Public response to the latest shame dumped on Wall Street firms and their executives indicates investors’ irritation over faulty government securities oversight. A congressional banking committee hauled in Jamie Dimon, CEO of Wall Street giant JPMorgan Chase, to explain the multibillion loss his firm sustained in the risky derivative marketplace and why the army of securities regulators did not see it coming.
Naive investors thought landmark legislation passed in July 2010 would put the brakes on the speculative Wall Street schemes that got the world into a serious recession in 2008. The Dodd-Frank securities regulation bill was full of compromise and vague definitions after the Wall Street lobbyists got their way with Congress. The 2010 law required implementing a series of regulations within two years, but it is now September 2012 and only a portion of the rules are in force.
Why is that? The Wall Street lobbyists and attorneys hired by the investment banks are making sure the heart and soul of Dodd-Frank are gutted. Lobbyists even coerced Rep. Barney Frank to agree that certain provisions of his law were not fair to the industry; the same lobbyists enhance his campaign funds for re-election.
Apparently the bureaucratic wheels in Washington are in low gear as the nation waits to see how the election will turn out. The Republicans, fired up by Wall Street lobbyists, predict that all or parts of the Dodd-Frank Act will be reversed. So why work so hard to write rules when the legislation will change? No matter that the law required a two-year limit ending in July to finish the work.
While all this drama has played out, Bloomberg columnist Mark Buchanan penned a hilarious review of a study on the effect of the testosterone steroid on Wall Street traders. For those not familiar with medical terms, but think they can guess what it does, here is a definition: Testosterone is the male sex hormone that fires up a person’s action. It is similar to the release of adrenaline and cortisone, which activate the fight-or-flight reaction. The release of these steroid hormones boosts fearlessness and an appetite for risk.
How can researchers perform a test measuring the testosterone drive in a delicate way so as not to embarrass the participant or offend the reader? That was easy. Two British neuroscientists did the experiment on the trading floor of a major investment bank in London over eight consecutive business days. They took samples of spit from 17 traders at 11 a.m. and 4 p.m. to measure the rising and falling levels of testosterone created by daily trading activity.
The results were revealing. Testosterone priming during a successful period of trading makes the winner more confident that he can win again by taking more risk. The scientists were convinced that biology does have an effect on economics, as we have witnessed with the recent failure of major banks and investment firms taking monumental trading risks.
One of the neuroscientists, John Coates, is at Cambridge but started his career as a trader at Goldman Sachs Group and Deutsche Bank for 10 years. He suspected at that time something other than economics drove market trends. The giddy energy of a long bull market reflects a surge in testosterone. When the bubble bursts, the trader is risk-adverse in a bear market with rising levels of anxiety and a sense of danger lurking everywhere.
A current case of uncontrolled risk-taking is the trading loss suffered by JPMorgan Chase. The highly regarded CEO announced originally a loss of $2 billion, which security regulators posted right at the bank did not detect. The interesting aspect of the shocking news was that Dimon could not identify where the loss occurred or exactly how much was lost in May. The current estimate has increased to $7 billion.
Financial pundits predict that the loss has exposed JPMorgan Chase to civil fraud litigation. Because the traders involved intentionally tried to hide the red ink, the bank plans to revoke two years’ pay for senior managers responsible and has closed that investment division. The “refund” could be as high as $29 million from just one trader — some comfort for the stockholders.
Despite all the bad publicity, the bank’s stock was down only 11 percent in July at the height of the scandal. That’s because after booking the potential trading loss in hedge funds, the bank still earned $4.96 billion in the second quarter.
When Congress passed the Dodd-Frank reform bill in 2010, it intended to put the brakes on the hyper-trading in high-risk investments. While the rules are being crafted, the Wall Street firms are still aggressively creating new quick-profit investments that would make a Las Vegas gambler blush.
Ford is a freelance writer located in San Diego. He can be reached at johnpatrick.ford@sddt.com.
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