The First Look - Andy Cinko, Bloomberg News

Good morning ladies and gentlemen welcome to the financial exchange its may eleventh 2012. But it might as well be may eleventh 2008. Because it appears nothing has changed in terms of the way our banks behaved. Yes our banks are still acting as large casinos and one of them took a very significant loss during the last week six weeks. That bank of course JPMorgan Chase losing two billion. Perhaps three billion dollars. During the last -- six weeks in derivative trading that's our lead story today were gonna spend a substantial amount of time digging into the details on it what I can tell you is this story is significant enough where it is causing a significant stock market sell off. The market won't open for another 24 minutes the June night tells me that the futures are in negative territory. Yeah a lot of red across the board let's start with the Dow futures buried down 86 NASDAQ futures down seventeen the S&P 500 is down eleven. Also ten year US treasury is at one point 839 that's down slightly gold is down fourteen dollars -- Oil fell on a dollar three at 9605. And I'm thinking that that that Producer Price Index. Coming in off just a little bit hasn't helped this at all either. All right well. You know I can't think of anybody other than the government that's capable losing two billion dollars in six weeks we're joined by -- single from Bloomberg to news in New York. Andy welcome to the financial exchange carried on this morning. I'm all right Derek thanks for having me back yes. How did how did JPMorgan Chase lose two billion dollars in such a short period of time. Yeah this is great story for us to Bloomberg we we first reported a couple of weeks ago that if there was London trading arm of Bloomberg. JPMorgan that had this become as as they are known whale. In these synthetic. CDS CDS market. And you know the positions were so large that this trader or traders I should probably say. We're moving that particular market and though its seen that want that story came to light. It and again amid the timeline here is not quite. Perfectly clear but it seems once the story came to light that they were trying to unwind some of these positions. You know because once it becomes common knowledge traded then there are able to work against you you and so you know they've they've logged 82 billion dollar. -- as they try to unwind those positions which may have been at large is 100. Billion dollars now now Barry we needed. Sort of put that two billion dollar loss in context. On a net basis they've only lost 800 million dollars because. What they're doing is selling other assets that they have had a profit offset that loss though. You know in in terms of these that synthetic. Credit products that there involved -- yes the law could be upwards of three billion perhaps more. The they'll be selling other assets to reduce that red. Well though yes they'll have to divestment can you explain to a safe because they got a lot of us are sitting here saying okay how'd you do that though I still don't understand. Would a credit default swap is I still don't understand what did derivative is. Explain that to our our listeners into because that's. People wanna know how how this could happen for years after supposedly we clean this mess up. Yeah Allah as some basic definitions here a derivative is any product any product that has its price based on another one though even -- the stock options yup in the derivative. It's few trees on commodities that's derivative. So what is happening here in the this particular cases that JPMorgan. Was creating and democratic products they were buying insurance. On a corporate debt or loans or government bonds. JPMorgan did not own those bonds or org or corporate debt what they would dealing without making a bet on whether those. Those on the line after its would rise and fall and -- -- they're writing what is known as synthetic. Credit default off. And that isn't he you know he can be a worthwhile thing to do justice in the futures markets they ExxonMobil would sell oil futures. To head its it's pricing so banks do this thing things they are hedging the price of those loans and bonds that they -- underwriting -- backing. And you know this is it worthwhile. Practice to do it's certainly the piece of insurance and help balance out their business however. JPMorgan as Bloomberg its support. -- turned at the office of the chief investment officer. Into one where where they were trying to not only had their book of loans and bonds and other assets but there -- also trying to make a profit that. And they become a little more aggressive in their bats and so it seems that this particular. Part of what this. She's investment officer was doing was was to create these very large positions but when you create life positions and relatively illiquid market. You end up being painting yourself into a corner and so when you try to exit those positions everybody knows is selling so all that happens. Is that every once held at a viewer they domestic market in these products and and you end up having to take massive losses Lou we don't have no different than what happened in the sub prime market and the media is being put it illiquid. Products to Begin with. And it's people old they just ended up with huge losses. But Andy here's what people are are going to be listening to it and and and not understanding. He this is what was occurring back in 2008. This is what caused Lehman Brothers to go under this is what caused Bear Stearns to