September 19, 2013

Liberals don't understand economics chapter 9,004

In this article, entitled JPMorgan Hit With Puny $920M Fine Over ‘London Whale’ Debacle. The writer shows a staggering lack of knowledge about capital markets, banking, finance, economics etc.

To wit:

For lying to multiple governments and its own investors about losses of $6 billion, however, the bank will have to pay just $920 million, or 0.03 percent of its current holdings. With total assets of $2.35 trillion, JPMorgan could pay the same fine every hour for three months, or every day for seven years, before their coffers would run dry.

Where to start. Well, one of the first commenters takes him to the woodshed:

Secondly, however, you need to get your basic financial knowledge straight. This is especially difficult for banks because what is an "asset" and a "liability" for a bank is somewhat counterintuitive. Let's start with the basics: Yes, JPM has a total of 2.36T in assets. It also has 2.15T in liabilities. The company's total market cap is only ~200 billion, not 2.3 trillion (2,300 billion). Big difference. Secondly, most of those "assets" are unavailable for use in paying this fine. The vast majority of JPM's assets are "long-term assets" which for a bank means (basically) "loans". JPM has loaned out 1.65T to individuals (mortgages primarily, I would think; also personal loans, car loans, what have you) and to corporations. These are liabilities on the balance sheets of the borrower but assets on the bank's balance sheet (I take out a $500,000 mortgage means I have a $500K liability but the bank has a $500K ASSET).

The bank's cash on hand is approx $471 billion, which means the $920M fine is approximately 0.2% of what it has available to pay, not 0.03%. Sounds minor but that's an approx 7-fold difference.

Indeed understanding what those "holdings" and "assets" are and to whom they belong is critical. Leftist types seem to forget that the bank's assets aren't really theirs. They belong to the investors and the banks are either the custodians or managers (or both).

Down further another commenter expands on this point:

Dimon should step down because of a 6B turn in a book that is over 1 trillion dollars large?

Even if the entire amount of the loss was attributable to poor risk management (which it wasn't), you fire one of the best CEOs in the world, a guy watching over a systemically important firm, for a 3% oversight?

Your comment regarding punitive value would be right on point..if you were penalizing the people who have some control over the process. We have laws to punish people who commit financial crimes, and massive regulations that banks need to operate under.

Anyway - couldn't disagree more and thankfully the regulators, even in their over-zealousness, don't steal money from pensioners out of spite that often.

None of this matters of course. A 3% variance on a balance sheet is enough to make them scream for lynchings. A brief glance at the balance sheet of the US Government somehow doesn't merit so much as a frown. I'll wager if you took all the economic horror and pitched it to them as the doings of a nefarious Big Corporation they would wail and rend their garments.

Posted by Duffy at September 19, 2013 02:44 PM | TrackBack

Comments  (We reserve the right to edit and/or delete any comments. If your comment is blocked or won't post, e-mail us and we'll post it for you.)

"I'll wager if you took all the economic horror and pitched it to them as the doings of a nefarious Big Corporation they would wail and rend their garments."

John Stossel made himself unwelcome at ABC before doing just that.

Posted by: Jeff the Baptist at September 19, 2013 05:01 PM

Interesting view: "Fines" my ass. Businesses and homeowners are being systematically robbed by government via vast chains of default or "bailouts" or takeovers or "penalties". These are purposefully mislabeled exchanges of money. It starts with businesses being gobbled by equity firms or homeowners being taxed to oblivion. It continues with banks and larger holding companies gobbling all the smaller fish in the pond. It ends as a government fine or levee. Government "regulators" simply have to wait until the alpha bank is sufficiently stuffed with meat before piercing it once and scooping up the effluence with one fell swoop. It's a mop job of historical proportions. Zerohedge

Posted by: mynym at September 20, 2013 03:01 PM

@mynym: Indeed. The only thing you missed was "inflation" as a means of robbing you. The counter argument is that such concentrations of wealth make plutocracy that much easier. If they overconsolidate they'll find the bear has become too large and they're the ones who will be eaten

Posted by: Duffy at September 23, 2013 01:11 PM

The Colossus of Rhodey: Liberals don't understand economics chapter 9,004
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