Bank Hedges and Social Justice

by  Chidem Kurdas

To hedge or not to hedge? That’s the question for many an endeavor. Farmers hedge by selling their harvest ahead of time. Building managers hedge by locking in a price for heating oil or natural gas—last year many got it wrong, blindsided by the decline in the price of gas. Most hedges we don’t hear much about.

Until last week, the most infamous hedge was the set of complex trades put on by Goldman Sachs as protection against losses in mortgage securities in the property bust. Financially this worked and Goldman Sachs escaped the 2008 crisis relatively unscathed. Thereupon it became an object of loathing and mockery in the media, inspiring calls for higher taxes and greater regulation.

Now we have the failed trades with resultant loss of $2-$3 billion at JP Morgan Chase. This also inspired calls for greater regulation, in particular of bank trading, which appears to be offensive whether it makes money or loses money. Continue reading