Thursday, June 28, 2012

Profit and Risk on Wall Street

The latest from Wall Street is that JP Morgan's losses in risky bets made in credit markets will probably be closer to $9 billion than the $2 billion they originally announced. Why, so soon after the great collapse of 2008, would a major bank be making such risky bets?

Because it is the only way they can find to make the kind of profit they have come to expect.

So much money is now sloshing around world financial markets, looking for investment opportunities, that the yields on any sort of reasonable investment have been driven down to 2 or 3 percent. US treasury bonds have lately been trading at a loss for investors. The stock market is treading water, with no new segment like the internet to provide exciting opportunities. Companies have already wrung as much profit as they can out of their existing operations, and their efficiency in doing this, mainly by firing workers or cutting their benefits, has become a drag on the overall economy. So there is little opportunity to snap up companies and increase their value by restructuring them.

So what is an investment bank to do? Holding lots of bonds and blue chip stocks generates meager returns and is, frankly, boring as hell for the bankers. So they make crazy bets. They will continue to do so, because they don't know what else to do. This situation will persist until the world economy grows enough to restore some sort of balance between the needs of growing companies and the vast pool of capital available for investment.

And this is why we must impose regulations on the trading undertaken by big banks. Frustrated bankers are too much of a threat to the world economy to let them run wild.

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