Friday, March 22, 2013

Gibberish in High Finance

Disclaimer:  This is serious banking stuff, so if you're just looking for the usual fluff, pass through quickly.

Floyd Norris, chief financial correspondent of the Mothership, otherwise known as The New York Times, wrote an amusing, in a troubling sort of a way, piece about Lily, Rosemary and the Jack of Hearts.

Which, as you have probably already guessed, is code for JPMorgan and the London Whale debacle.  Lily is Ina Drew.  Rosemary is Bruno Iksil.  The Jack of Hearts is, of course, Jamie Dimon.  Although it's possible that Jack is Iksil and Rosemary is Dimon.  Regardless, I'll call your attention to this masterpiece ...

The whole piece is here.  The gist of the thing is that massive amounts of the formal documentation coming out of JPM's CIO was complete gibberish.  So laden with arcane jargon as to make it incomprehensible.

In a better world, somebody would have sent these memos, etc., back to Iksil and told him to rewrite them.  In the world we actually live in, everybody just nodded their heads, approved the strategy and moved on.  When they were eventually dragged down to Washington, several JPM senior people were literally unable to apply any meaning at all to what Iksil had written.

The kicker comes at the end, when Norris makes reference to the demise of Barings Bank (1762-1995).  He writes ...

Nearly two decades ago, one of the great names in international banking, Barings, disappeared. It was destroyed by a fraud committed by Nick Leeson, a trader based in Singapore, who became a star by reporting huge profits from a trading strategy involving derivatives that, by today’s standards, were remarkably simple.

In reality, there were no profits, just big losses that he managed to conceal until the firm collapsed.

When auditors and bosses asked how he was making all that money, Mr. Leeson later explained, he responded with meaningless but impressive-sounding jargon.

“Luckily for my fraud, there were too many chiefs who would chat about it at arm’s length but never go further,” Mr. Leeson wrote in his memoir. “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”

Gaaaah -- you do the math.  I should have painted Iksil while the soup was hot, although the whole JPM thing seems to have a continuing life of its own.  Perhaps there's still time.

And standing over all this, like a halo, is what Jeremy Irons' character in Margin Call said to a young employee who has just discovered the company is completely in the shits.

"Maybe you could tell me what is going on," Irons' character says.  "And please, speak as you might to a young child.  Or a golden retriever.  It wasn't brains that brought me here; I assure you that."


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