Experienced Wall Street executives and traders concede, in private, that Bank of America is not well run and that Citigroup has long been a recipe for disaster.
But they always insist that attempts to re-regulate Wall Street are misguided because risk-management has become more sophisticated — everyone, in this view, has become more like Jamie Dimon, head of JP Morgan Chase, with his legendary attention to detail and concern about quantifying the downside.
In the light of JP Morgan's stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model.
But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed.
JP Morgan claimed to have great risk management systems — and these are widely regarded as the best on Wall Street.
But what does the "best on Wall Street" mean when bank executives and key employees have an incentive to make and misrepresent big bets — they are compensated based on return on equity, unadjusted for risk?
Bank executives get the upside and the downside falls on everyone else — this is what it means to be "too big to fail" in modern America.
Read more: JP Morgan debacle reveals flaw in Federal Reserve thinking | The Nelson Daily
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