Friday 22 June 2018

Colm McCarthy: We know about bank's failings in the US but not what went on here

Not one Irish bank has released an account of what went wrong. It's high time they did

Colm McCarthy

Colm McCarthy

THIS is a story about two enormous recent banking failures and how they have been dealt with by the banks concerned.

JP Morgan is one of the world's largest banks. Originally a Wall Street merchant bank, JPM has been absorbing large US retail banks for decades, including Manufacturers Hanover, Chemical Bank and Chase Manhattan, and has built wholesale banking operations all over the world. Its gross assets come to about two trillion US dollars and it employs about 250,000 people. It was the chosen vehicle of the US government for the rescue and takeover of Bear Stearns, the first of the Wall Street banks to go wallop in the current crisis, back in March 2008. Along the way, JP Morgan had come to be regarded as the least accident-prone, and best-managed, of the large multinational banks.

In June 2012 JP Morgan announced that it was writing off the enormous sum of six billion dollars due to dealing losses at its central treasury unit, called the Central Investment Office (CIO). This unit was established because JPM collects more deposits through its extensive retail operations than it lends out. It is a cash-surplus bank, and decided to centralise the management of this spare liquidity in a single unit, the CIO. In the normal course of events, this unit would have been a low-risk operation, putting the surplus cash to work in boring investments like US Treasury bills and other low-yielding but liquid and safe investments. If these yielded a modest premium over the rate paid on deposits, all would be well and the bank would enjoy the security of knowing that it had ample spare liquid assets for the rainy day. The rainy day duly arrived in the US markets in 2007 but JP Morgan survived and prospered as others went under or had to be rescued by the US government. But subsequently the decision was taken to broaden the CIO's remit and it began to take riskier positions in derivatives markets with a view to enhancing profitability.

Please sign in or register with for free access to Opinions.

Sign In

Today's news headlines, directly to your inbox every morning.

Don't Miss