Streetwise

Lauren Rudd

Sunday, May 20, 2012

The First Amendment is a Wonderful Thing

The First Amendment is a wonderful thing. It means you can go off half-cocked blathering prose that is tantamount to carrying a sign saying, “Repent now, the world is coming to an end.” The difficulty arises when you prattle under the auspices of being a forthright purveyor of truth and rational reasoning.

A year ago at this time I wrote about the mêlée over whether to raise the debt ceiling. The collateral damage from that squabble included a downgrade of the country by Standard & Poor’s. Nonetheless, an agreement was reached and it was expected that the next time the debt ceiling issue would arise would be after the upcoming presidential election.

Well guess what, it seems like there is no time like the present for a good debt ceiling dispute, despite the minor detail that any increase is unlikely to be necessary before 2013. Although it does divert attention away from those nettlesome issues of unemployment and student loans.

Not wanting to be left out, Wall Street continues to promulgate its own variety of irrationality, including a continual reincarnation of the precept that cutting taxes on the wealthy produces miraculous economic results, such as lower unemployment and a reduced the deficit, especially when aided by less financial regulation.

Macroeconomic Advisers — which tells businesses what they need to know, rather than telling politicians what they want to hear — is adamant that such logic is, “both flawed and contrived.” Yet, the touted danger of a rising deficit and an engrossing fear of the national debt are being used to exalt a vision of utopia, defined as small government, low taxes, especially on the wealthy, and minimal regulation.

Meanwhile, the banking industry continues to make risky bets with untold billions of dollars, knowing that they will be obscenely well rewarded if they bet right, and bailed out by the tax paying public if they bet wrong.

Consider the recent shareholders meeting of JPMorgan Chase at which Jamie Dimon, JP Morgan's CEO, apologized for a $2 billion trading loss. The loss resulted from trades that were originally designed to hedge against risk, but grew in size and complexity, raising questions about whether the bank's actions violated the spirit of the Volcker Rule.

The Volcker Rule refers to that part of the Dodd Frank Wall Street reform act that would ban risky trading by banks for their own profit, a strategy sometimes referred to as proprietary trading. Unfortunately, it was never implemented. The key reason – pressure from bank lobbyists. In other words, casino capitalism is back in style on Wall Street - not that it was ever really out of style.

Why did the hedges get so large? Dimon blamed "sloppiness and bad judgment." Consider instead the too real possibility that JPMorgan was expanding its hedging operation to offset a large number of risky holdings that the bank absorbed when it took over Washington Mutual. In other words, JPMorgan's trading disaster was likely a symptom of the toxic debts still on its books.

Dimon said that he believes it is important for the bank to continue to be able to hedge against risk, but that he also recognizes the need for rules that "ensure hedging doesn't morph into something different." So will the lobbyists now allow the Volcker rule to be implemented? Unlikely.

Which brings me to one of the most often asked questions in the mailbox this week and that is whether you should buy shares of Facebook’s initial public offering. My opinion is that it would not be a wise move. There are a myriad of reasons but suffice it to say that much of the stock price and the possible ensuing rise in price immediately after the shares are priced will be due to Wall Street hype.