A BIG but digestible mistake by a financial institution with abundant profits and capital should normally be viewed as the market equivalent of an electric shock, a jolt that leads to smarter behaviour. The response to JPMorgan Chase’s $2 billion (and rising) loss on a position taken by its chief investment office could not have been more highly charged.The loss has reinforced the political appeal of bashing banks, no matter what the facts. Barack Obama went on a TV chat show on May 14th and responded to questions about the loss by implying it would have been blocked under the Volcker rule banning proprietary trading. Given the proposed wording of the rule and the apparent nature of the trade, which seems to have started out as an attempt to hedge risk, that assertion is at best a stretch.Elizabeth Warren, a senatorial candidate in Massachusetts, also jumped on the bandwagon. “Wall Street isn’t going to change its ways until Washington gets serious about strong oversight and real accountability,” ran a campaign ad. Yet JPM is already among the most heavily regulated institutions in America, if not the world. Supervisors have employees climbing all over the bank; they routinely review its credit and business practices. Perhaps to pre-empt criticisms of inept oversight, a string of regulators has nonetheless announced investigations into the trade.Competing financial firms...

A RARE slip-up by lawyers has helped shed some light on a high-profile legal battle, the details of which some of the largest Wall Street firms have been fighting to keep under wraps. The case concerns allegations of illegal “naked” short selling, where the rules have been tightened several times over the past seven years.In 2007 Overstock sued 11 brokers, alleging that they had caused its share price to fall by helping their clients to naked-short the Utah-based retailer. In a normal short sale, shares are borrowed (or at least “located”) with a broker’s help before being sold. In the naked version, there is no attempt to borrow or locate the stock. This can create “fails to deliver”, where the trade is not settled when it should be, and messes with the laws of supply and demand, allowing shorting to take place beyond the natural limits set by the number of borrowable shares.As the pre-trial discovery period proceeded, Overstock narrowed its focus to two firms, Goldman Sachs and Merrill Lynch, now part of Bank of America. Before the case was set to go to trial in California, however, the judge dismissed it on jurisdictional grounds, ruling that not enough of the alleged wrongdoing had taken place in the state. Overstock appealed and pushed for all of the evidence to be unsealed. The defendants objected. Four media groups, including The Economist,...

IN 1900 America had around 500 carmakers; by 1908 it had 200. In 1960 Britain had 16 banks; ten years later it had just six. In both cases, this rapid consolidation came about because of a flurry of mergers. From soft drinks to steelworks, plenty of other industries have seen similar patterns. Mergers happen in waves, so the number of firms collapses suddenly rather than dwindling over time. And the next one may soon crest.

The programme in West Bengal evaluated by Esther Duflo (Free Exchange, May 12th 2012) was implemented by Bandhan, not BRAC. BRAC devised the original scheme on which Bandhan's was based. In the same issue ("Frontier mentality"), we inadvertently relocated Lebanon to Africa. Sorry. These have both been corrected online.

THE pattern is eerily familiar. Investors start the year in a blaze of optimism, hoping that the euro zone has been stabilised and that the American economy is growing strongly. By the late spring, the latest example of euro-zone “make and mend” policies shows signs of fraying and the American recovery is proving less robust than hoped. The same description of events applies to both 2011 and 2012, even if last year’s market correction was also triggered by special factors—the terrible damage resulting from the Japanese earthquake and tsunami, along with the Libyan civil war.This year’s rally really began in late November, and got much of its impetus from the €1 trillion ($1.3 trillion) in three-year loans made by the European Central Bank to the region’s banking system. But the effect of the ECB’s liquidity package has quickly worn off. The MSCI World stockmarket index had gained 12.6% at one stage this year but has seen that advance cut to 2.7%. In Europe, the Euro Stoxx 50 has fallen by 6% in dollar terms; Spanish shares are off by 21%.Investors have retreated to the safety of selected government bonds. Since the start of 2012, the yields on British and German ten-year government bonds have fallen to levels that are pretty much unprecedented; French yields are a third of a point lower. American yields have fallen, too, but not by as much. The yields on ten-year Bunds are...

