good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for monday may twenty first two thousand and twelve bloomberg reports investors are worried j.p. morgan is planning to pull back and the european mortgage bond market in the wake of course of this disaster this could cause significant volatility is the j.p. morgan is the biggest buyer of european home loan bonds is this just one of many examples of how j.p. morgan's reckless two billion dollars trading loss may be felt most by other people and other firms while j.p. morgan could perversely enough actually be the firm to benefit most you know how

this story typically goes. to. show is when. the house always wins we will make the case for what we're arguing with trader and zero hedge contributing editor bobby english also the former goldman sachs director mr gooch goes on trial for insider trading today wall entire too big to fail firms arguably engage in this behavior as a matter of normal business by front running their own clients meanwhile it's revealed the same guy managing risk in j.p. morgan's c.i.a.o. was fired from a firm a few years ago for wanted to take a guess overseeing trading losses that resulted in a regulatory probe so basically dissed by billions of dollars spent on financial regulation that is increased over the years we'll talk about what's missing and why it will continue to fall short of preventing the next systemic crisis and the g

eight summit came and went with leaders there you see him taking in a little soccer they also signed onto a communique where a top mandate read are impaired. it is to promote growth and jobs so as they seemingly sign their name to a more screwed up central planning they do so against the backdrop of this history and the us for the first time ever those who didn't go to college at all may officially be better off than those that just went to high school or excuse me those that went to some college i messed that up but all explain it all in a little bit let's get to today's capital account.

taking a look at the numbers this is what we found they seem to indicate that when there is a crisis in the financial industry in the financial system there's a push to regulate take a look at what that amounts to here is the increase in federal spending on finance and banking regulation over the decades you can see how that his increased and here is the cost to financial firms spent on technology alone to comply with these regulations now this chart starts from two thousand and two this is the year that sarbanes oxley was passed this was of course in response to the enron accounting scandal and then you can see how it's escalated and after the two thousand and eight financial crisis we have course had dodd frank regulations passed and those are the estimated costs in complying again this is just technology spending by wall street banks and fund managers asset managers in order to comply with these regulations for what so for

a london whale multibillion dollar trading loss at the quote unquote best managed bank that doesn't seem like a lot of bang for your buck our next guest argues these and harold flood models keep blowing up because fundamentally nothing has been done to rein in moral hazard or assert personal accountability at these systemically dangerous financial institutions and combine that with free money from the fed and you can look forward to more whales london or otherwise no matter how much is spent on dodd frank or the volcker rule and in this twisted world of these big huge too big to fail firms is one consequence of this trading loss unintended or otherwise that j.p. morgan may actually stand to benefit from it while bob english is here he's contributing editor for a zero hedge in economic policy journal dot com and he will make the case first of all it's so nice to have you on the show welcome back to capital account bob. thank you it's very great to be here again well we always love having you and first ok so

let's really break this down the ways in which this trading loss perversely could benefit or is benefiting j.p. morgan even though all eyes appear to be focused on them because of the two billion dollar trading loss first this is of course attracted the attention of ratings agencies and moody's will reportedly conclude a review of financial institutions by the end of june some are expecting more downgrades of major banks which can to give an example to viewers who may not know this can impact the cost of raising a very can raise the firm's funding cost us just one example what would be the impact in your view of more scrutiny possibly more downgrades for both j.p. morgan and its other competitors. it's interesting that you bring that up first because one of the first things to happen was the drawing of the attention of the regulatory ratings agencies and they focused on j.p. morgan and a few of them downgraded them or put them on negative watch immediately but like

you said moody's is putting the entire industry under review and more or less they've committed to it it's not certain yet but they've committed to downgrading certain entities at the end of june and what that means is the cost of them holding their trades on in order to the margin that they have to post is going to be more and what happens with firms like back and this when they get these collateral calls they're going to have less capital to work with and it disproportionately affects those that aren't as well capitalized as j.p. morgan which has the largest deposit base in the country so you're saying so you're saying essentially the scrutiny that has come to this industry as a result of j.p. morgan will result in other banks like bank of america and morgan stanley as you mentioned possibly having a tougher time it could weaken them while j.p. morgan is the best able to deal with things like downgrades. exactly exactly ok so there's exhibit a let's move on this is one thing that you pointed

