Saturday, February 05, 2011

Snow Derivatives

I kid you not -- snow derivatives.

Big storms drive trade in snow derivatives

”Jeff Hodgson of the Chicago Weather Brokerage sells snowfall derivatives. Here's how they work:

JEFF HODGSON: I'm going to pay $10,000, and if it snows over 40 inches in Chicago, that option will be worth over $25,000. If it doesn't snow over that level, then I lose my $10,000.”

Do you get the feeling we didn’t learn a single thing from The Great Recession? Isn’t running a business tough enough? Do you have to learn how to gamble on the weather too? What does this do for the economy? What does it do for the country? What does it do for humanity? I’m coming up with the answer “nothing” over and over again. How about you?

While I’m here, you might want to notice that Paul Krugman mentioned Jamie Dimon in his blog today. (I mentioned him on Tuesday.)

”If he cares about making even more money, it’s purely as a way of keeping score. And once you’re motivated mainly by considerations of prestige, you start to care more about whether the president is saying nice things about you than whether his actual policies are letting you off scot-free from any consequences of your industry’s sins.”

There is a danger in all this -- besides the obvious greed. The pursuit of fantastical profits is one of the things that lead to The Great Recession. Take Madoff for example. Everyone (now) recognizes that he was a crook. But for a long time, honest businesses were trying to compete with him -- and Madoff was winning. He offered larger and more consistent returns to his investors. And investors flocked after what he was offering. That put the pressure on the law-abiding businesses to increase their returns -- or go out of business. That of course, leads to a race to the bottom of the ethics barrel.

John Paulson (our 3.7-billion-dollar man) still isn’t recognized as a crook. At least by the law. He was just willing to be a lot less ethical than others. He was rewarded beyond measure for his lack of ethics. So were his clients. In that his clients weren’t committing any illegal or immoral acts, their consciences were clear. At least they could tell themselves that. And so could other investors that wanted the kind of returns that Paulson was offering. The race was on. If you wanted to compete with Paulson (who had to compete with Madoff), you had to find a way to increase the returns your investors were earning. You can’t do that by being more ethical than your competition. At least most of the time.

Deregulation sounds like such a harmless word. But allow me a little hyperbole to make my point. Thou shalt not steal. Try deregulating that.

Regulations provide a level, ethical playing field for all parties. I understand that regulations are viewed as cumbersome and sometimes wasteful by businessmen. Reasonable businessmen should recognize that good regulations keep everyone honest. Or at least closer to honest. There is a happy median somewhere that we can all live with.

As far as ethics, you might remember I said Jamie Dimon (of JP Morgan Chase) was one of the better-behaved bankers. Notice I didn’t use the word “ethical”. My brother pointed me towards the rash of “xtranormal” videos on YouTube about the “Chase 123 drill”. I haven’t found one “clean” enough that I’d want to embed on my blog. (The cursing is really excessive but I guess that’s the world we live in.) However, the sheer number of videos speaks volumes as to how the employees of JP Morgan Chase feel about the ethics of their company.

It may be a little difficult for a man that makes $40 million a year to understand how a customer with a food stamp debit card feels. Pushing your customers into online banking makes financial sense. The ethics of pushing a computer-illiterate 80-year-old into an online checking account are a little less clear.

Don Brown
February 5, 2011

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