On many recent radio interviews I have shared my opinion that the banks in America are in worse shape today than they were in 2008. I've pointed out that nothing changed after the painful lessons of just how much damage speculative trading, in an attempt to boost profits, can do to destroy bank capital. This same speculative trading,which placed the whole financial system in danger of total collapse, is alive and well in the 2012 banks.
This comes as a result of bailing the banks out in 2008 instead of allowing them to fail for their reckless behavior. Banks are still clearly in the business of speculating with all of our futures. One need look no further than the news today coming out of JP Morgan of a $2 billion loss resulting from a failed hedging strategy. This is prima facie evidence that bank behavior has not changed from what took the system to the brink in 2008. JP Morgan cited a trader for this egregious loss and referred to him simply as the "London Whale”. No name, no responsibility.
And all this coming from America's largest bank by assets. Heralded as the bank with the strongest risk management in the business. What does that say about Bank of America or Wells Fargo?
JP Morgan was also forced to reveal that their business unit, which was expected to post a $200 million profit, actually sustained a $800 million loss. That is a billion dollar turnaround!
The takeaway from the JP Morgan news we need to share with our clients is this; reckless behavior in our banking system is still alive, well and continuing to speculate with the future of the nation. Knowing full well they are too big to fail and will be bailed out once again at the taxpayers' expense if they lose.
Nothing has changed. And now we see the results of removing Moral Hazard from the equation. I wonder just how many banks, that continue to window dress their balance sheets are in the same, or worse shape, than JP Morgan?
If the economic principle of 'creative destruction' was allowed to purge the system, we would have strong, solid banks today. Instead we have banks in an even more precarious position than they were in 2008. But all of these banks have still made billions over the last four years on increased fees and selling their deposits to the FED for a virtually guaranteed 2% risk-free return.
This once again illustrates the importance of maintaining a position in gold. If this loss had put JP Morgan in danger of failure, the FED would have printed plenty of money to bail them out costing all of us on Main Street a massive loss of buying power in the process.