Showing posts with label New York Times. Show all posts
Showing posts with label New York Times. Show all posts

Monday, May 21, 2012

Dimon’s Déjà Vu Debacle


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Published: May 20, 2012 453 Comments
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Sometimes it’s hard to explain why we need strong financial regulation — especially in an era saturated with pro-business, pro-market propaganda. So we should always be grateful when someone makes the case for regulation more compelling and easier to understand. And this week, that means offering a special shout-out to two men: Jamie Dimon and Mitt Romney.
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I’ll come back shortly to the troubles at JPMorgan Chase, the bank Mr. Dimon runs. First, however, let me talk about Mr. Romney, whose remarks about those troubles were so off-point that they constitute a teachable moment.
Here’s what the presumptive Republican presidential nominee said about JPMorgan’s $2 billion loss (which may actually have been $3 billion, or $5 billion, or more, but who’s counting?): “This was a loss to shareholders and owners of JPMorgan and that’s the way America works. Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain.”
What’s wrong with this statement? Well, suppose that someone — say, Jimmy Stewart in the movie “It’s a Wonderful Life” — runs a bank that takes in deposits and invests the money in various ways. And suppose that one of those investments is a risky bet on some complex financial instrument, with Mr. Potter, the evil plutocrat, on the other side.
If Jimmy Stewart’s bet pays off, we’re in Romneyworld: he’s made money, Mr. Potter has lost money, and that’s that. But suppose Jimmy Stewart loses his bet. If the bet was big enough, he no longer has enough assets to pay off his depositors. His bank collapses, probably in a chaotic bank run that takes down the whole town’s economy as collateral damage. Mr. Potter makes money on the deal, but so what?
The point is that it’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out. And the prospect of such bailouts, of course, only strengthens the case that banks shouldn’t be allowed to run wild, since they are in effect gambling with taxpayers’ money.
Incidentally, how is it possible that Mr. Romney doesn’t understand all of this? His whole candidacy is based on the claim that his experience at extracting money from troubled businesses means that he’ll know how to run the economy — yet whenever he talks about economic policy, he comes across as completely clueless.
Anyway, it goes without saying that Jamie Dimon is no Jimmy Stewart. But he has, in a way, been playing Jimmy Stewart on TV, posing as a responsible banker who knows how to manage risk — and therefore the point man in Wall Street’s fight to block any tightening of regulations despite the immense damage deregulated banks have already inflicted on our economy. Trust us, Mr. Dimon has in effect been saying, we’ve got this covered and it won’t happen again.
Now the truth is coming out. That multibillion-dollar loss wasn’t an isolated event; it was an accident waiting to happen. For even as Mr. Dimon was giving speeches about responsible banking, his own institution was heaping on the risk. “The unit at the center of JPMorgan’s $2 billion trading loss,” reports The Financial Times, “has built up positions totaling more than $100 billion in asset-backed securities and structured products — the complex, risky bonds at the center of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses.”
And what was going on as these positions were being accumulated? According to a fascinating report in Sunday’s Times, the reality behind JPMorgan’s facade of competence was a scene all too reminiscent of the behavior that brought down firms like A.I.G. in 2008: arrogant executives shouting down anyone who tried to question their activities, top management that didn’t ask questions as long as the money kept rolling in. It really is déjà vu all over again.
The point, again, is that an institution like JPMorgan — a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers — shouldn’t be engaged in this kind of speculative investment at all. And that’s why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010.
Will we get that kind of regulation? Not if Mr. Romney wins, obviously; he wants to repeal Dodd-Frank, and in general has made it clear that he would do everything in his power to set us up for another financial crisis. Even if President Obama is re-elected, getting the kind of regulation we need will be an uphill struggle. But as Mr. Dimon’s debacle has just demonstrated, that struggle remains as necessary as ever
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Saturday, May 12, 2012

At JPMorgan, the Ghost of Dinner Parties Past - Gretchen Morgenson

At JPMorgan, the Ghost of Dinner Parties Past

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Published: May 12, 2012
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WHAT goes around comes around. Sometimes it happens sooner than you’d think.

