Monday, May 28, 2012

Financial Whales

While JP Morgan Chase recently lost two or three billion dollars, Boaz Weinstein of the $5.5 billion Saba hedge fund made an astronomical sum.  What useful service did Weinstein perform to earn this kind of money?  None!  He observed a price difference between a credit derivative index and the market it was supposed to track.  The aberration was caused by a trader for Morgan called the London Whale.  The Whale kept selling and Weinstein began buying. Like in poker, someone who makes a mistake often doubles down to scare off competitors, but the Whale did not scare Weinstein.  (NYT  May 27, 2012) You need a lot of capital to play this game such as Morgan has as one of the nation's largest banks.  The Whale lost.  Should we care?  Morgan points out that their loss is a tiny fraction of their assets.  This is one meaning of “too big to fail.”  Still, it was just this kind of trading that made the recent financial crisis a crisis. 
Mr. Weinstein has been banned from the Bellagio Casino in Vegas.  In this case, the Casino should be banned and banks should not be allowed to make such bets (Volker Rule).  These brilliant minds should find something else to do with their smarts like making useful products and investing in plant and equipment that provide jobs.

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