Dude, Where Is My $2 Billion?

Back in 2008, Jamie Dimon, head of JPMorgan Chase, was the toast of the town. His company was one of the few financial firms to avoid the subprime credit crisis, and it had bought up busted entities like Washington Mutual.

Today, Dimon is looking like less the subject of toasts than, simply, toast.

In news now dominating the headlines, JPMorgan managed to lose $2 billion in proprietary trades that were supposed to be a “hedge.” What’s even worse for Dimon is that Congress is in the midst of considering regulations on just these kinds of activities.

As we’ve noted several times, Peter Drucker didn’t see much to laud in Wall Street’s supposed hedges. What he saw instead was a system set up to mask—with great complexity—a lack of true innovation.  Since the advent of the credit card in the 1960s, Drucker noted in a 1999 article for The Economist, “the only innovations have been any number of allegedly ‘scientific’ derivatives.”

That these financial instruments existed at all was not really meant to benefit customers. “They are designed to make the trader’s speculations more profitable and at the same time less risky—surely a violation of the basic laws of risk and unlikely to work,” Drucker wrote. “In fact, they are unlikely to work better than the inveterate gambler’s equally ‘scientific’ systems for beating the odds at Monte Carlo or Las Vegas—as a good many traders have already found out.”

For, in the end, the gambler always runs out of luck. “When trading for a firm’s own account becomes a big activity, it ceases to be ‘trading’ and has become ‘gambling,” Drucker wrote. “And no matter how clever the gambler, the laws of probability guarantee that he will eventually lose all he gained, and then a good deal more.”

What do think: Is proprietary trading no better than gambling?