Submitted by Daniel Drew via Dark-Bid.com,

After the carnage of the 2008 crash, former Federal Reserve Chairman Paul Volcker proposed a rule that would prevent banks from making short-term proprietary trades with financial instruments. In other words, no gambling allowed. This rule would become known as The Volcker Rule, and it went into partial effect on April 1, 2014. Full compliance is required by July 21, 2015. Of course, the bank lobbyists were hard at work, and numerous exceptions and loopholes were created. The definition of "financial instruments" did not include currencies, despite the fact that currencies are the basis of the modern financial system and should be considered the ultimate financial instrument. Also, banks were allowed to "hedge" their risks. As JPMorgan demonstrated in 2012, apparently, it is possible to lose $6 billion while hedging risks with credit derivatives.

JPMorgan is at it again – this time, with the Swiss franc. On January 15 of this year, the Swiss Central Bank sent shockwaves around the financial world when they abruptly abandoned the 1.20 EURCHF floor.

CHF/USD Futures

The Wall Street Journal reported that JPMorgan made up to $300 million in the ensuing trading chaos. With the FX market facing a severe shortage of liquidity, JPMorgan stepped in. However, as with any illiquid market, the dealers call the shots. Bid/ask spreads can explode, creating enormous transaction costs for anyone who has to trade. These parties included desperate retail FX brokers and small clients who were bankrupted by the Swiss central bankers. As the WSJ reported,

J.P. Morgan filled client orders at a certain rate, allowing them to quickly assess their position and continue trading when liquidity dried up in the market, this person said. The bank told clients it would fill orders at 1.02 francs per euro while the Swiss currency grew from 1.20 francs per euro to nearly .85 on Jan. 15, the person said. It is unclear how long the bank offered this rate to clients.

By setting the fill 15% away from the last price, JPMorgan was able to lock in any gains from a long franc position instantly. It also gave the firm's traders an anchor so they knew where they were at. What if the clients could get a more advantageous rate at another bank? It didn't matter. 1.02 was the price. If JPMorgan's traders saw a better rate elsewhere, they could trade with that third party and effectively arbitrage the market against their own clients. Of course, it was all transparent. You knew you were getting 1.02, but if your bankrupt broker is margin calling you at any price, there's not much you can do. It was JPMorgan's market.

The chaos of the Swiss bank bluff showed up in JPMorgan's first quarter report. In the trading section that reports the firm's value at risk, January 15 stands out like LeBron James in his 5th grade class picture.

JPMorgan VAR

With free reign to trade currencies and under the guise of "market making," JPMorgan raped the accounts of retail FX brokers and small clients who never could have imagined that the Swiss Central Bank would turn the stable franc into one of the most volatile currencies of the decade. It also appears that The Wall Street Journal overstated the $300 million headline number. According to JPMorgan, they made about $200 million that day.

The fact that JPMorgan still takes value at risk (VAR) seriously is another irony. Wall Street anti-hero Nassim Taleb has made multiple fortunes betting on improbable events via out-of-the-money put options, and he remains one of the most steadfast critics of VAR. Taleb has an arcane style of communication, but the summary of his criticism is that VAR is based on the normal distribution, which underestimates the effects of extreme price moves. Furthermore, the very idea that wild events can be predicted by any model is an arrogant assumption, according to Taleb. A white paper by the Chicago Board Options Exchange (CBOE) verifies Taleb's assertions.

S&P 500 Skew

The chart shows the type of statistical distribution that Taleb described as "Extremistan" in his popular book "The Black Swan." The frequency is heavy in the middle and higher than expected in the "tails," or the far extremes of the distribution. What this means is that wild events like the Swiss Central Bank bluffing the entire world happen more frequently than risk models suggest.

