In all the hullaballoo about the London Whale trade at JPMorgan Chase (JPM), Congress has yet to even ask whether the trade is still on.
It was last week. There are signs today that the specific trade may be in the process of unwinding but even the House never got to the key question - does the bank still hold the assumptions leading to the trade?
Getting out of an index of investment credit isn't the question. The question is, or should be, whether JP Morgan Chase, whether Jaime Dimon, think we're on the cusp of a credit crunch like that of 2008?
That's what Bruno Iksil was betting on, the idea that Greece would fall, then Spain, then Italy, then Ireland, just as Lehman and the other big investment banks did here in 2008. That's why Dimon called it a "hedge" - that's what he was hedging against. If that's what JP Morgan Chase expects will happen, this wasn't a rogue trade
The trading lesson is that you can be right on the merits but your timing can be bad. If there is a credit crisis in the next few weeks - and there are now London bankers saying that's just what is in the process of happening - then unwinding the Whale's bet is only opening the bank to bigger losses later on, when what Iksil feared comes to pass.
If JP Morgan Chase were just an investment bank, and not a commercial bank with deposits backed by the full faith and credit of the U.S. taxpayer, then we would not have to know what Dimon really expects to happen. The fact that his capital does have those guarantees means we should expect that kind of transparency, which he still hasn't given.
A new Glass-Steagall Act could not protect against Dimon making a huge bet against stability. Failing to make such a bet would, if he believed a catastrophe was imminent, be a breach of his fiduciary duty. But the size of the bet, and the risk to capital, is just what we saw in Lehman Brothers, and the other 2008 failures that whipsawed the markets and sparked the crisis.
We don't just need to separate poker players from the public trough, in other words. We also need to cut these whales down to a size where their bad bets can be handled by the table.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
