Jamie Dimon, chief executive of JP Morgan Chase, had a good crisis and has since been posing as a latter-day George Bailey (the character played by Jimmy Stewart in It's A Wonderful Life). In recent years he's been insisting that his bank is better managed, with better risk management systems and greater integrity than the other Wall Street players.
Dimon has also been leading the resistance against financial reform. In September 2011, he famously chided Bank of Canada governor Mark Carney over the Basel III capital and liquidity rules. Dimon claimed the new rules, cooked up by the Basel Committee on Banking Supervision, discriminated against US banks and were therefore 'anti-American'. He has also been a vociferous opponent of the 'Volcker' rule since it was first proposed.
When on 10 May, Dimon admitted to at least $2 billion of losses in the bank’s chief investment office (a proprietary trading desk masquerading as a client-friendly hedging outfit), the schadenfreude among commentators was palpable.
The losses have been blamed on massive, ill-judged bets or speculative trades made by JP Morgan trader Bruno Iksil, also known as the 'London Whale', who operates out of JP Morgan's London office. Iksil and colleagues built up positions totaling more than $100 billion in asset-backed securities and structured products — the complex, risky bonds which were at the center of the financial crisis in 2008 — over and above the credit derivatives position that have been blamed for the $2bn losses.
Dimon's $14m-a-year lieutenant Ina Drew has already fallen on her sword. Dimon, who has admitted the bank made "egregious mistakes", may have follow her out the door -- especially if losses rise to $7bn as some have predicted, and especially given recent claims that he “personally approved the concept behind the disastrous trades” (see Monica Langley’s Wall Street Journal article of Friday, May 18).
In recent days, there have been a string of damaging revelations about lax risk management, excess risk-taking and internecine strife at JPMorgan. We have learned the bank didn't have a treasurer at the time the loss making trades were made; that it put a former trader in charge of risk management at the CIO, and that the CIO had a more permissive Value at Risk (VaR) model than the rest of JP Morgan. An earlier scandal over the bank's failure to segregate client funds at its London office, for which it was fined £33.32m by the FSA in May 2010, has not been much mentioned.
In a round up on Naked Capitalism, Yves Smith said the CIO unit remained remarkably free from oversight, despite warnings from JPMorgan executives dating back to 2005. Red flags were raised internally about the size of the CIO, its opaque approach to risk reporting and its ability to get “bigger and bigger” due to a lower cost of funding than the rest of the investment bank. But they were ignored by Dimon and his co-directors.
The unusual autonomy given to the CIO meant that, just like AIG Financial Products Group before it, it was able to rapidly build up risky positions without alarms being sounded. In a blog post, anonymous investment banking blogger Epicurean Dealmaker wrote:
[Dimon] unforgivably failed to perceive that the line officer responsible for the CIO’s biggest and most opaque bets unilaterally “dropped risk-control caps that had required traders to exit positions when their losses exceeded $20 million.”
The humbling of Dimon has come as a massive boon to campaigners for much tighter financial reform -- or just for existing laws to be implemented. Writing in the New York Times Paul Krugman said:
The point, again, is that an institution like JP Morgan — 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.
William K Black, associate professor of economics and law at the University of Missouri–Kansas City, believes JP Morgan should be closed down or broken up. Writing on CNN Black said the only reason it still exists is because it has bribed the US political class.
"It is simply irrational to allow such an institution to exist … Banks are more efficient when shrunk to the point that they can no longer endanger the world economy. But because JP Morgan and similar banks are the leading contributors to Democrats and Republicans, neither political party has the courage to order them to reform.
Black said punting on derivatives was always going to be a massive temptation to the likes of JP Morgan and Dimon:
Because they are opaque, create fictional income that leads to real bonuses and when (not if) they suffer losses so large that they would cause the bank to fail, they will be bailed out. The Volcker Rule was designed to solve the problem. However, JP Morgan led the effort to gut the Volcker Rule...
There have also been calls for Dimon to step down as director of the New York Federal Reserve, which is responsible for the supervision and regulation of financial institutions and the implementation of monetary policy, including one from the alternative banking working group of Occupy Wall Street. In an Open letter to Jamie Dimon, OWS highlighted the conflicts of interest between Dimon's two roles.
"It is inappropriate, and dangerous to us, for you to oversee the banking system or the economy when you have proven incompetent at overseeing your own bank — particularly since the Federal Reserve is investigating your bank and your behavior."
It's not looking good for Dimon. But some good may yet come of this. The fact that the very guy who, for years, has arrogantly claimed that tighter reforms and greater transparency for the finance sector were wholly unnecessary and would harm the US economy has stumbled this spectacularly means he has become a hollow man.
Further reading on the regulation and supervision of banks and financial institutions in the United States:
- 2012: The Year Ahead – Winners and losers in the war over financial regulation by Ian Fraser
- US Financial Regulation: A Hopeless Tangle, or Complexity for a Purpose? by Lawrence J. White
- Why Organizations Need to be Regulated—Lessons from History by Bridget Hutter
Tags: 'white collar' crime , banking , Barack Obama , Bruno Iksil , CDS , Dodd Frank , financial crisis , James K Galbraith , Jamies Dimon , JP Morgan , JP Morgan Chase , Mark Carney , New York Federal Reserve , Occupy Wall Street , Paul Krugman , University of Missouri–Kansas City , US , Volcker Rule , William K Black