Four Years After AIG, Wall Street Back to its Old Tricks

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My Sunday Washington Post Business Section column is out. This morning, we look at the JPM debacle: Has the Economy been made safe from Wall Street? The short answer is not very.

The print version had the full headline Four short years after AIG, Wall Street is back to its old tricks (The online version is merely JPMorgan’s debacle, and its parallels to AIG).

Here’s an excerpt from the column:

“Finance has become a low-margin, high-leverage business. This is not surprising in an environment in which trading volumes are exceedingly low and interest rates even lower. In any other industry, a slowdown in economic activity sends management scurrying to cut costs, develop new products, become more productive. In short, to innovate. Companies can throw money at new products, marketing campaigns or discounted pricing, but a slowing economy brings down demand. What we have today is a deleveraging economy, and that is even more challenging — limiting the options that CEOs can take to increase their company revenue.

The world of finance refuses to accept that reality. Whenever Wall Street is confronted with a decrease in profits, we see the same response: Increase leverage. We usually don’t hear about it until some market wobble causes the excessive leverage to blow up in someone’s face. This time, the novelty cigar was smoked by Dimon, and the damage was inflicted on his reputation. The losses, we learned, were a “mere” $2 billion, described as manageable.

Consider any major finance disaster of the past 30 years, and what you will invariably see is the result of trying to spin dross into gold. The magic of finance is that this can work for a while. The reality of finance is simple mathematics. Eventually, the probabilities play themselves out and the dice come up snake eyes.”

I submitted this kinda late; there was not much they could do in terms of graphics for the dead tree version of the paper.
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click for ginormous version of print edition


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Source:
JPMorgan’s debacle, and its parallels to AIG
Barry Ritholtz
Washington Post, May 20 2012
http://www.washingtonpost.com/jpmorgans-debacle-and-its-parallels-to-aig/2012/05/18/gIQAPJxLbU_story.html

Washington Post,  May 20 2012(PDF)

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