The London Whale

Posted by Jeff Carter
on May 11th, 2012

No one is bigger than the market. No one. I learned that lesson early in my trading career. One day, a huge trader decided to retire. He covered his positions and was gone. There wasn’t a ripple in the market. The only difference was there was an open spot in the pit to fight for.

The London Whale isn’t any different. Sure, because of the capital behind him, he could move markets and hold them there for a short time. But at the end of the day, the market always wins.

The pundits are going to have a field day. Bankers aren’t exactly the most highly respected people in the room right now and this total disregard for risk on the part of JP Morgan($JPM) isn’t going to change that opinion any time soon.

The company screwed up. But, they are still operating and even when you add in the loss, still made a profit last quarter. That’s not what will undo the market in the long run. The more likely culprit will be European government debt and US government debt. When the Euro unravels, look out below.

Jamie Dimon will get the blame for this transgression, and he should. But one person can’t possibly know everything about everything, even a CEO. That’s why they put good people around them. Dimon leads the bank but this was also a failure of all the people that report to him. They dropped the ball every bit as much as Dimon did. Dimon doesn’t need to know the ins and outs of hedging. He just needs to know how exposed his shareholders are and to be able to make an educated business decision. In this case, either he didn’t have enough information to make a good decision, had the wrong information, or, made a really bad decision.

A lot of folks that hate markets will use this opportunity to deride futures markets and over the counter derivative markets. They are wrong. Run correctly and transparently, markets are some of the greatest truth detectors known to mankind. It’s not like market pros were in the dark about the big trader in London. Everyone knew. They just didn’t have any ability to do anything about him because he had more chips than they did and the forces in the market kept giving him more chips to play with. Now they can and it will hurt. Hopefully JPM calculated their exposure correctly. Because payback is hell.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.