At JPMorgan, the Ghost of Dinner Parties Past
By GRETCHEN MORGENSON
Published: May 12, 2012
WHAT goes around comes around. Sometimes it happens sooner than you’d think.
Related
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DealBook: JPMorgan Discloses $2 Billion in Trading Losses (May 10, 2012)
Times Topic: Gretchen Morgenson
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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