out to me a truly a noxious look at how the bank benefited from losing two billion dollars via accounting magic so j.p. morgan announced this loss on a thursday the price of their bonds dropped after that on that friday you pointed out that this drop in j.p. morgan's bond prices resulted in a five billion dollar gain for the bank that more than offset that two billion dollar loss how in the world did that happen can that happen well this is this bit of information comes via sober look blog and they explain the methodology called value adjustment accounting and it is indeed a bit magical it has to do with a rule change that was blessed by thespian two thousand a. basically allows a firm such as j.p. morgan to price and its own default risk when the price of a bond it's gone goes down you know we're probably familiar with the way the hedge funds for instance have to mark down mark to market their losses on bonds on

a certain valuation they are reporting to so that if they've bought a j.p. morgan bond at one hundred cents on the dollar and at the end of a quarter it's ninety seven cents on the dollars they have to take a three cent accounting loss at least on paper well j.p. morgan is doing the flip of it and it's all perfectly legal they can actually record again on their liabilities in their net of three cents on the dollar so they benefit when their bond prices are going down for everyone else that is through their very things as do all of the big banks through this accounting magic meanwhile while we're on accounting we've spent a little bit of time already on this show talking about the fact that this wasn't a hedge but if you could just briefly bob explain when we're talking about accounting terms what is this even accounting for is ahead the way that j.p. morgan would have us believe it is. well according to francine mckenna who was on your show friday the answer is no because these if you read their ten q. and ten k.

j.p. morgan specifically states that these hedges are not gap edges in other words for accounting purposes they don't qualify as hedges yet they're using the most convenient definition to try to sell to the public that in fact there they are hedging whatever is going on in some other side of the firm so yes and this isn't the first time we've seen this kind of definition or disclosure arbitrage is it is there another high profile case then you can enlighten us with another big major player using whatever was most convenient as far as disclosure of definitions and order to hide massive risks or losses. definitely and it was done by none other than john corazon at m.f. global back in september of two thousand and ten finra regulatory agency for the broker dealers sent out a survey to all of its brokers asking them to report on their sovereign debt

exposure and m.f. global replied in the negative that they had no such exposure in fact they did they had significant default risk and credit risk in the broker unit to these sovereign bonds but because of the way accounting rules are written and they were able to book them or keep them off their balance sheet they replied in the know so once again the firm using the most convenient definition at the time when it's most convenient for them a lot of magic going on a lot of really good magicians pulling the wool over our eyes now one of them at the top could arguably be jamie dimon and he when you thought about him before this you thought about him as railing against regulation railing against the volcker rule behind the scenes his bank lobbying against the vocal or lobbying for loopholes then he goes on meet the press and when he's pressed on this and the interviewer says hey you've been the biggest advocate of the fact that these regulations go too far you've been opposed to the volcker rule this is how he

responded let's take a listen that's all completely untrue and by the way for anyone to go check the documents that i actually write every year my chums letter which i write myself i get help we have supported seventy percent or so of dodd frank we supported rose so he says the interviewer he says you know us completely untrue what you're saying he didn't directly address volcker rule not answer all all remind everyone but he did say you know we have supported seventy percent of frank regulation my question to you that feels like a back pedal to me of how we know jamie dimon do you think it's possible that he has at all tried or could be manipulating this trading loss to gain some political capital. or try to well the yes the term you bring up is interesting and the example is interesting because if you look at the c. of theses web page and they disclose all the public meetings that have to do with their part of the dodd frank rule into the rule making and j.p. morgan is all over in that so i don't know what exactly he means by support but

j.p. morgan terms of. at least half of these meetings and so you brought up before the fact that he had made this announcement the initial trading loss on a thursday and a friend of mine dave harrison trade with dave dot com brings up a very good question why in a thursday why not a friday why go on meet the crew meet the press he could have buried this if you really wanted to with his connections probably but instead he's doing a media whirlwind tour so i think that's a bit questionable a big questionable we don't know exactly why or what could come of it but there is a historical precedent it appears you brought to my attention on the princes article where she talks about the push by a certain high powered banker for glass steagall in the thirty's do you see any parallel. well yes and i think she did it was when winthrop eldridge who was chairman of chase and it was done nine hundred thirty three and glass steagall was

on the table and he went to the newspapers and pushed heavily for it all the other banks hated him for it and it's kind of ironic because aldrich's father had been one of the creators of the federal reserve the federal reserve system and the glass steagall of course eventually went through in the eight decades decades later or so we have the merger of chase's biggest competitor j.p. morgan and now we have j.p. morgan chase again in the senate with the irony it all just came coming back around and one of the things of course we've seen from this is a push or a question about if more regulation is necessary or if this is exhibit a for the volcker rule and when we come back you have some very interesting insight into how that is impacting smaller firms the not too big to fail firms the not jamie diamond of the world the not j.p. morgan's and our viewers are not going to want to miss it so everybody stay tuned we'll have more bob english contributing editor for zero hedge and economic policy journal dot com also still ahead while the g. eight leaders were all business about job growth or maybe it seems the business of

