good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for may eleventh two thousand and twelve after hearing about his action on wall street since april we have finally seen this animal rear its head and tail take a look. at the london whale capsizes the j.p. morgan see i ope profit boat jamie dimon announces a two billion dollar trading loss saying more could be on the way saying big mistakes were made but hey this doesn't make the case for more regulation or for the volcker rule we'll talk about why this is exhibit a for why the volcker rule is needed that said we'll ask if the rule in its current form would have even stopped

the london whale marketplace's heidi moore joins us plus we will look at how the federal reserve may be in the building and incentivizing this kind of risky behavior in too big to fail firms also president obama's mortgage financial fraud task force was touted in his state of the union address but some allege it's been starved of staffing and momentum since then some members of occupy wall street have offered to help but they haven't necessarily been well received we'll talk to two of them let's get to today's capital account. so just yesterday ben bernanke in

a speech was talking about how conditions in the banking system have improved significantly over the past few years how banks capital and liquidity positions have really improved how the quality of loans and assets on banks' balance sheets has improved he said it all in his speech we covered it then what do you know after that yesterday the bank that touts itself as having the quote unquote fortress balance sheet j.p. morgan has a surprise conference call to announce significant mark to market losses at least a two billion dollars trading loss on credit derivatives coming from the firm's chief investment office this is of course the now infamous london wales office this raises a lot of questions about hedging about risk proprietary trading and regulation let's get right to them because joining us is new york bureau chief and wall street correspondent for marketplace heidi moore first of all welcome to the show it's a great pleasure to have you here on capital. it's great to be here thank you good

ok so let's just start straight from the top i know you've been covering this head to toe there's a lot of speculation out there about whether or not this loss resulted from a poorly executed hedge or in fact if it was a directional position to begin with meaning that it was a one way proprietary bet made by j.p. morgan with company money for the firm something that the volcker rule is explicitly supposed to guard against first i guess heidi why is it important to differentiate whether or not this was a hedge. well because it's important to see what j.p. morgan how it treats its trades in the market ok if they are trying to avoid the volcker rule it's a little shady we want to believe that the biggest bank the allegedly smartest bank in the country knows what they're doing and that they're not trying underhanded tricks to make money to avoid regulation is a great point so then i guess the question is where do you fall on this do you take jamie dimon at is word that this was a legitimate head or do you think this was

a proprietary bet made on the part of j.p. morgan because of course we did have that story a while back in bloomberg where several former j.p. morgan executives came forward and said hey diamond has transformed this he io into a prop trading operation that's what he's done over the last five years i would think that those people have a credible point we have to reserve judgment until we have the facts but if this were a hedge it we would call it the unicorn hedge because it's never been seen before there is no way that a bank would create a hedge of its entire portfolio right i mean that's how big we're talking here you don't hedge at the level of an entire financial institution you hedge a trade a few trades at a time so the people who argue that this is prop trading really have common sense on their side but again we do have to reserve judgment until we get the facts the facts just don't seem to be on jamie dimon side as of this moment i love that point

a unicorn now how's that for innovation on wall street let's say if this were a legitimate had heidi then where exactly is the offsetting position on j.p. morgan's books what would they be hedging against. well one theory that i heard from a trader which i really like is that j.p. morgan is heavily invested in high yield bonds it's been really involved in those junk bonds so it would make sense that it would have a lot on its books if that's the case how do you manage your high yield book by keeping an investment grade book corporate bonds with good ratings which of course you wouldn't expect to default and in fact that's exactly the bet this trader was making he'd bet that high rated corporate bonds would not the faults so this is a good example of being right and still getting it wrong as a really great point now jamie diamond did say that this position and his view would not have violated the volcker rule you have made the point and agreed that there are valid points to be made that this could be proprietary trading that we've never seen this kind of

a trade before if it is had so is this just more evidence that as currently written regulations are too porous to rein in these banks especially if you know this could be considered prop trading. yeah it's definitely a good argument for regulation and here's the thing you can see that the banks the regulation isn't actually in place yet the volcker rule doesn't technically exist right already the banks are trying to get around it so that tells us that regulation is necessary and we don't have to be nihilistic about it there are times when regulation has actually worked yes the banks will find loopholes but look at glass steagall right i mean banks had trouble during glass steagall but they could keep it contained that's all we can hope to do right now j.p. morgan's loss is contained because of sheer luck with this kind of influence in the market with this huge bet they could have created a panic that would have not just hurt them and us because they used our deposits but also the entire financial system as bank after bank after hedge fund responded

