by converse positions. In today’s reality, those who bet against these “sure profit” moves can now employ methods to enhance their position by artificially manipulating buying and selling (naked shorts anyone?). Prospective gold mines can quickly turn into dry holes.

Nobody seems to learn when there are no meaningful consequences. Almost the same exact scenario befell Long Term Capital Management (LCTM). Both LCTM in 1998 and JP Morgan in 2012 bet on the “sure” convergence of newly issued and older treasury bond interest rates, hoping to amplify a small but relatively guaranteed profit into a huge profit by creating a large position through leveraged borrowing.

This very action and the actions of others piling on actually increased divergences by straining the Treasury market. Leveraged hedges built around amplified, “safe” profits create a fertile climate for significantly increased risk and billions of dollars of loss.

Genuine hedges increase operating profit over time by anticipating and reducing possible loss. These latest hedge mutations used by JP Morgan and others have sought to increase profit directly through betting. By using access to data and resources that others now share in the information age, LCTM and JP Morgan failed to anticipate the effects their very actions would have on the market. They needed a genuine hedge against their mutated hedge. (Maybe they should have consulted Goldman Sachs, the experts in betting against their own advice and their own customers for profit.)

When moves to create stability and safety are themselves more gambling, there is no coherence to the system, no buffer, no feedback loop. Excess is rewarded and prudence is punished. With such an operating premise, finance can only spiral into a senseless spectacle. The din is still off in the distance but getting louder as the hounds of reality refuse to be kept at bay.

Savings deposits in big banks have effectively become market casino fodder

Investment involves gambling plain and simple. Risk-return assets are not simply product purchases. If investment were just a consumable, the buyer would use the product for personal needs and see its value depreciate gradually through use. Investors have much different expectations. They are seeking a stake in an enterprise, not just a product, that will generate financial return and appreciate in value. However, this enterprise can also lose its value and leave the investor with nothing.

Even entrepreneurs who invest in their own business, as laudable as that may be, are gambling. They can lose their money for a variety of reasons, even if their business plans are well conceived, organized, and executed. There should be no guarantees with investment except those legal protections against fraud, theft, abuse, manipulation, and corruption that maintain a free enterprise system of risk and return on a transparent, accountable, and enforceable playing field. Bad luck, bad timing, and even bad management are all a fair part of free enterprise.

What happens, however, when big banks, unleashed by the abolishment of the Glass-Steagall Act, are allowed to link their unregulated investment gambling activity with regulated and guaranteed deposit taking? A sham of a free enterprise system emerges, where public funds and guaranteed private savings are nothing more than backstopping fodder for irresponsible gambling.

Here is the key question: Is money that I deposit to a bank, money that I give to a bank? The big bank’s answer is, “Yes. We will use your money or lose it any way we choose.” My answer is, “No. Deposit means deposit. I am not lending it. I am not investing it. I am not agreeing to get a below-inflation return so I can lose my money outright. (For a too-close-for-comfort parody on this see: The Important of Saving Money)

Savings is supposed to be secure dollar storage in a financial lending service. In consideration for lenders circulating my deposited funds at higher interest, I am given a modest user fee. I am parking my money with a bank or credit union to use in safe, vigilantly underwritten lending activities. The lending institutions I patronize garner a higher interest return than they are paying out to me. Interest rates they charge others vary to compensate for default risk. Of course this does not maximize profit! It maximizes stability. That’s its purpose, and that is the purpose of guaranteeing my deposit.

This is why savings is distinct from investment. Investment is a gamble. Its purpose is to maximize profit (including minimizing loss) by wisely supporting enterprises that are managed well and that return well. At least that is the way it is supposed to be. Not so today. Big banks are treating my deposit money like an investment in a greed-driven empire with no upside for me. If banks’ stocks go up, I'm not getting a dividend. If these banks go bankrupt through unwise or unlucky gambling, either I don't get my money back, or taxpayers ending up bearing the costs.

The global financial system has turned into a rigged Las Vegas minus the neon. Instead of the gambling addict going broke and being escorted out of the casino, my livelihood and my children’s is being put on the table to allow these addicts not only to win back their money but make a killing in the process. (Of course big banks are also the gambling houses themselves, as well as the addicts, charging fees for every transaction, giving themselves hundreds of billions of dollars in bonuses, and skimming profits.)

This same condition extends not just to savings, but to the way assets and future public entitlement payments are being annexed through taxpayer bailouts and increased national debt. In fact, the present and future wealth of the entire planet is being put up for chips. “Don’t worry,” say the big banks in a slurred voice, “My rich uncles, the central banks, will make good. Deal me another hand! Hey, bring on mortgages and Social Security and put them on the betting block too.”

