JP Morgan’s $2 billion experiment with truthiness

By David Cay Johnston

June 11, 2012

 

JPMorgan Chase & Co blames its $2 billion, and maybe much larger, trading loss on mistakes made in hedging the market. Bill Black, a finance criminologist, calls this “hedginess.”

“Hedginess” riffs on “truthiness,” the word the comedian Stephen Colbert invented in 2005. Truthiness means favoring versions of events that one wishes to be true, and acting as if they were true, while ignoring facts to the contrary that are staring you in the face. Fake hedges are to real hedges as “truthiness” is to truth. Hence “hedginess.” JPMorgan’s trades got around the Volcker rule, which tries to prevent banks from speculating in financial derivatives, by labeling as “hedges” bets that were clearly not hedges.