Bluefield Daily Telegraph, Bluefield, WV

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May 23, 2012

JP Morgan investment exposes the problem

By Nick Massey

CNHI News Service

Well I hate to say I told you so, but I can’t help myself.

In case you have not heard, JP Morgan bank had a little trading problem recently that resulted in a $2 billion loss. Oops!

At least they say the problem is “contained.” Oh wait, isn’t that what Fed Chairman Ben Bernanke said in 2007 about the subprime mortgage problem before it blew up? And wasn’t that what every bank and investment bank said in early 2008 before they finally confessed to having a problem? And isn’t that what they said after Bear Sterns collapsed and just before the sushi hit the fan at Lehman Brothers?

But this time is different because we know better now. Yeah right! The inmates are still running the asylum and putting us all at risk again.

Perhaps JP Morgan just gave us a glimpse of the next financial crisis. A surprise, hidden $2 billion trading loss in a bunch of exotic financial instruments at an offshore branch of one of our premier banks was certainly not what the markets wanted to hear right now.

But it begs the question that if one of the most sophisticated banks in the world can screw up this badly and get caught on the wrong side of a trade, what else is out there among institutions of lesser abilities? Mark my words; this is just the first of many revelations to come in this area of trading by major financial institutions. There is never just one cockroach.

I don’t want to beat up on JP Morgan. Plenty of other people are doing that. The problem is much bigger than just them. This is precisely why I have argued since 2008 that we need to bring back some version of the 1933 Glass–Steagall Act, which separated commercial banking from investment banking. These two businesses have completely different risk characteristics and capital requirements.

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