We are so far down the rabbit hole that even reinstituting Glass-Steagall will not be sufficient. Big banks are simply reshuffling practices in such a way that investment banking is not labeled as such. Enforced separation between investment brokering and traditional deposit taking means little if I can simply "rename" my investment brokering as something else or if I can classify my deposit taking so it is guaranteed by the FDIC even as I funnel and gamble that money. Heads I win, tails you lose again.

What can be done

The answer to this hijacking of private savings and public funds is public refusal to redeem gambling debts. This can be done in several ways:

Financially, citizens en masse need to coordinate taking their money out of corrupt big banks and put that money into financially strong community banks and credit unions that don’t gamble with other people’s money. If I decide to gamble with my own money with a bank-serviced investment portfolio, fine. If an investment bank decides to gamble, it can use its own capital and not mine. If I decide to let a hedge fund gamble my money for me, I should be prepared to lose it all.

Politically, we need to push for an enforced law with a very simple rule: “No public guarantees for private gambling” and do a much better job of ensuring that no guarantees of public funds go to any activity that is even associated with investment gambling.

We could charter and support state or regional banks from the national level to provide low-cost liquidity (an alternative “Fed window) to small banks and credit unions--organizations that actually make their money lending prudently to communities and enhancing the economic health of the nation and local populations. These organizations would then more effectively compete with the current corporate financial monopolies holding this country hostage.

Policy-wise, we could limit counter-party risk and the systemic damage caused by Big Finance’s investment gambling. (Karl Denninger has a good suggestion in these two posts: Why The JPM Trade Matters and Solution: ONE DOLLAR OF CAPITAL). Denninger’s "One Dollar of Capital" rule would “Prohibit as a matter of Federal Law… the lending of money unsecured that exceeds the firm’s capital.” However, if firms, like MF Global, can gamble with segregated customer accounts as if these accounts were their own money, this suggestion won't work for a particular bank or investment company. Hence the need for the previous strategies.

We have a long way to go, but the hounds of reality strain closer. Instead of running from them, let’s grab their leashes and turn the hounds on the banks.

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Gringo Viejo's picture


Newsboy's picture




ZerOhead's picture

“Yes, it’s supposed to earn revenue,” Dimon said, referring to hedging inside JPMorgan’s chief investment office unit, where the $2 billion loss originated. “This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge.”

Looks like Jamie wanted a crisis and he must therefore be very disappointed.

As Max would say... "This man is a TERRORIST."

Gringo Viejo's picture

To further illustrate the contemptable inadequecy of the MSM......the MSN hompage makes no mention of unfolding events in Egypt in their top 7 headlines. Justin Bieber sits in the #2 slot.

slewie the pi-rat's picture

The Tripoli Post - Libya News and Business

this covers noAfrica as a general source [w/ agenda]

their agenda does not always interfere with their stories, but this is published outa tripoli...  think about that for a minute, now and then, ok?

they cover egypt;  they covered the political ravings to persecute coptics

they publish stuff from alJaz, boston, the internationalCriminalCourt, LA, london, africanUnion and sports!

almost every time i go there i learn something new and strange;  inclusive of recent events in egypt

writingsonthewall's picture

Rebuild capitalism?


You have learnt NOTHING.


This was all predicted - but for some reason you decided to believe Friedman or Mises.


Capitalism IS the problem - this 'end game' was inevitable in a system where monopoly power rules and everyone is working to get their hands on some.

GeneMarchbanks's picture

Only partially true. We can safely say the Oligopoly power rules and the monopoly they're working towards is by no means secure.

Abiotic Oil's picture

We haven't had free market capitalism in a long time.

We have "corporatism", or "crony capitalism" if you prefer.

writingsonthewall's picture

Oh do shut up - corporatism is merely a form of fascism - a predictable outcome of Capitalism.


I mean how dumb are you - did you expect Goldman Sachs to be 'outdone by a fitter rival'?


What a joke - you are trying to claim that going back is going forwards and that somehow this end game has been 'created'.

If you bothered to read you would know one K Marx predicted this outcome as inevitable and even explained why.


...but it's something else - right?


Total rubbish - you're just another sheep being led back tot he slaughterhouse.


Capitalism has broken, it hasn't formed into 'something else' - it's merely fulfilling it's destiny - to develop into fascism where the world is designed around the ideals of the powerful few.


You were sold a lemon and now you want more - ha ha ha ha - some suckers never learn.