In their 10-Q filing, JPMorgan boasts that there were no VAR band breaks. Translation: They never had a 1-day loss that exceeded their estimates of about $50 million – although they did come uncomfortably close in March. Just like a typical swashbuckling bank that throws around billions of depositors' FDIC-insured money on convoluted derivative bets, JPMorgan is only concerned about downside volatility while ignoring upside volatility. Yes, they didn't have any downside VAR breaks, but anyone can look at the chart and see there were multiple instances where they made more than $50 million in a single day, with the Swiss bank debacle being the most notable one. Veteran traders know that this kind of wild upside can be just as great of a risk as unexpected downside. If you can make $200 million in a single day, you can also lose the same amount – especially when the P/L comes from linear non-derivative sources like the spot currency market. In this case, JPMorgan happened to be on the right side of the tidal wave. However, Citigroup, Deutsche Bank, and Barclays got caught in the crossfire, and they lost a combined $400 million on the franc. Just another day in casino capitalism.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2015-06-15/what-volcker-rule-loophole-looks

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Wishing it was true doesn't make it true–it makes you a chump who fell for the con.

Once upon a time in America, no adult could survive without possessing a finely tuned BS detector. Herman Melville masterfully captured America's fascination with cons and con artists in his 1857 classic The Confidence-Man, which I discussed in The Con in Confidence (October 4, 2006).
 
An essential component of the American ethos is: don't be a chump. Don't fall for the con. And if you do, it's your own fault. The Wild West wasn't just thieves shooting people in the back (your classic "gunfight" in the real West)–it was a simmering stew of con artists, flim-flammers and grifters exploiting the naive, the trusting and the credulous.
 
We now inhabit a world where virtually everything is a con. That "organic" produce from some other country–did anyone test the soil the produce grew in? It could be loaded with heavy metals and be certified "organic" because no pesticides were used during production. But what about last year? And the year before? What's in the water used to irrigate the crops?
 
The employment/unemployment statistics are obviously BS. 93 million people aren't even counted any more–they're statistical zombies, no longer among the living workforce. If the unemployment rate were calculated on the number of full-time jobs and the true workforce (everyone ages 18 – 70 that isn't institutionalized or in prison), the unemployment rate would not be the absurdly delusional 5.6% claimed by the bureaucratic con artists.
 
The corrupts-everything-it-touches bribe vacuum known as Hillary Clinton is still disgracing the national stage, 24 years after she first displayed her con-artist colors. Hillary's most enduring accomplishment is the Clinton Foundation–a glorification of bribery, chicanery, flim-flam and cons so outrageously perfected that it serves up examples of every con known to humanity in one form or another.
 
And as she learned from hubby Bill–if the smarmy charm-con fails, quickly revert to veiled threats. "You'll never work in this town again!"
 
Hillary would fit right into Melville's river boat teeming with con-artists. The accent she uses on the marks–oops, I mean audience–changes as readily as the camouflage on a chameleon. Upper Midwest, Noo Yawk, Fake-Southern–what you hear depends on the credulity of her marks.
 
The entire American political system is a con, a sleazy mix of legalized bribes, auctioning off of favors, revolving doors between government agencies and the corporations they enrich and the blatant hypocrisy of snake-oil salespeople who know the marks (voters) face a false choice between two parties that are the same poison sold under different labels.
 
Which brings us to China, one of the greatest credit bubble and financial cons ever. Please examine this chart of the Shanghai Stock Exchange (SSEC). Clearly, there is no upper limit to the Chinese stock market: 5,000 today, 10,000 next week, 50,000 the following month and 100,000 shortly thereafter. The sky's the limit, Baby!
 
That China's credit machine is now dependent on a stock market bubble for its very survival speaks volumes about the true health of China's economy. This dependence was recently explained in Why China Is So Desperate To Blow The Most Epic Stock Bubble.
 
Everybody who thinks China's economy is healthy because its stock market is soaring has been suckered. Every good con-man/ con-woman knows that the con only works if the chump/mark wants to believe the impossible is true–that the snake-oil remedy will actually cure their ailments, that the "hope" candidate will actually change the corrupt system from the inside (ha-ha, they fell for it), and that China's economy is on its way to becoming the world leader in everything.
 
Many people want to believe this fantasy because it suits their agenda: For American pundits, China isn’t a country. It’s a fantasyland.
 
But wishing it was true doesn't make it true–it makes you a chump who fell for the con. We want to believe our political system isn't an unreformable cesspool, that our economy is a vibrant creator of new middle class jobs and that China will manage the greatest credit bubble in history without a hitch. But these are all cons put over to protect the wealth and power of those benefiting from the con.
 

If your BS detector isn't shrieking, it's broken. You've been conned. Wake up.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2015-06-09/if-your-bs-detector-not-screaming-its-broken