The $2 billion trading loss at JPMorgan — a failure of the famed risk-management prowess of bank chief Jamie Dimon — is cause for celebration in some quarters.
Dimon deftly steered his bank from most of the excesses that brought about the 2008 banking crisis. He’s since emerged as the industry’s chief spokesman — an effective one — against some excessive regulations in the Dodd-Frank financial-reform law.
So fans of Dodd-Frank aren’t too unhappy at seeing the Great One take a tumble.
But JPMorgan’s mess doesn’t necessarily mean Dodd-Frank is the answer. It’s also fodder for those who argue that JPMorgan — and Citigroup, Bank of America and the rest of the country’s large financial institutions — are simply too big to manage and need to be broken up.
I’ve written about this before, but Dallas Federal Reserve chief Richard Fisher recently laid out his case as to why the big banks need to be broken up — and I hear that the industry’s lobbyists have been reaching out to both the Romney and Obama camps to see if the idea’s gaining traction even before the “London Whale” trading loss at JP Morgan came to light.
The reasoning: No amount of rules, regulation and smarts (Dimon is the smartest guy in banking today) can prevent banks from sometimes losing money. And the bigger these banks are, the more likely they are to have losses with severe economic consequences for the markets and the whole US economy.
See, for all Dodd-Frank’s mind-numbing rules, it fails to address the fact that regulators can’t catch every screwup. If they could, then the Federal Reserve officials who regularly camp out in JPMorgan’s offices would’ve caught the London Whale’s bad trades before they snowballed into these huge losses.
Plus, Dodd-Frank allows these banks to remain large, unmanageable and (in the end) “too big to fail,” which could leave the taxpayers on the line for a bailout that could easily dwarf TARP and the Obama stimulus.
Even with the bad trades, JPMorgan will likely have a record year and earn $4 billion this quarter. But if JPMorgan’s loss had been truly life-threatening, no one in Washington would’ve let it fall into bankruptcy.
Dimon has stated publicly he’s against “too big to fail.” If JP fell apart, he says, the government should just put it out of business. Problem is, the ripple effects in the global markets would be huge — not to mention JPMorgan’s $1 trillion-plus in federally insured (that is, taxpayer-insured) customer deposits.
Why have we allowed so much risk to be housed in just a few large institutions like JPMorgan, Citigroup and Bank of America? One reason is that the banks and their lobbyists like being big, which is why they never really opposed Dodd-Frank, just some of its provisions.
In many ways, Dodd-Frank was a Faustian bargain between the big banks and the Democrats who ran Washington the crisis’ wake. The surviving banks got to stay intact as long as they agreed to the rules that the Obama administration, Rep. Barney Frank and Sen. Chris Dodd offered up.
Sure, Dimon and others opposed much of the fine print, but they publicly supported the overall law — which, in the end, let them keep their mega-institutions, risk and all.
In the wake of last week’s loss, Dimon has argued to me that Dodd-Frank’s higher capital requirements for banks helped JPMorgan to weather the hit. Meanwhile, being large helps his bank compete globally and service big Fortune 500 companies.
And, he asks pointedly, how exactly do you break up JPMorgan?
Fortune 500 companies don’t do much hiring, especially coming out of a recession. To get people working, you need expansion of small businesses — whose owners often tell me that they find it hard to get loans to expand from megabanks like JPMorgan.
Force JPMorgan, Citigroup and Bank of America to become less systemically important, and they’d then have to sit on a hell of a lot less capital — freeing it up for small-business loans.
Separate JPMorgan’s federally insured commercial bank (where the “Whale” loss came from) from its investment-banking division, and Dimon would have fewer risks to manage — and when he (or some successor) fails, the damage wouldn’t be systemic.
We’ll be hearing much more in the days ahead about the “London Whale” loss and who should be held responsible. Heads will roll at JPMorgan, possibly as early as today. The Securities and Exchange Commission, the Federal Reserve and just about everyone else will “investigate.”
Too bad they do that best after things blow up. Recall how the Securities and Exchange Commission missed Bernie Madoff’s Ponzi scheme, even after an investor provided it with proof on a silver platter.
That’s why the current system is sure to fail; it relies on regulators to catch every major misstep at JPMorgan and the other complex megabanks. If Jamie Dimon can’t do it, no one can.
Charles Gasparino is a Fox Business Network senior correspondent.