Ghordius's picture

again this discussion with a lot of people that use old political terms in the "new way" it is used in the US political discussion?

the way the original(TM) italian fascists understood corporativism was leaned on the way the guilds used to work in the Middle Ages, best explained in those cities where every guild had one vote (if you were not member of a guild you were a peasant under a lord, anyway - not a citizen).

so as Benito Mussolini explained corporativism (from memory, but this is the gist): you call all the stakeholder of an industry at one table, the shareholders, the management and the worker's representatives,  and then you (as a minister of the state or just a thug of the dictator) put a pistol on the table and say: "who is going to say or do something that is against the interests of the Nation? speak up, I've got enough ammunition for everybody".

funnily, by terrorizing everybody involved, the system worked, somehow. they had good, constructive talks.

GeneMarchbanks's picture

Funnily enough, I believe it was Ford who was a huge fan of Mussolini. You had the choice of any color as long as it was black.

Yanks like to reminisce fondly of them good ol' days...

Ghordius's picture

nearly everybody was a huge fan of Mussolini, at that time. Churchill was a big fan, too, and this includes Herr Hitler.

it sounded like a wonderful idea. and many here on ZH say things that lead me to think they would be new fans...

Great post, btw. Well done. Funny how all the banking terms all have a history of why they were set up this way, and how it repeats itself.

Unwittingly, perhaps, a political pressure of this kind would be good for the safe assets USD & UST.

tmosley's picture

Yes, to worthless fools like yourself, words always speak louder than actions.  

GeneMarchbanks's picture

By "worthless fool" you mean, off course, someone who doesn't agree with your libertarian 'philosophy'.

No, my friend, I don't fall for such simplistic lines of thought. I recognize that words are in direct association with actions.

tmosley's picture

No, you claim that words are worth more than actions.  You ignore the fact that Ford paid his line workers three times the gong rate for factory workers, for exacmple.  You also ignore the fact that as a private businessman, he had every right to limit the colors he offered in his products, as that would drive down costs for his consumers.

But hey, fuck him, some worthless shit says that he had bad thoughts and said bad words, therefore capitalism is bad.

GeneMarchbanks's picture

You ignore the fact that Ford paid his line workers three times the gong rate for factory workers, for exacmple.

You ignore the fact that coming out of the Depression you had wages so depressed(excuse the pun) that the need was for skilled labour and he wanted to have a monopoly of that.

I never said anything like 'fuck him' nor 'capitalism is bad'. I'll leave it to you to wage war on words among countless other things you like slandering so much.

tmosley's picture

Waffle away from that position faster, waffler.

EDIT:  Also funny that you fail to realize that he TRAINED those workers.  ANYONE could train workers the same way.  Your idiotic claim that skilled labor is some sort of natural resource that can be monopolized is utterly ridiculous.  You know, like pretty much everything else you say.

GeneMarchbanks's picture

Nonsense. Via Wiki:

Ford astonished the world in 1914 by offering a $5 per day wage ($120 today), which more than doubled the rate of most of his workers.[24] A Cleveland, Ohio newspaper editorialized that the announcement "shot like a blinding rocket through the dark clouds of the present industrial depression."[25]The move proved extremely profitable; instead of constant turnover of employees, the best mechanics in Detroit flocked to Ford, bringing their human capital and expertise, raising productivity, and lowering training costs. (emphasis mine)

Please stop.

tmosley's picture

Uh, yeah, did you read the part about reducing turnover?  

Christ, it's like trying to explain evolution to a Baptist preacher.

Abrick's picture

Three times the wages until he put most machine shops out of business. Then the wages were flattened for a couple decades.

Ghordius's picture

Capitalism works or breaks down when the rule of law breaks down.

The rule of law breaks down when I am in doubt if an action I'm contemplating or doing is going to be punished or not. Eventually. Of course, at the moment everybody (that counts) is "doing it".

See the CEOs of the MegaBanks. Great Leaders or Guilloutine Fodder?

See Iceland, where the bankers face jail time...

Killtruck's picture

Or China, where they are summarily shot. or hanged. Not sure of the method. They end up dead in the end.

AnAnonymous's picture

Capitalism works or breaks down when the rule of law breaks down.


Again with that stuff? The rule of law is broken?

US citizens have always exerted the rule of law the same way. The US is a record breaker of treaties during its short history.

But what, did it mean that capitalism did not work because the rule of law was broken?

Especially since US citizens locate their capitalism break down in the 1970s, 1980s.

BooMushroom's picture

The rule of law is broken.  The law is so large, so detailed in some parts, and so vague in others, and so poorly organized, that it is impossible for anyone to know the totality of the law.  If you took 12 lawyers, put them in separate rooms, and asked each one whether a specific action was legal or illegal, there are many times that they would not agree.

