Jamie Dimon’s whale-watching tour came to a crashing end last week as the JPMorgan chief was forced to admit a huge trading loss.
JPMorgan’s London Whale Bruno Iksil, the French trader whose super-sized appetite for synthetic bets on exotic derivatives earned him that appellation, had beached the firm to the tune of $2.3 billion and counting.
While Dimon takes the fall from grace as Wall Street’s lead banker taking on Washington’s push for financial reform, these risks that JPMorgan took reflect the consequences of the Bank of Bernanke’s misguided plan to recapitalize our banks and jump-start our economy.
Four years into the Fed’s near-zero interest-rate experiment, the loss is the unhappy outcome of a strategy that may be doing more harm than good. And putting the US taxpayer at risk again for bailing out the bank.
So what’s a good banker like Dimon to do? It’s fairly obvious. Borrow as much money as you want from the Fed at almost no cost, expand your investment portfolio and ramp up the risk in hopes of juicing earnings and lock in fat bonuses.
That’s how the derivatives portfolio at JPMorgan grew to what is reportedly at $360 billion. That’s $360 billion that isn’t going toward business loans or mortgages or creating any other economic growth — until bonus time, of course.
And while the bank says its loans to small businesses rose by more than 50 percent in 2011 to $17 billion, that’s a drop in the bucket compared with the amount of money the London Whale routinely played with.
Until the black swan appeared earlier this year, the derivative strategy was working like a charm. JPMorgan earned a record $19 billion, Dimon was touted as the new King of Wall Street, and Ina Drew, the woman running the chief investment office, took home about $14 million to reward her risk-taking prowess.
Now, what appears to have been a synthetic bet on the creditworthiness of scores of companies has imploded. It is unclear how much more than the announced $2.3 billion in losses the bank will suffer as it unwinds the trade and a possible downgrade.
So it is little surprise that the whole episode has already given lawmakers ample ammunition to call for more whale-watchers in Washington, starting with strict implementation of the Volcker Rule banning all proprietary trading. And very ironic that the Fed is tasked with writing the rules for Volcker, since its policies have created the need in this case.
But all this noise misses the point. There is no bigger whale in the world than the $16 trillion US economy. Until Uncle Sam’s CEO, President Obama, and its CFO, Ben Bernanke, realize that the policies they have put into place have juiced the financials while doing very, very little for the rest of the economy, no amount of regulation will keep bankers from taking out-size risks in hopes of outsize rewards, with taxpayers as the safety net.