be out of business that it you know if this is what brought the banking industry to its knees. Why has this behavior not been curtailed wired the big banks. That we are are effectively utilities 'cause they're -- we now know. That they're gonna be bailed out by the taxpayers why are these big banks being allowed to continue this very risky behavior. It it comes down to one that hasn't stopped and trading began grind as I said before you know all that all that. JPMorgan was essentially originally trying to do. Went ahead it's Booker does that the loans and bonds that its own right it doesn't wanna -- haven't -- the -- long position short position in those. At that that -- the heads that. So but at what point. Is the -- is too large and now. Crosses the line to tree and profit making. You know in addition to that you may have a head on that looked very small and in the market moved and that becomes the you know upbeat profit or big losses. Not because of anything you did as a banker or as a traitor but simply because the market moved. You know banking has become a much more complex business so much more trading oriented business. That that you could be used to be very sleepy back in the day and now it's become this. You know much more exciting place with a trade it in they do a lot of other things that you know traditional banking has not done before. Look this regulator it becomes hard to say we you know stop doing that because he -- the bankers will turn around and say I have to do this to protect my. Wildly but they didn't do this before Glass-Steagall today. You -- Glass-Steagall is. They couldn't. They could possibly you know they would have to do it as traders like if you just simply let's just make it really simple meetings and long were you may loans and. And he kept deposit not only did if you wanted to head that look at businesswoman you probably would have to go to Wall Street and you know find a banker who would you view. Derivatives and insurance and other things like that you didn't keep that in house. You know because that was that was not allowed. Or you might have done is a very minor way because again I was not allowed. You know RT I think one of the question if you wanted to -- to me was whether Glass-Steagall is coming back. Yeah -- it does make sense adding I think -- -- all I want is eight I just don't want the taxpayer again to have to foot the bill. For risky behavior on the part of the banks now you know Jamie diamond he his reputation as a as a risk manager will clearly -- his reputation was unfounded. He does not deserve the reputation he's earned. ID -- date they are taking risks and we know. Indeed that if they go bust you and I are gonna be pain -- to bail them out and I'm sick about it gallon up the banks. Yeah that this is probably. The the event that the puts the nail on the confidence in the credit default -- market that's what one comment came out today. It's -- it's gonna look like it's gonna make the Volcker Rule goes through and very. Robust and and punitive way and if you look at it from the bank's perspective because they've been trying to watered that down. I I don't think Glass-Steagall was going to come back at this point. And it's and it's not clear that we're gonna turn -- Goldman Sachs and Morgan Stanley in the other crew Wall Street. Investment banks back into. Private partnership which is what they were before. You know although many people would like to see that happen to your point because you know if if the if they're limited partnerships the partners money's on the he will keep a much. Shorter leash on what traders India because if in the massive loss like this the partners if it was that not the regulators not the government. That's right and they're not I -- quarterly bonus or quarterly earnings report you know they that's that the problem Jamie diamonds only worried about his bonus and am I gonna make fifty million or sixty million this year you know it that's that's the part that I think. The the the individual investors looking at this sandy insane -- -- Wall Street is just dirty again proven that -- they're they're untrustworthy yet again. Well I think it is the -- the message that will come out of this broadly is that. -- do what you said originally -- that really it looks like nothing much has changed. In the last four years and -- and I can't speak to how much it has changed or if it has at all but if that is the perception and broadly I think that is the perception -- among Republicans and Democrats and regulators and just the average man on the street. This is going to be just another. Wrenching up of the controls on banks. And that the banking sectors has box that does it look like a much worse bet this morning given what we don't know. Natured as it -- and -- sure appreciate your time thanks for bearing with me. This -- -- that -- rout amid a bad move that to Andy single from Bloomberg News joining us today on the Fannie while you are gross today I'm really -- been slow it's just indicative Judy I mean it's it's. Are we are we haven't changed -- thing right Wall Street. Is is just continuing to bribe of our political leaders right and they get the laws invoked in a way that is appealing to them but and screw the taxpayer that we're the ones that bailed them -- it JPMorgan Chase goes under there the largest bank in the country right. If -- under -- and they've got more than 10%. Of all the deposits in the United States can't let him go wonder yet they're still out there it you know behaving like a casino.