By Pam Martens: June 5, 2013
It’s not that Congress actually believes that it has passed legislation to rein in the Wall Street frauds and abuses that crashed the largest economy in the world. It’s that Congress desperately wants Americans to think it has Wall Street under control – not the other way around. That’s why there is going to be a lot of screaming and phone slamming on Capitol Hill today.
Katy Burne has busted one more Wall Street illusion today with her piece on the front page of the Wall Street Journal that offers up this headline: “One of Wall Street’s Riskiest Bets Returns.”
According to Burne, two of the largest Wall Street firms are assembling Synthetic Collateralized Debt Obligations (CDOs). Adding to the Congressional angst will be the name of one of the firms involved and the location of the bankers putting the deals together: JPMorgan and London.
That combination is sure to spark déjà vu over JPMorgan’s last venture into risky gambles in London in 2012 – the so-called London Whale trades in illiquid derivatives that created losses of $6.2 billion and resulted in multiple Congressional hearings to deal with the fact that the funds used were those of depositors at the insured bank that resides under the JPMorgan umbrella.
The name of the other firm will provide little comfort either: it’s Morgan Stanley. As of last April, the firm was reporting that it held $1.75 trillion (with a “t) of client assets (mostly retail investors) and had 17,193 financial advisors wooing investors to keep their money at Morgan Stanley.
The last thing a Wall Street firm that is trying to rebuild trust among the investing public should be doing is resuscitating Synthetic CDOs. As Burne explains:
“CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.”
With the U.S. job market still weak, small businesses having a tough time getting loans, and Wall Street abuses still coming to light, that two of the major firms would think it appropriate to resuscitate a thoroughly discredited practice tells one all one needs to know about the impact of the Dodd-Frank financial reform legislation.