to whatever aftershocks could have been left by this trade it's pure luck they should consider it a wake up call but i wouldn't be surprised if they've missed the message if they've missed the message let's talk about what enables that because bigger picture heidi i have to add as long as money is made so cheap by central banks by the fed as long as there is this implicit too big to fail backstop provided again by the fed and also the treasury not to mention zero percent interest rate which you could argue incentivize risk taking to chase yield does this incentivize and enable this kind of risk taking incentivize and enable people to not get the message as you just said. right and the thing that actually all of those things play into it the thing that incentivizes them the most is that the banks made a lot of money after the financial crisis they bounced back in ways we could not have predicted they were really strong and over the past four quarters they haven't been their stock prices are languishing their profits are down they're doing

layoffs lower profits like that are the chief incentive to take gigantic risk when you and i talk about risk we think of risk when investment banks talk about risk they think reward and they need a lot of reward right now and they're also hoping probably in the back of their minds to get back to the place they were before the financial crisis and what they haven't realized even though everyone's been telling them is that the place where they were was the wrong place they were doing business the wrong way and they're just not getting the lessons this is an excellent example this is j.p. morgan it's the one bank that didn't have a scar from the financial crisis so of course they would be the one to make the stupid mistake yeah it's a really great point i want to get more into risk with specifically j.p. morgan first i want to talk about the nature of this position from what i understand j.p. morgan was effectively long corporate debt but they did so by going short on credit protection on that debt so it's kind of like a double short if you will so what is the advantage of structuring

a trade like this and is it mainly to hide risk and expand leverage because of course the average person is just going to glaze over talking about this so it's kind of get to you know the bigger picture here. we need to find the same for all of this was done i mean i know i find this enthralling heidi i just don't know how many you know average folks actually do and i think that it's an important lesson to not be lost on anybody. exactly so for those who don't find it is riveting as we do the basic idea here is indeed that they wanted to short a short which would mean going along ok so it's a very complicated they used an index to do it we can all basically understand the idea of the index and it had really strong corporate bonds like fannie mae freddie mac. c.v.s. that kind of thing so in order to make sure that they could get all of the advantages of that index they sold credit default swaps when you buy

a credit default swap it means you're going short when you sell a credit default swap it's kind of a way of going long it's a really twisted way to get there and there were numerous other mechanics and hedges involved but that's the basic route that they took it's a very circuitous route and what i suspect is that they built to that labyrinth and then didn't know how to get out of it what is it to hide risk and expand our lever up. if you see to rivet is it's a good bet that there's a lot of leverage hiding in there but we don't know those facts yet because j.p. morgan has been really obscure about it as you know you know obviously obscurity they believe has been their friend they haven't released those details so we're still piecing them together ok and do we know at this point how long this trading loss wasn't mark to market and why it wasn't mark to market earlier. that also doesn't make sense any investment bank would mark its losses to market meaning

checking the value they believe it has against the value that the market believes it has they would do that pretty regularly but j.p. morgan is claiming right now that they either waited too long or they saw something suddenly change which changed their idea of what the mark to market losses would be we don't know what that impetus was we don't know what made them change it and we also don't know why they weren't marking it to market all along why didn't they know this you know a month ago when everyone in the press was warning them well heidi let's talk about of these guys even know what they are doing jamie dimon said this was bad judgment on a certain level one have to wonder if anyone well meaning or not can be trusted to take such tremendous bad or put on such huge hedges with this savings of ordinary people jamie dimon and j.p. morgan have of course calibrated the bank as having the fortress balance sheet the best risk management so what does this say about the risk management culture more broadly on wall street. tells us that there is no risk management culture on wall

street this was the one bank that we had hoped to get it right we've heard smack talk about every other big morgan stanley goldman sachs j.p. morgan said it was above the fray it acted above the fray and it didn't have anything that we could pin any concerns on. when this happens to them it shows us that they didn't learn the lessons of the firms that they acquired bear stearns wall move right all of those firms took great risks and suffered for it but again because j.p. morgan didn't have the institutional history of suffering through the financial crisis i suspect they didn't have that scar they didn't have the wound they just didn't understand what true risk management is even if they misjudged the risk they should have been open minded enough to listen to all the warnings in the press from regulators from fellow traders they just ignored that and sailed forward and

that's called arrogance arrogance and let's talk about where that arrogance goes now and what it could run up against because from reports we've been getting the hedge fund community in particular is really upset to say the least about this huge position that j.p. morgan's taken on so what happens when the firm actually tries unwinding this thing everyone knows they have this position now their counterpart are going to be very nice to them i would imagine when j.p. morgan starts looking for buyers. yeah it's going to cost them a dime and covered his bases a little bit by saying they could lose a billion more due to market volatility part of that is probably rival traders figuring out how much they can charge the whale to let him out of the zoo right right so they're going to have to pay an intense cost to unwind those positions which they should have thought of before so you know make a couple of mistake get the capital list punishment total a we'll have to see if it creates any kind of tsunami or a backlash or whatever but i really appreciate you being on the show to help us