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That round wheel turned on JPMorgan Chase last week, which disclosed that it had suffered a $2 billion trading loss in credit derivatives. That such a hit had befallen the mightiest of banks was perhaps more stunning than the size of the loss.
So where does the karma come in? The loss, and the embarrassment it held for Jamie Dimon, the bank’s imperious chief executive, came just one month after a private dinner party in Dallas at which he assailed two respected public figures who have pushed for policies that would make banks like JPMorgan smaller and less risky.
One was Paul Volcker, the former Federal Reserve chairman, whose remedy for risky trading by too-big-to-fail banks is known as the Volcker Rule. The other was Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who has also argued that large institutions should be slimmed down or limited in their risky trading practices.
The party, sponsored by JPMorgan for a group of its wealthy private clients, took place at the sumptuous Mansion on Turtle Creek hotel. Mr. Dimon was on hand to thank the guests for their patronage and their trust.
During the party, Mr. Dimon took questions from the crowd, according to an attendee who spoke on condition of anonymity for fear of alienating the bank. One guest asked about the problem of too-big-to-fail banks and the arguments made by Mr. Volcker and Mr. Fisher.
Mr. Dimon responded that he had just two words to describe them: “infantile” and “nonfactual.” He went on to lambaste Mr. Fisher further, according to the attendee. Some in the room were taken aback by the comments.
Neither Mr. Fisher nor Mr. Volcker would comment on the remarks. But it appears to have been a classic performance from Mr. Dimon. In-your-face. Pugnacious. My way or the highway.
Mr. Dimon declined to comment.
AS overseer of the bank that emerged in the best shape from the credit crisis, Mr. Dimon has gained in stature in recent years. Hailed for his management skill, he has also become the financial industry’s point man in the war against tighter regulation of derivatives andproprietary trading. Almost since the financial crisis began, JPMorgan Chase and its legion of lobbyists have swarmed lawmakers and regulators in an effort to beat back efforts to bring transparency to derivatives and to separate risk-taking activities like proprietary trading from commercial lending units.
JPMorgan has not been alone in these efforts. But it has had more clout because of its position as the grown-up in the financial industry’s playground.
The industry’s efforts to curtail or derail both derivatives transparency and the Volcker Rule — which would eliminate proprietary trading at commercial banks — have had significant effects. In the case of the Volcker Rule, lobbying has made the proposed regulation vastly more complex. Mr. Volcker himself told lawmakers at a Congressional hearing last week that “I could give you stories all day about lobbyists making things more complicated.”
The financial industry’s opposition has delayed the effective dates of regulatory changes. Had those delays not occurred, it’s possible that JPMorgan would not have incurred its big and jarring loss.
Mr. Dimon does not agree with this assessment, judging from his comments in a conference call last Thursday. But it’s an argument made persuasively by Michael Greenberger, a law professor at the University of Maryland and an authority on derivatives. He said that if two still-pending aspects of the Dodd-Frank legislation had been in effect, JPMorgan’s trading position probably wouldn’t have been allowed to grow as large as it did. Even better, the trades might not have been made by the bank at all.
“If the trades at issue were proprietary trading, as now appears to be the case, they would be banned by the Volcker Rule,” Mr. Greenberger said. “And if derivatives rules under Dodd-Frank had been in effect, these trades would almost certainly have been required to be cleared and transparently executed. The losing nature of the trades, therefore, would have been obvious to market observers and regulators for quite some time and the losses would not have piled up opaquely.”
Mr. Greenberger is talking about Title VII, the section of the Dodd-Frank law dealing with over-the-counter derivatives, which were at the heart of the JPMorgan trades. It would require clearing on an exchange and transparent execution of these derivatives. Under these rules, when trades go against an institution, additional capital would have to be supplied. “A Title VII clearing facility would have priced this trade regularly, and if it kept moving away, the facility would have been asking for margin,” Mr. Greenberger said. “That kind of discipline tends to head people off from these positions.”
But regulators are still hammering out the Title VII rules, and the lobbyists are hellbent on weakening them. This much is clear: If the Glass-Steagall law were still around, the problematic trading at JPMorgan would not have occurred.
The hypocrisy is that our nation’s big financial institutions, protected by implied taxpayer guarantees, oppose regulation on the grounds that it would increase their costs and reduce their profit. Such rules are unfair, they contend. But in discussing fairness, they never talk about how fair it is to require taxpayers to bail out reckless institutions when their trades imperil them. That’s a question for another day.
AND the fact that large institutions arguing against transparency in derivatives trading won’t acknowledge that such rules could also save them from themselves is quite the paradox.
“These regulations are not just protecting the United States taxpayer,” Mr. Greenberger said. “They protect the banks themselves. The best friend of these banks would be laws that prevent them from shooting themselves in the foot. The fact is, they can’t do it themselves.”
As if we had to learn that lesson again.
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