On Oct. 19, 1987, the U.S. Dow Jones Industrial Average dropped 508 points, or 22.61 per cent, in what continues to be the largest one-day percentage decline in the history of the American stock index.
Those who choose or are forced to remember the late '80s may know the piece of financial trivia by its more popular, ominous handle - Black Monday.
What you likely didn't know was, according to Reuters, in the wake of that cold sweat Sir Dennis Weatherstone - a name that drips with propriety, pinstripes and patronizing glances over top of pince-nez - turned to the various bankers in his charge and asked: "How much can we lose on our trading portfolio by tomorrow's close?"
The answer to Sir Dennis's question turned into a formula called value at risk (VaR), which is used by banks to measure how much damage trading losses can do to them. All of this is about as thrilling as the prospect of sitting on Sir Dennis's knee (difficult since he died in 2008) until one discovers he was the chairman of J.P. Morgan & Co. Thus, the bank that in 1895 bailed out the U.S. government with $62 million in gold and in 1987 reinvented risk management for financial institutions this month lost $2 billion and counting.
It's a goof that's Titanic in both scale and hubris - the Unbreakable Bank gets Busted. It also has tinges of the Deepwater Horizon, the oil well that fountained oil into the Gulf of Mexico for months, because the loss is hemorrhaging, with the damage itself set to be billions more on top of at least $14 billion in losses to the bank's stock.
Perhaps the most shocking part of this whole maniac farrago is that it's not really that big a deal. According to an article by the Brookings Institute, admittedly written by a former
JPMorgan Chase employee, the firm made $25 billion in pre-tax profits last year, has a net worth of $189 billion and $2.3 trillion in assets.
Put in more local terms, the bank literally lost more than a highway, or more precisely, the Cariboo Connector, the 460-kilometres, $2 billion plan to widen Highway 97 between Cache Creek and Prince George. And it caused about as much inconvenience as JPMorgan would get from losing a wallet on the bus.
In terms of sheer danger, the possibility of a disorderly Greek exit from the euro is a far more terrifying proposition than anything JPMorgan could do. But, like the eurozone crisis, the billions-plus-blunder is fascinating and frightening because of the sheer scale and complexity of the forces involved, concentrated in the hands and heads of a frail few.
In a 2008 article in Vanity Fair, Niall Ferguson attempted to illustrate sheer mass of the entity he called Planet Finance. In 2006, the output of economies of the world was $48.6 trillion; the value of the world's stock markets was $50.6 trillion; the value of the all the world's bonds was $67.9 trillion. At that time, the exotic financial instruments that ultimately caused the 2008 crash, the Greek problem and more recently JPMorgan's problems were just emerging, doubling down what was an inscrutable, complex entity into something even more
incomprehensible.
And that's the rub. The individuals who made the blunder were all exceptionally gifted, from banking legend and CEO Jamie Dimon, to CIO Ina Drew, one of Wall Street's most respected female figures, to the literally named heel Achilles Macris who oversaw the obscure British bank unit that created the disastrous financial manoeuvre, to the so-called London Whale, Bruno Iksil, who attempted the Icarus strategy that led to the mammoth mistake. Yet all that smart money looked oh-so-silly when one by one they realized they'd attempted $100 billion worth of trades on synthetic financial instruments so complex and so distorting that the only people who understood it ultimately ended up being the hedge fund managers who profited from the gaffe.
But, as Brittany McLean, the reporter who led the coverage of the demise of Enron pointed out, all business stories are ultimately about ego and greed. Dimon, who had led the charge against financial reform to the point of getting into a shouting match with Bank of Canada boss Mark Carney, couldn't see past his and his firm's iconic status as risk managers. He, along with Drew, loosened the very rules and the VaR formula that protected JPMorgan, opening the door for the error in the desperate search for profit.
The perversion is that Dimon was ultimately responsible for the blunder but by virtue of his reputation and supposed skill, shareholders and the bank board alike have no choice but to retain him as CEO to fix the problem.
Only in this bizarre world would the man who chopped off the head of the golden goose be the only man who can sew its head back on.
It's Frankenfinance. And as another mad genius with Promethean ideas once said: "Its gigantic stature, and the deformity of its aspect, more hideous than belongs to humanity, instantly informed me that it was the wretch, the filthy
demon to whom I had given life."
-- Rodney Venis, associate news editor