AnAnonymous's picture

They are some good lawyers and some bad lawyers. Good lawyers win cases. They are winners. Bad lawyers lose cases. They are losers.

US citizenism.

Bpseudomallei's picture

Because the only type of law out there is what you see on Boston Legal.  The Rule of Law is broken and the education system teaches people nonsense making the situation worse.

Kobe Beef's picture

The Rule of Law is just a joke. Barack Obama, Constututional Lawyer. That's the punchline.

michigan independant's picture

Which cafe red crusader are you today? The world was shocked when the Tibet nun, Kelsang Namtso, was killed when Chinese border police opened fire on a group of pilgrims as they fled Tibet over the infamous Nangpa Pass. Nearly three years later and in the lead up to the 50th Anniversary of the Dalai Lama’s exile, SBS TV will air February 19 at 8.30pm, TIBET: Murder in the Snow – a new documentary which uses original climber footage, reenactments and interviews with witnesses and survivors to tell the story of young Tibetans who risk their lives each year to illegally cross the rugged Himalaya Mountains in an attempt to see their spiritual leader, the Dalai Lama, or attend school in India.

Got to love Red Citizenism on the Dole

Ghordius's picture

again, I will assume you are using a Chinese point of view. which will allow me to state that in China, the rule of law is not broken. bent, very often, but if I have any doubt about how I will treated if I get caught then it's because I am not a borderline but a terminal case of sociopathy.

and the punishment is even clearer, as the difference between a slap on the wrist and a bullet in the head

tmosley's picture

Communism is awesome.  That is why I moved to Best Korea and now live in a mansion on the surface of the sun (the A/C is paid for by the state!), and skip daintily through meadows made of candy-canes and unicorn skittles all day!

AnAnonymous's picture

Capitalism has broken, it hasn't formed into 'something else' - it's merely fulfilling it's destiny - to develop into fascism where the world is designed around the ideals of the powerful few.


Strange way to put it. When something breaks, it forms into something else.

US citizens discussing.

The reality is that US citizenism has not changed one bit since materialization in US on 1776, July, 4th.

Nothing is broken in US citizenism, save maybe the covenant leading some US citizens to think they have a birth right to be on the right side of US citizenism.
Even though this covenant barely exists.

US citizens have always applied selectively the law in what they call the rule of law. The only thing different is what written earlier: now, some US citizens are pushed on the wrong side of it and for them, it is such a change they want to sell the idea that it means US citizenism has changed.

LFMayor's picture

applied selectively the law.

That there is what you call a winner, Ricky Bobby.  If your meek, timid and  servile ancestors had told the emporer to stick it up his ass instead of destroying all the ships, charts, logs and shipyards when that dumbfuck commanded them to you would be making the rules bend today. 

But instead, you're choking down your melanin-enhanced rice, bitchin about how the world and capitalism are so unfair while using technology that you would have never even fucking dreamed about were it not for capitalism and that big, mean old unfair world.

That's a bitter drink isn't it?  To have had it in your hands only to throw it all away.  Nothing like proving your unworthiness to lead by testifying against your own self.  Wanna know how to redeem yourself?  Get those parasites off your back.  Fight them, crush them and make your people free.  Do it for your family's future, rise on your own feet and become great.

So here is how I see it shaking out.  You'll contine to bitch, and leech, especially you, who cravenly works for your masters.  And when things get so bad here, where I am, there will be blood.  And ropes.  And the interest is going to come fucking due all at once.

I think we'll come through the other side even stronger, be as we will a bit lighter do to frequent and liberal application of Darwins correct theory.   We'll have to wait and see though, won't we?  Now run and tell your masters, they'll ponder it a while and realize that they sure as hell don't want it to break out that way.  What comes out the other side might not be nearly so accomodating to the parasites around the world.  Instead, it may seek them and crush them, to prevent it's own re-infection.

AnAnonymous's picture

Made me laugh. Typical US citizen mixture.


-alluding to China decision not to expand, leading to chinese not bending the rules today.

Does it mean that bending rules is something to be desired? Because that is what most US citizens blame the elite, the banksters, the illuminati to do. Have not US citizens onthis stie started to challenge on consistency?

Shaking off the parasites would allow to expand? Expand into what? The world is finite, you know.

Typical US citizen speech.

LFMayor's picture

China's "not wanting to expand" in Tibet worked out pretty good, didn't it?

But the Viets and the Indians and the Russians in mongolia whipped your "non-expanding" asses real good, didn't they?

