The unwinding of the transformation of Wall Street’s largest financial institutions into huge hedge funds specializing in mortgage backed securities is being accomplished with breath-taking speed. Two bits of news from JP Morgan today crystallize the transformation.
- Shuttering prop-trading. The Financial News is reporting that JP Morgan has closed its global proprietary trading business. Stricter risk guidelines expected from regulators are being blamed, although others say the firm was forced into this after Citadel poached JP Morgan’s stars. It seems to us a feedback loop: JP Morgan was obviously going to cut back on the value at risk in its trading operations, which encouraged traders to flee toward hedge funds in search of leverage-driven yield and higher compensation, which only made JP Morgan more determined to cut back on prop trading, which convinces more traders to leave, and so on and on.
- Growing Asset Management. The old-fashioned, and long derided, asset management business at JP Morgan expects to make a profit in the fourth quarter and may start hiring next year. The group cut 44% of its staff earlier this year but now looks set for a comeback.
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