sort us all out stuart this all out that was heidi moore new york bureau chief and wall street correspondent for marketplace. and still ahead the new york attorney general was tapped by president obama to expand investigations into the housing crisis pacifically mortgage backed securities but critics say that caps force is guarded staff they will tell you what happened when some activists showed up to help out but first your closing market numbers. just put a picture of me when i was like nine years old so if you know lou true. i have a confession i am a total get a high low gravity pop music and pretty. much it

was kind of the gesture that. i'm very proud of the world with its place. you know sometimes you see the story and it's. so you think you understand it and then you glimpse something else here sees some other part of it and realize that everything. i'm trying hard is a big issue. what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is you know who

with the global machinery to see where are we heading state controlled capitalism is called sessions when nobody dares to ask we do our t.v. question more. welcome back we've been talking about j.p. morgan the london whale if this is proprietary trading disguised as hedging and if it speaks to the need for and the ways to get around the volcker rule which is due out pretty soon if it's on schedule now jamie dimon when he was asked how easy it would be to unwind this london whale trade on the conference call yesterday declined to answer lucky for us last month alexis goldstein when i interviewed her for the work she was doing here in washington at the time for occupy the s.e.c. brought up this very issue in relation to the london whale and prop trading risk

take a listen. j.p. morgan is in a very bad position now especially now that the market knows about this position it's going to be very hard for them to unwind it so it's a perfect example of why proprietary trading is not only risky to the entire economy but is it risky to the banks that conducted because now she's a former business analyst on wall street who has been lobbying for a vocal role without loopholes and told me last month yes the london whale was a red flag substantiates the need for the volcker rule and maybe an example of how banks could move in disguise prop trading here is another red flag she and other occupy wall street activists have been raising us president barack obama in his state of the union address touted a special unit of federal prosecutors led by the new york attorney general tapped to expand investigations into the abuse of a lending and packaging of risky mortgages that led to the housing crisis listen to . this new unit get paid to come. along speed

assistance to homeowners and help turn the page on an era of recklessness that hurt so many americans however critics have said it lacks manpower and funding firepower so some occupy wall street activists went to the new york attorney general last week to offer help they're here they are. now when you know they were brought in as volunteers in fact several were arrested so joining me now to talk about their efforts and the whole issue are two of the occupy wall street activists alexis goldstein and brett gold bergan now first i just want to touch on this j.p. morgan story because it is the biggest story in alexis you and i have talked number of times about the volcker rule so i just want to get your take on it because jamie

diamond it's funny because you talked about unwinding this position that was something jamie dimon declined to talk about on the conference call yesterday one thing he did say is that this wouldn't have violated the volcker rule so my question to you is he right about that it does this expose some of those loopholes that you've been fighting to close in the volcker rule so technically they did this out of the treasury department and the treasury department is not covered by the volcker rule but the treasury department was never really meant to be the place for these multibillion dollar positions so it is still sort of the jury's still out on whether or not this was an attempt by j.p. morgan to sort of hide proprietary trading inside the treasury department to maybe change their practices before the volcker rule went into effect or if they were just doing a terrible job of hedging a position somewhere else in the bank the jury is still out but i do think that this shows the potential for ways that the banks could try and evade the volcker rule yes and do you think because jamie dimon is saying hey punches are going to jump all over this as a reason to stay the volcker rule and they're wrong which i don't know how anyone

could make that excuse but just to be clear should this kind of trade be considered prop trading two billion dollars were lost of the company's money on it it's a big bat and does this make the case for a tough vocal role that is in the spirit of what it was intended to be. i mean i think it absolutely does i think this is the perfect example of why we need this rule i think it's the perfect example of why we need it without loopholes and i think you know we just saw today that the f.c.c. is launching an investigation into this and hopefully this will be a strong signal to the regulators that need to keep a very close eye on these banks regardless of what the final state of the rule is and now switching gears to investigation and punishment of people that violate financial regulations and the law you have to have both been involved in activities to offer your help to the new york attorney general for the task force that's been set up to investigate mortgage backed securities brat you weren't so well received

a what happened and why are you guys offering your help. so recently the attorney general put out a public statement saying that he needed pressure to be kept on the task force that he didn't have the resources or the personnel necessary for an investigation of this magnitude so many comrades went to his office to show our support and offer our services in any way that they could be utilized and myself and four others were arrested unlike any of the bankers that are that should be investigated by this task force. and. so you know we were not well received even though we were there to offer our support it's worth mentioning that the attorney general's office did not call the cops on this it was actually the building manager and we were actually having a nice dialogue with a representative from the attorney general's office and the building manager sort of got ahead of us and said no we're. we're calling the police and the police never

