Well, I found it quite interesting when JP Morgan Chase lost $2 Billion from their hedging and several Senators called for an investigation. You see, Frank-Dobbs has not gone fully into effect yet, and international banking concerns based in the US are allowed to hedge to protect against losses. Further, as they were making incredible profits and gains from their hedges previously, no one said a thing, well, except; congratulations. Okay so, let's discuss this for a moment shall we?
Now then, if a bank needs to hedge against poor choices in its lending, then perhaps it needs to reassess its risk better, and perhaps do fewer loans in economies that are unstable, or economies using currencies which are not stable. Another interesting point in all of this is that the only way to recover that two billion dollar loss in hedging, is to continue doing aggressive hedges to make up for and level out the losses in the current quarter against those gains in future quarters. In fact, if you look at it in that regard the banks are then hedging against their hedges, and if so, where could it possibly stop?
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Of course, every industry needs to hedge against a volatile commodity prices such as fuel in the airline, railroad, trucking, or shipping industry for instance - and that is perfectly legitimate and makes sense. However if regulators are closely scrutinizing each and every deal, it would be hard to estimate where a legitimate hedge is placed, and one which is nothing more than an economic bet, and really if you are hedging, it is important to win, not lose.
Indeed, there are risks all over the globe regardless of industry, and if we wish our banks to be boring, especially if the taxpayer would be on the hook for the lender of last resort in the case of failure, then the line has to be drawn somewhere; but where? And back to the first point above; no one complained when these banks were making huge amounts of money hedging, folks are only concerned now with the losses. Micromanaging in a new era of Frank Dodds is quite problematic.
Elizabeth Warren wants to have the US Government fully regulate all this, but could anyone in the government really do any better with protecting the banks money than the banks themselves, which is the overlying debate of course - pro or against excessive regulation in the banking sector.
When government gets involved in business and industry, that incestuous relationship can lead to all sorts of places we shouldn't go, and I fear we are rapidly advancing to just such a space. Indeed I hope you will please consider all this and think on it.
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