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Re: JP Morgan Chase Execs Vaporize $2B

Posted by Charles G on Mon May 14 15:07:41 2012, in response to Re: JP Morgan Chase Execs Vaporize $2B, posted by AlM on Mon May 14 12:16:20 2012.

I don't know much about Canadian bank regulation (though I do see their banks taking on some "courageous" insurance and reinsurance risk from time to time). The problem is that risk has become too hard to define empirically. I haven't seen it in print anywhere, but was told today that JPM's VAR (value at risk) calculation for the transactions in question was $63 Million. How you can lose $2 Billion when you supposedly have only $63 Million at risk strains the brains of mortal man.

My preference would be to split the banks into those which would be bailed out (i.e. those with FDIC protections), for which there would be heavy-handed regulation of the types of assets they could invest in and into investment banks for which there would be no bailouts and no regulation.

In addition to the investment banks own executives being incentivized to do a better job managing risk because there was no safety net, the counterparties would also demand better risk management (as well as limiting the amount of potential recoverable they have from any firm).

The models always assume that everyone pays what they owe. As the banking industry found out in 2008, that isn't always true. You need to limit your exposure to any one counterparty.

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