By William K. Black
The usual apologists have rushed to the defense of Jamie Dimon, JP Morgan Chase’s CEO, after he announced that JPMorgan lost over $2 billion on purported hedges. The academic apologist-in-chief, Yale Law’s Jonathan Macey, is outraged that anyone is concerned about these matters. Macey, channeling Dimon’s flacks, asserts that the facts are as follows:
“The sole purpose of hedging is to reduce risk. The particular trades that J.P. Morgan was making were designed and intended to protect the bank’s balance sheet against losses from its exposure to the apparently increasing risk of some of its European assets, including approximately $15 billion in European distressed debt.”
My prior column explained why the purported hedge was not a hedge but a speculative investment in derivatives in contravention of the purpose of the Volcker rule. This column makes two more basic points. First, if JPMorgan’s “sole purpose” was “to reduce risk”, particularly of “$15 billion in European distressed debt” – why didn’t it sell the distressed debt? That would have eliminated the risk, which is far better than “reducing” risk. A true hedge would lock in any loss in the “European distressed debt” so the vastly better strategy if JPMorgan’s “sole purpose” was to “reduce risk” was to sell the inherently extremely risky assets. Even a true hedge is rarely perfect and has some risk of performing poorly, so selling “distressed” assets was unquestionably the superior alternative if one believes (and I don’t) Macey’s assertion that JPMorgan’s sole purpose in dealing with the distressed debt was minimizing its risk.
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