Alf Young: No need to blubber over this lot

WHALE watching is supposed to be one of the great wonders of the natural world. A spectacle to savour. But on Thursday evening, New York time, one they call the London whale crashed into global consciousness for all the wrong reasons.

This whale doesn’t possess an ounce of blubber. It’s the nickname for an out-of-control money machine that demonstrates, yet again, that the root causes of the great banking crash of 2008, like excessive risk-taking in financial instruments few really understand, remain with us still around the western world, largely unresolved.

The JP Morgan Chase trader, known for many weeks past as the London whale, has managed to poke a $2 billion hole in the trading income of one of the few mega-banks to emerge from the 2008 crash with its reputation largely intact. He did it all in the space of six short weeks. And these trading losses, on the bank’s own admission, could climb as high as $3bn by this summer.

He did it all by building up positions in derivatives so extensive that other players in the market could see exactly what he was up to. Hence his whale soubriquet. He was egged on by the female head of that London operation, whose own pay packet topped $14m last year.

The bet he was making was an optimistic one, that a basket of high grade corporates wouldn’t default over the life of their contracts. Then a variety of hedge funds decided to bet against him. And, in a deteriorating economic climate, the dice fell their way. He and his bank were forced to unwind their position at a huge loss.

It has reminded us all – as if we need the prompt – that too-big-to-fail banks, still scrambling to protect their mega-bonuses and resisting tougher capital adequacy rules and tighter regulation, have yet to acknowledge fully their own culpability for what happened four years ago or demonstrate that they have genuinely changed their ways.

Don’t just take my word for that. Listen to Jamie Dimon, JP Morgan’s sharp-tongued chairman and chief executive. In recent times Dimon has told US Federal Reserve chairman Ben Bernanke his plans for tougher banking rules would “strangle” the economy. And described Paul Volker, a previous Fed chairman and author of the so-called Volker rule that restricts bank investment in hedge funds and private equity and prohibits them from trading on their own account, as someone who “doesn’t understand markets”.

A month ago, when stories about the London whale first surfaced in the American financial media, Dimon dismissed suggestions that the London-based trader, Bruno Michel Iksil, had built up unsustainable positions in credit default swops as a “tempest in a teapot”. Now, in a late-night conference call on Thursday evening, he’s had to confirm the losses, including a $800m hit on the bank’s earnings in this quarter, resulted from a “bad strategy, badly executed and poorly monitored”.

He went on: “The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought. There were many errors, sloppiness and bad judgement.” The mistakes made had been “egregious” and “self-inflicted”. Well, at least Dimon’s choice of language went some way towards matching the scale of the follies committed.

He also knows that JP Morgan’s current woes are a gift to critics of the post-crash banking system, seeking tougher regulations and other constraints under which banks should be operating. Dimon admits the blunders “play right into the hands of a bunch of pundits out there” who would go further than even Paul Volker in curbing banking excess.

Pundits, in Dimon’s world view, are so-called experts that don’t begin to know what they are talking about. Bankers, on the other hand, no matter how many foul-ups they become embroiled in along the way, posses unparalleled insight into markets and financial complexity. That’s why bank boards pay them and their top traders millions each, each year. They are the real life force in any post-industrial economy, are they not?

If only governments, central bankers and regulators had the courage and the sense of urgency to take on some of this self-serving nonsense. The United States already has its Dodd Frank Act, which incorporates the so-called Volker rule on outlawing proprietary trading. But Wall Street has lobbied hard to delay and water-down its implementation. Were Mitt Romney to prevail in November, it might prove to be one of the shortest-lived pieces of legislation ever seen in Washington.

This week’s Queen’s Speech over here promises measures to strengthen regulation of the financial services sector and to implement the recommendations of the Vickers commission on banking reform. But even if a bill finally reaches the statute book, it could be the end of this decade before it is finally implemented.

Meanwhile, the Bank of England, despite its own questionable record in responding to the crisis of 2008, is being given unprecedented power over not just monetary policy but the regulation of our whole financial system too. Who will hold that leviathan to account?

Where politicians do still have some democratically accountable clout – as over the defence of the realm, say – they and their civil service advisers still find large- scale procurement programmes devilishly difficult to deliver to time or to budget. We are to have two new aircraft carriers, but only one is ever likely to see service. The other was to have jump jets, then catapulted jets. And now we are back to jump jets again, after the first lot were sold at a knock-down price to the Americans.

Somewhere in the middle of all this, somewhere between the “egregious” self-interest of big bankers and the woeful incompetence of leading politicians, millions of the rest of us are just looking for a route out of austerity, lost jobs and squeezed living standards towards a world we can feel proud to hand over to our sons and daughters.

There may be some hope in the willingness of voters in France and Greece and elsewhere to reject the current sterile orthodoxy of synchronised austerity. But if financial institutions like JP Morgan and, before it, MF Global, go on screwing up and politicians, central bankers and regulators fail to measure up to the challenge of doing something effective about it, who, London whale-style, would bet the house against many more years yet of lost opportunities and snuffed-out hope?