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JPMorgan Loss May Turn US Banks into Japanese Banks ...


5 Dec 2007
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JPMorgan Loss Bolsters Volcker Rule Supporters
JPMorgan Loss Bolsters Volcker Rule Supporters - Businessweek

US President Obama aims to limit risky behaviour within banks but is narrower than the Glass-Steagall Act. Banks that take retail deposits would not be allowed to engage in proprietary trading that is not directly related to the market making and trading they do for customers. These banks would also be prohibited from owning or sponsoring hedge funds or private equity funds. Mr Obama also wants to cap the overall size of banks. This rule was developed by Paul Volcker, the former chairman of the Federal Reserve.
Volcker rule definition from Financial Times Lexicon

Japanese Banks are known a Low-profit model as they earn money only from the difference between deposits and lending to business. In other words, Japanese Banks are prohibited to make money from "Investment (aka Gambling)".

Until some years ago, major US Investment Banks, typically Lehman Brothers, JPMorgan, Goldman Sacks, etc., enjoyed high returns from Investment, while Japanese banks were struggled to earn small profits. At those days, Japanese Banks were told "Take More Risk ! Otherwise Little Return !".

At the end of the day, "Risk" is re-defined as "Gamble", and US Investment Banks are turning Japanese Banks if Volcker Rule is implemented. After all, Turning Japanese again.


29 Mar 2012
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$2 billion is nothing though.

All prop trading is struggling recently. Many banks downsized their prop trading desks. In my opinion, investment opportunities ebb and flow, like a wave. (Are you familiar with that expression? It's an American expression.)

So, for example, when prop trading is very profitable, many firms rush to increase their prop trading desks. When there are more firms prop trading, the opportunities are more difficult to find. There is no easy money left. When there is high volatility and financial difficulty (huge problem with volatility in US Equities in 2011, which lead to many banks closing their prop trading desks), the prop traders suffer. After many banks stop prop trading, and financial situations improve, and volatility decreases, there become a lot more opportunities for prop traders, because nobody is taking advantage of it. Then banks rush to increase their prop trading divisions again. It's a cycle, like regular business cycle, or a wave.

Anyway though, $2b is not a lot of money. I think the US public becomes easily astounded by these large numbers, because they compare it to their own bank account.

The problem with restricting banks investment options is that is takes a very narrow perspective. It is like moving back to the Prudent Man Rule instead of the Prudent Investor Rule.

Prudent Man Rule says, every single investment in a portfolio must be safe. This rule was established way before mathematics studied portfolio theory. It's almost impossible to have high returns with this rule. It's only possible to stay above inflation.

Prudent Investor Rule says, the entire portfolio should be well diversified so that it can be safe. This rule can have decent returns, and still low risk, if the individual assets in the portfolio have low correlation (therefore, the portfolio as a whole is still not risky).

---------- Post added at 01:12 ---------- Previous post was at 01:09 ----------

Here's a link from US Government that talks about these two rules.

Prudent Man Rule sounds like the way you describe Japanese banks ability to choose investments.

Prudent Investor Rule uses Modern Portfolio Theory discoveries by Nobel Prize winner Harry Markowitz.
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