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Sallie Krawcheck is submitting her opinion on JP Morgan’s $2 billion (and counting) CIO trading debacle.The former executive of Merrill Lynch, Citi, and Bernstein published a thoughtful op-ed in The Financial Times. She notes that everyone has been overly focused on the ‘Who did what?’; ‘How much was lost?’; and ‘What should we do now?’ questions while missing one key thing.
Much of this commentary misses a crucial point: the size and risk of the trading position was identified to the management team by an outside party (the press) and once highlighted, it took weeks for them to understand and quantify the loss. This occurred despite JPMorgan being run by one of the financial sector’s savviest management teams.
Rather than focusing on JPMorgan’s particular oversight, Krawcheck uses the case as just another example of how incredibly complex risk in the financial services industry has become.
And the type of regulatory path we’re going down might not be the right one.
If regulators engage with the banks and regulate topic by topic – to stop this exact scenario from repeating itself – Wall Street will innovate businesses and trades that overtake their efforts every time, in search of new pools of profitability.
Krawcheck offers her own big picture, three-point regulatory plan to address risk.
- Regulators should better understand banks’ total risk, fix the risk measurements, and make sure banks have enough capital to support the risk.
- Regulators should address the credit agencies so that they are unbiased.
- Regulators should be honest with themselves. If they don’t understand particular risky activities, then those activities should not be allowed. “Full stop,” she writes.
Her tone toward the banking industry is hopeful. But the only way to sufficiently address the problems, she argues, is to have an honest conversation about risk.