IT HAS taken almost two years, but the debate over the restructuring of American finance has at last reached the issue at the heart of the industry’s reregulation: systemic risk. The idea is simple, the execution controversial. Policymakers want to help prevent the ailments of a single institution from infecting the system as a whole by limiting the exposures that firms have to any one counterparty. The implementation, typically of the mind-numbing Dodd-Frank act, is horribly complex.The core provision on “single counter-party exposure limits” comprises only 81 words among the hundreds of thousands in the act. The final rules were supposed to be in place by January 22nd, but the Federal Reserve issued its initial proposal just weeks before, on January 5th, and the comment period, prompting a deluge of letters, ended only on April 30th. Some of the comments were incoherent rants. The ones from trade groups and financial firms are far from objective. But the depth and the extent of the criticisms will require a detailed response.The law calls for institutions to limit their exposure to any single institution to no more than 25% of their capital, but the Fed has gone beyond this (as permitted in the act). It has proposed that large, important institutions should have no more than 10% exposure to a counterparty. It also wants lenders to provide it with ongoing credit-exposure...

SIMMERING anger over bankers’ pay was fuelled afresh on May 9th when a British court ruled that Commerzbank, a serially bailed-out German bank, had to pay bonuses promised to some of its investment bankers in London even though it subsequently posted colossal losses and collapsed into the arms of the state. The court ruled, reasonably enough, that a promise made was one that really ought to be kept.

HAVE Spain’s policymakers at last woken up? The news that Rodrigo Rato was leaving Bankia came at the start of Madrid’s siesta on May 7th. The abrupt departure of one of Spain’s most prominent bankers came hours after Mariano Rajoy, the prime minister, admitted that he might need to use public funds to shore up the banking system. Two days later, the government nationalised Bankia’s parent.Bankia, a merger of seven savings banks and the largest property lender in Spain, is not Mr Rajoy’s only banking problem, but it is a good place to start. In a report last month the IMF singled the lender out, urging it to strengthen its balance-sheet as well as to “improve management and governance practices”. Its auditor did not sign the 2011 accounts of Bankia and its parent company, Banco Financiero y de Ahorros (BFA).The bail-out heaps more pain on shareholders: the bank made its debut on Madrid’s stockmarket only last July and its shares have since lost 45% of their value. It is also an embarrassment for regulators. Most of the bad land assets of the seven original savings banks reside in BFA, a 45.5% shareholder in Bankia that had already received €4.5 billion in preference shares from the state. The idea was to detach Bankia’s banking business from the contaminated parent, but the fall in Bankia’s value made the whole structure vulnerable. The preference shares will convert to...

WITH their overnight-lending rates at zero for most of the past decade, the Japanese public long ago stopped caring about interest rates. Instead the yen is their focus. Shoppers may revel in its current strength against the dollar but in the news media, the financial markets and corporate Japan, it is a relentless source of woe. Carlos Ghosn, the boss of Nissan and Renault, publicly lambasts it as a “1,000-pound gorilla” that hurts his ability to sell Japanese cars abroad. Its strength is increasingly becoming a political issue, too.Both the Bank of Japan (BoJ) and the finance ministry have taken steps recently that analysts believe are surreptitiously aimed at the currency markets. On April 27th the BoJ increased the size of its asset-purchase programme by ¥5 trillion ($62 billion), and extended the maturity limit of government bonds it would buy from two to three years. That enhanced easing measures introduced in February which sharply weakened the yen.Days before, the finance ministry promised the biggest single contribution—a $60 billion slug—to a $430 billion increase in IMF funding which is largely aimed at alleviating concerns about the euro crisis. As a senior official admitted, Japan’s decision was not altruistic. When the euro crisis gets worse, it weakens Japan’s exports to Europe and strengthens the yen, which compounds the first problem. So Japan has a direct...

BANKS in China appear to be in rude health. The seven biggest mainland banks have just posted a 16% year-on-year increase in pre-tax profits between them for the first quarter. The level of non-performing loans (NPLs) remains low, at just about 1%. But trouble is being stored up for the future.There are two big worries: bad local-government debt and souring property loans. The infrastructure binge of the past few years saw a boom in local-government financing vehicles (LGFVs), off-balance-sheet entities used to get around prohibitions on borrowing. Regulators say these entities’ bank debts were worth $1.4 trillion at the end of September. Private estimates range much higher, and suggest that 20-30% may be non-performing.