employment is changing we give you our three cents and nine to five families change but first your closing market numbers. 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 view with a global reach see where are we heading state controlled capital as it's called sessions when nobody dares to ask we do our tea quest. should morning. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something

else you hear or see some other part of it and realize everything you thought you knew you don't know i'm sorry bloke is a big issue. here would you like to. look into the alone a fellow you know get the real headlines with none of them are the problem with the mainstream media today is that they're completely disconnected from the viewers and what actually matters to those viewers and so that's why young people just don't watch t.v. anymore if they want news they go online and read it but we're trying to take those stories that people actually care about and transfer them back in t.v. .

welcome back we're talking about the per verse world in which huge losses while for your two billion dollars is a huge loss for j.p. morgan it's not but in this perverse world where a two billion dollar laws could be a gain for j.p. morgan in many ways and a loss for a lot of other players and of course there is this call for more financial regulation or question about financial regulation that has come in the wake of this two billion possibly more trading loss so far of course the volcker rule proponents have said this trading loss is exhibit a for why we need it i should mention there are all these loopholes already in the draft version of the volcker rule which big banks lobbied for reportedly so that's just one example and who knows what else could come out of the regulatory fallout from the whale trade but who really gets hurt the most and the least when it comes to complying with financial regulation that's really the question here that we want to look out so you can see right there

how the cost of escalating as belated that's just a technology alone complying with the technical spending on technology to comply with the regulations now let's bring in bob english contributing editor for a zero hedge and economic policy journal dot com to answer that question that's just very simple bob who does it impact more when you have financial regulation a large firm or a small firm very very simple it is the smaller firms even the mature firms when they're not when they don't have the access to capital when they don't have in terms of banks to securitization methods when all they're doing is simply going on the short end and trying to loan on the long and these compliance costs just proportionately more and when it disproportionately affects smaller mid-size banks more which i imagine this is already happening with dodd frank what is the impact of that on the financial system or the economy is there any kind of broader big red flag that you see. there is going to be

a wave of consolidation it's already begun to begin again in two thousand and eight but there is we're at the beginning of another one and it's not just failed banks that are going to be resolved by the f.b.i. see there's going to be a wave of mergers in which it was issued and which is being helped along by tarp the very system that was supposed to have helped these things or at least provided them a lifeline in the first place in two thousand and eight and two thousand and nine so break this down because as you point out that you found that a lot of these small and mid-size banks that were tarp recipients you say are in default on preferred stock payments to the treasury so what does this mean and what's the significance. of the seven hundred plus banks that took tarp money or i should say forced to take tarp money about four hundred or so are in default and that means that they haven't been able to make the six or seven percent dividends whatever they might be for that particular firm back to the treasury and about three hundred or so of those are smaller banks ok and so what is the significance

of that in your view can you just argue they're broke maybe they need to go under. some of them do and some of them will but a lot of them are viable smaller community banks and the only thing that's keeping them down is this albatross over the next of these tarp payments and if one were to remove the they would be viable entities viable banks instead what we're seeing is the treasury has announced a program where they're going to sell off and they've already begun this they've done a program with twenty banks so far they're selling off the preferred stock at a discount to p. e. funds and other banks anybody who would like to come in and step up these viable smaller banks and get their assets on their books and you found that a lot of these a firm these private equity groups have with day and tried to capitalize on these banks you gave one example of what's in it for them is there anything else that can

help convince us that there's something in it for these pay a firms to acquire these small broke banks. you could just look at who's doing the buying and it doesn't impute that anything is wrong legally here because it's all perfectly legal but that's kind of the point and you have to ask yourself why do we need a cottage industry built around the fact that governments are picking winners and losers so one example is this bank bank of hampton roads which is in norfolk virginia and has been bought by private equity group of fund that's managed by a former comptroller of the currency. let's get a little bit more into that so tell me a little bit more about the situation that this bank is in the usa is kind of the typical situation of these smaller firms they are talking about. right they have a somewhat troubled loan book but they do have would appear to be some valuable assets and this highly connected group or fund has expressed interest in this

