Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

In the J.P. Morgan annual letter to shareholders, Jamie Diamond, the CEO, blamed regulators

for the recent banking panics that we've seen and warned that the current

crisis is not yet over and that there will be repercussions from it for years to come.

He argues that the recent events where three US banks failed and the Swiss government

engineered an emergency takeover of Credit Suisse, risk undermining

confidence in the banking industry and prompted investors to price in a greater risk of recession

in the United States. In his letter, he put forth that the regulations ushered in after the credit crunch encouraged banks

to build large portfolios of treasury bonds that then fell in value when the Federal Reserve

raised interest rates, leaving certain banks nursing losses that spooked investors. Ironically,

banks were incented to own very safe government securities because they were

considered highly liquid by regulators and carried very low capital requirements, he wrote

in the letter published earlier this week.

Diamond took aim at banking stress tests in his letter

too. Stress testing is the annual process run by the Fed to gauge the biggest bank's ability to

withstand major economic shocks. He said in his letter that the exercise has become an enormous mind-numbingly

complex task about crossing T's and dotting eyes that might give a risk committee a false

sense of security. He says that even worse, the stress testing based on the scenario devised by the Fed, never

incorporated interest rates at higher levels.

He says that he's not aiming to absolve bank management, he just wanted to make clear that

this wasn't the finest hour for many players.

All of the colliding factors became critically

...