Astounding! J P Morgan Chase managed to lose $2 billion. But, whose money was it? Was it money belonging to the executives of the firm or the traders? Most probably not. How did they lose it? According to press reports it was â€œbetsâ€ gone awry. Focus on the word â€œbetâ€. That word appears in almost every media report describing the transactions that induced the loss. Yet, J P Morgan Chase has been a vocal opponent of the kind of financial regulation that might prevent these kinds of losses.
Reading the news stories underscores the view of many that Wall Street is a giant casino and that the players are driven by a casino mentality. The lines between investing and outright gambling have been blurred. High speed trades based on a wide variety of factors generally do not involve an in depth analysis of quality of the firms whose stock is being traded. The amount of time that traded shares are held can be miniscule. The admonition â€œdon t fight the tapeâ€ would be the same as the admonition â€œdonâ€™t fight the diceâ€ at the dice table but these are very short time strategies more geared to gambling than to investing.
When the trader is under pressure to deliver results the odds would favor taking more chances than would be taken if there were no pressure threatening salaries or bonuses. Would the investment model be different if the trader had a significant amount of his or her own money in the trade? Probably yes.
Imagine what would happen if there was an application for an IPO in a company whose business model was to take the investors money to Las Vegas and bet it on the tables even if the betting strategy was a hedging strategy. Would that kind of IPO be approved?
At various times the Federal Government has moved to outlaw internet gambling. That, some may say, is a sensible protection for the people who would not protect themselves. But, the policy says nothing of putting money into trading strategies that are pure and simply high speed gambling.
The individual trader using his or her own money studies and analyzes their trades because a trade that didnâ€™t work out is money right out of their own pockets. That is the way it should be. The people have expressed a lack of confidence in the investment banks and that lack of confidence is earned. People are right to question a culture that seems to have lost sight of placing the interests of their customers and investors first.