Keep up the good work.  Someday, you'll make the mistake the Japanese did and piss us off real well.  Then all the powdered fetus magics and six demon bags in the world won't save your little asses.

history doesn't repeat, but it sure rhymes brother:

Dirty knees

TheFourthStooge-ing's picture

AnAnonymous said:

The world is finite, you know.

In finite world some things even being are exist to infinitely nevertheless.

Genuine example presented is AnAnonymousistic fetish to disagreement over universally aspects everything from US citizens being in writing or saying. Infinite fetish of AnAnonymousism now in finite world here being sharply.

AnAnonymous does not viewing himself possessing harbour of malice toward humans resultantly fetish cloaking him this viewing from. Fetish of infinite US citizen disagreement cloaking himself against self indiction is most fruitful gift he is to himselfs bestowing.

The deliciousness of US citizenism fetish inoculates AnAnonymous from conjugating all forms of self indiction. This allowing him perpetually living in bedazzlement interior regions of tralala land with totality blamelessness. Self constucted exterior which regions onto he can project away from him source of his malice harbour of humanity.

He confused very mixed up in head sickness.

Abiotic Oil's picture


 I see a great future ahead for you... as a farmer contirbuting to the collective good in North Korea.

I mean if Karl was correct that this is the end game of capitalism then there is no reason for you to stick around right?

And rest assured, the communists in North Korea have in no way let communism develop into a world that is designed around the ideals of the powerful few.  Just ask Dear Leader.



Plymster's picture

"Corporatism" or "crony capitalism" is the natural end-game for free market capitalism.  This has been repeated in history many times, from the first time corporations were used in the Age of Enlightenment to the Gilded Age, always with the same outcome - massive, widespread revolution.

Hell, just play Monopoly with the family to see how free market capitalism works.

LMAOLORI's picture

Speaking of Crony Capitalist's JP Morgan boss flashes presidential bling at Senate hearing


JPMorgan Employees Join Goldman Sachs Among Top Obama Donors


President Obama's Favorite Banker

InconvenientCounterParty's picture

Markets are part of Human wiring.

Collective government is too.

When investments in government corruption have the highest return on capitol in the market you've lost both.

shovelhead's picture

Ding! Winner.

Give this man a cigar.

FL_Conservative's picture

You're wrong!  Capitalism is NOT the problem.  The PROBLEM is an over-reaching government that legislates and regulates to the benefit of those closest to it and contribute to the maintenance of the status quo.  REAL capitalism hasn't been practiced in over 100 years.  Fix how government "represents us" by instituting strict term limits, returning more powers/responsibilities to state and local governments and reducing the size of the national beauracracy.  THEN you will see what capitalism can do.

writingsonthewall's picture

You're an idiot - Governments didn't start regulating to gain power moron.


They did it because the PEOPLE DEMANDED IT - after the 'capitalists' treated them so badly.


You're just playing 'chicken and egg' - but actually it doesn't matter. Government regulationin capitlaism is as inevitable as capitalisms development into fascism.

tmosley's picture

Collectivist tripe.  

If by "people" you men corporations and union thugs.  The people rose from the status of poor farmers to rich middle class because of those capitalists.

Capitalism descends into fascism the same way a clean room descends into squalor.  Thing is, you can't avoid descending into squalor by avoiding cleaning, just like you can't avoid a descent into fascism by getting rid of capitalism.

AnAnonymous's picture

The people rose from the status of poor farmers to rich middle class because of those capitalists.


Actually, as shown more and more explicitly every day, they managed the promotion because of the welcomed help of sponsors the likes of Indians.

Suddenly, as US citizens appear to go through a shortage of those kind donators, promotion is no longer that a given.

Will be even best when the exterior US citizens are used to tap in to promote their own will be ostensibly declining.

tmosley's picture

Indians died out a hundred years before the rise of the middle class, moron.  And they would have died no matte what the Europeans did, as the diseases they brought ran rampant and wiped out 99% of the population before whites even arrived.

But then, I don't know why I bother saying to someone who had their brain replaced with a little box that just outputs jibberish followed by "US citizenism".

Rip van Wrinkle's picture

Since when have Governments ever done anything because people demanded it?


And please tell me the last Gvernment not to want more power?


You're showing yourself up.

Mercury's picture

"Capitalism" is a Marxist epithet, so I don't see much point in trying to defend someone else's straw man.

But if you're looking to replace private property, free enterprise, rule of law, enforceable contracts and individual civil liberties against the state with...Marxism, you're in for a hard sell and up against a lousy track record.