Hedging Our Way to Prosperity

A writer to another local publication recently expressed resentment at the vilification of Jamie Dimon, the J.P. Morgan CEO, for a hedged financial bet that may have lost the bank two billion dollars. The writer remarked: “I for one would feel much more comfortable going to sleep at night knowing that Jamie Dimon or folks of his qualifications were watchdogs over the assets of this country” (rather than the government) .

Really? And just what are those qualifications in which he poses such trust?

After this bank fiasco became apparent, Dimon came out on national news and credited the blunder to his bank being “reckless,” “negligent,” “foolish,” and a few other such startling admissions. Now, why would a CEO – of a bank, of all things – cop to such damning shortcomings?

The answer is fairly obvious. His only alternative was to admit a truth even more damaging to him, as well as to the underpinnings of other financial establishments: that their risk-management strategies (the penchant for which he was so highly touted) are based on fatally flawed assumptions

This is not big news. It had been pointed out by others, including Nassim Taleb in his best-selling Black Swan, that a few years ago the giant hedge fund Long-Term Capital Management similarly “exploded,” leading to Federal Reserve intervention. That fund’s risk-management strategies were based upon the “expertise” of a couple of economists on its board, whose method had recently earned them the Nobel Prize in Economics (and later lost the firm $4.6 billion).

Yet we continue to entrust our wealth to these big-headed, cocksure geniuses who steadfastly indulge in the illusion that their brilliant algorithms can succeed in predicting the unpredictable (and “hedge” our way to greater wealth).