group and looks to be buying up a significant amount of its number of its shares and this is what we just saw on the federal reserve's website that you that you showed to us it reveals that cap gen capital that's the group is seeking approval to increase their investment up to forty nine point nine percent of the voting shares of this bank you're talking about hampton roads bank shares in norfolk virginia indirectly increasing their investment in the bank of hamptons so give us a little bit more insight into who is the leader of cap gen you said you mentioned his ties to the office of comptroller but it's more than that. yes his name is eugene the big and besides being the former comptroller of the currency he was the founder of prom and tory financial group very prominent. advisory firm that started in two thousand and one. been a an officer for various federal institutions and is generally a very well connected guy well connected guy picking up assets from these broke

firms that are broke because of tarp which is a federal program so we've talked about a lot of things bring us full circle bob what do you think is the big trend that's very concerning in your view coming out of all of this. i think the big trend is the crowding out smaller firms mid-size for arms in general and we see this not only in the financial industry but in several others and it's coming to what has historically been the most free which is tech but especially in finance which is so heavily regulated there's just no place for the moment pop firms anymore which is unfortunate because they're the ones that have the ability to know their local communities that have the ability to make loans to people based on actual due diligence considerations and not some model that's filled so however many times in the past so it's a shame that we're going to lose this segment of the business but that is the trend that is the trend and as that happens the too big to fail get bigger and stronger and you point out one of the other things that can happen is they just eat up these

smaller firms so again it could be an opportunity for the j.p. morgans of the world bob inglis we're going to leave it there thanks so much for being on the show breaking down all this really complex but very interesting stuff and a unique take in my view on this j.p. morgan trading loss that was bob inglis contributing editor for a zero hedge and economic policy journal dot com thank you very much. all right let's wrap up with loose change dimitri and shannon and we all know the job market is bad we look at the figures all the time but we do know that some major corporations have been creating jobs had some very successful turn out for

jobs hiring days here's one. donald hires thousands of clean cut young men to lie to his the things they learned working at mcdonald's others will pay dividends throughout their lives they may have played it all again . hopefully those dividends do pay off throughout their lives because for the first time ever it seems that college may not labor department data shows the number of jobless workers aged twenty five and up who have attended some college now exceeds those with just a high school diploma or less so basically if you have a high school diploma only you're more likely to have a job now in that demographic than if you had some college maybe people that dropped out of college are just quitters i think i think talked about this before but i think college education has become so diluted in value that it's become

simply it's becoming a racket all right so it's a right it's a business that it's a rather educated this is a record rack up all this debt and there are those jobs and all this that and what do you do with a degree so many people go to college they get this degree and it's worthless it's absolutely worthless and go into the workforce and they can't find a job because they go to the group green worthlessness do you do you think that this speaks to the kind of jobs that are being created in the u.s. and being lost that more of them and i think facts to support this are in low paying service sector jobs the kind that you don't need college for and that could explain this of course of course absolutely there's a. yeah yeah so i mean i guess the question is when you look at things like this and you see the g eight leaders getting together and watching some soccer and scientists communique which is like you and wall talk about this stuff but not really do anything and they talk about jobs and growth like what. board actually do

something you know you let's move on because speaking of jobs scarcity men are now comfortable finding a position in fields dominated by women we've seen it before. if you know greg's a medicine filled letter oh really well feel i'm nursing oh. that's good you. know really well feel. version. according to a new york times analysis from two thousand to two thousand and ten occupations that are more than seventy percent female accounted for more than seventy percent female accounted for almost a third of all job growth for men and doubled their share of the previous decades so basically men are just going to fight back against this big. thing they're fighting back against the. gender discrimination this reverse gender discrimination or you know oh there's one remark everybody knows everybody wants to talk about their all day or zero absolutely zero being discriminated going by women with the

only move here are also you want to do is in authority over them so that's why you want to do this i don't think this story this or a good should and what do you think. you said lead to that and business journalism is actually more dominated by him. making headway there. and whiskey a new york times has done ok the new. york lord knows i'm the only guy here there's no one else here but to me i'm still i don't know that i'm still a trailblazer in the traditional sense you are going to have this doesn't make sense exactly they are my argument falls flat so let's hand it to you tell us what you think as that's all we have time for thanks so much for watching make sure to come back tomorrow in the meantime you know you can follow me on twitter at lauren lyster and give us feedback on the show or catch any of the episodes that you missed at you tube dot com slash capital account the whole you can catch our show

in h.d. now on hulu if you get the hulu plus version at hulu dot com slash capital dash account by the way that's the only place you can see as an h.d. from everyone here have a great night see them are. culture is that so much i'm going which of course is what kind of going to give it a pony countless is what critics call america's banking system again the world has witnessed the specter of a major financial institution reporting. there hasn't been a good on t.v. . it is to get the maximum political impact. before source material is what helps keep journalism honest we thought.

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