really treat us very well yeah yeah they're really in the process of trying to get a public forum to discuss the taskforce to find some accountability to see where things are given an opportunity for the public and folks affected by the financial crisis to ask questions of the attorney general and before we were able to finish that discussion the police escorted us out that just as the irony that actually you were talking to schneiderman's office and then you know there's some other bureaucracy that saying hey you got to get out we've called the police on you but how do you guys move forward in getting some of that dialogue going with office finding out where things stand and i guess offering your help so i have a sort of a fortuitous opportunity to talk to him on a show on sunday so i did get to ask him a few questions but i'm just one person and i didn't even get all of my questions answered i know brett and lots of others have more questions and we are going to continue to pressure them we have not seen any sort of movement towards the public

forum yet apart from that show which was sort of a coincidence but we're going to continue to keep the pressure on about it i know one of the concerns that you guys have pointed out is that there have been reportedly around fifty attorneys there are investigators who have been assigned to this from the white house as compares to in the savings and loan crisis thousand so there was concerns about manpower also concerns about funding i know schneiderman did address some of those questions with you alexis i'm curious if you guys are still very concerned about this or if he said what you needed to hear i guess. i'm really concerned about the funding because on tuesday we saw an attempt in the house there's an appropriations bill that was passed by the house that only gives eleven million dollars of the fifty five million dollars that was promised to the task force representative maxine waters put forth an amendment to to up that to the fifty five million that was promised that was voted down in a voice vote so we're not actually even sure who voted no and who voted yes because

it was not a recorded vote so the signs are not encouraging at least on the funding do you guys think in the nature of what this is which is supposed to execute the letter of the law and what was the largest financial crisis this country seen since the great depression mortgage backed securities a big question mark there about what kind of fraud or abuses went on do you think that should be subject to the politics of congressional appropriations and a vote on funding i mean. there's just no and why do you guys think that go ahead oh i was just going to say i mean i think that the congress for unfortunately there's a lot of allies of the banks in congress i think a lot of them have very perverse incentives to protect the banks at all costs whether that's because of campaign contributions or because of other types of political pressure so i think listen. attorney general sharon actually has made

this point before that there shouldn't be two sets of laws in this country there shouldn't be anyone who is above the law and there shouldn't be anyone who is too humble for the law and we sort of entered this world where banks are unaccountable and so i don't think that congress should be able to step in and say well we're not interested in prosecuting and investigating these people who you know give us lots of money in are somewhat above the law at this point i don't think that i think the law should apply to everyone why does this issue matter to you why are you why do you put faith their stock in this task force and think what they need to do is important. well i think it's incredibly important as we pointed out in the letter that we delivered to the attorney general in three months since the taskforce was announced four hundred thousand homes have been foreclosed upon and one of the groups that i work with in conjunction with my wall street is a group called zero four zero that does a lot of work with. folks whose homes are currently being foreclosed and we try to keep them in their homes sometimes that's by disrupting the actual foreclosure

auction and when you work with these people it homes are such a personal thing and it's something that everyone can can really relate to and when your home is on the line it is everything about your life is thrown off and the fact that where so much of this fraud originates from it's just it's heartbreaking when you actually talk to the affected people and you know if we can start by punishing the folks who who organized these frauds it will maybe while it's not going to solve all the problems but it will potentially prevent them from continuing to happen moving forward and then quickly we're running up against the end of the show but i just have one follow up about financial regulators because i know alexis you are saying hey why are financial regulators involved in this task force one question i had for you are you worried about them getting in the way because i know i've heard eliot spitzer on a panel say that the biggest obstacle for him in going after the banks was that

regulators didn't really want to help them. well the o.c.c. is some ways the most bank friendly regulator a lot of the time and they are not involved in the task force the f.c.c. has a little bit of a better track record and they are involved but i do think you're right i do think there is potential for that for people to get in the way but sort of the worst offenders at least right now are not involved in the task force and you know we're at the moment taking attorney general sherman on his word but we are going to continue to hold his feet to the fire and make sure that he lives up to it and we really want to see this task force succeed and just in five seconds yes or no do you really think this task force is going to result in criminal prosecutions. we can only hope all right well thank you guys for telling us a story that was that alexis goldstein and brett goldberg byrd they are owed ws occupy wall street activists and with that that is our friday show that's all we have time for thanks so much for tuning in don't forget to follow me on twitter at lauren the story and give us feedback on the show a you tube dot com slash capital account i promise i will respond we didn't get to

it today too much news but from everyone here at capital account thanks so much for watching and have a great night. there hasn't been anything good on t.v. . it is to get the maximum political impact. the full source material is what helps keep journalism honest we. we want to present. something of. the issues that so much good news are going to mean you can get a lot of people over here you know but look at what is happening in europe french voters appear to be moving to the left one priest is leaning hard to the right what

is causing the collapse of the political scene.