On Thursday and Friday the big story was that America's biggest bank lost a huge amount of money from trade by one of it traders in London nicknamed the 'London Whale'. This has raised serious questions whether our banking system is any more stable and safer than it was in 2008, when Greenpsan and Bush's naive faith that financial markets could regulate themselves blew up in everybody's faces scattering wreckage across the economy. Wreckage that is still being repaired.
$2 billion loss at JPMorgan triggers calls for tougher regulation of banks
“It just shows they can’t manage risk — and if JPMorgan can’t, no one can,” Simon Johnson, the former chief economist for the International Monetary Fund, said Friday.
But Dimon’s contention that the $2 billion loss came from a hedging strategy that backfired, not an opportunistic bet with the bank’s own money, faced doubt on Friday, if not outright ridicule.
“This is not a hedge,” said Sen. Carl Levin, D-Mich., chair of a subcommittee that investigated the crisis. He said the trades were instead a “major bet” on the direction of the economy, as published reports suggested.
In particular, the industry has fought hard against a few provisions that might have prevented the problems at JPMorgan.2014? Really? Why is this urgently needed law taking 3+ years to implement?
One is the so-called Volcker rule, which will prohibit banks from trading for their own profit. The rule is still being written, and the Federal Reserve has said it will begin enforcement in 2014.
A couple of Senate Democrats were scathing in their criticism of JPMorgan and Dimon.
JPMorgan’s trades show that the derivatives market remains too opaque for regulators to oversee effectively, said Rep. Barney Frank, D-Mass., one of the law’s namesakes.
“This is an exact description of proprietary trading-style activity,” Sen. Jeff Merkley, D-Ore., told reporters Friday. “This really is a textbook illustration of why we need a strong Volcker rule firewall.”From the New York Times editorial on this:
JPMorgan Chase’s $2 Billion Loss
The loss, according to Mr. Dimon, was in the bank’s “synthetic credit portfolio,” which presumably means it involved the same type of complex derivatives that played such a destructive role in the financial crisis. And Mr. Dimon said that sloppiness, bad judgment and stupidity — his own and his colleagues’ — had led to the loss.
Dodd-Frank also calls for new rules on derivatives — including transparent trading and requirements for banks to back their trades with collateral and capital. If such rules were in place, JPMorgan’s trades could not have escaped notice by regulators and market participants. In the face of heavy lobbying, the derivatives’ rules have also been delayed or watered down.Profoundly dangerous? In a number of respects that would also be a good description of a Romney presidency.
There are now several bills in the House, with bipartisan support, to weaken the Dodd-Frank law on derivatives. One of those would let the banks avoid Dodd-Frank regulation by conducting derivatives deals through foreign subsidiaries. The JPMorgan loss was incurred in its London office, which doesn’t lessen the effect here.
Mitt Romney has called for repealing Dodd-Frank. That may win him Wall Street cash, but it is profoundly dangerous. President Obama and Congressional Democrats can take credit for Dodd-Frank, but they have not done enough to ensure that the rules are strong enough.
Of course President Obama and his Administration also made nice with the Big Banks as this new Newsweek article spells out.
Why Can't Obama Bring Wall Street to Justice?Also on Thursday
By Peter J. Boyer and Peter Schwiezer
The absence of prosecutions, and the fact that the cops on the beat hail from the place that represents the banks, does not sit right with many who hoped Obama would fulfill his promise to hold Big Finance accountable. The left's frustration fuels the Occupy movement, and chills the Democratic base. And it gives Romney, the career capitalist, an opening he is avidly exploiting.
Through last fall, Obama had collected more donations from Wall Street than any of the Republican candidates; employees of Bain Capital donated more than twice as much to Obama as they did to Romney, who founded the firm. By this spring, however, resolution had come to the GOP contest, and Wall Street could see a friendly alternative to Obama. While most of Romney's contributions so far come mainly from the financial sector, Obama's donations from Wall Street have dropped sharply.
In a much lees noticed story the Republican dominated House passed a deficit reduction plan that included the elimination of the federal bailout fund for financial institutions. The funds elimination was Chairman of the House Financial Services Committee Spencer Bachus' big favor for the Big Banks that he has shepparded through his committee, Here is Backus crowing about it on his website:
CONGRESSMAN BACHUS VOTES FOR PLAN TO CUT SPENDING, END BAILOUTSEliminating the Federal bailout fund will end the possibility of the Too Big to Fail Banks needing a bailout in the same way that eliminating the Fire Department would eliminate the possibility of fires. Spencer Bachus is saving the big banks some money by effectively shifting the costs of any possible future bailout from the Federal bailout fund funded by theToo Big to Fail Banks back onto the taxpayers.
As Chairman of the House Financial Services Committee, Congressman Bachus was responsible for identifying $35 billion of savings included in the package, going above and beyond the committee’s deficit reduction target by more than $5 billion. Bachus’ recommendation to eliminate a federal bailout fund for large financial institutions was accepted.
“The Committee’s work on this reconciliation package saves more than $35 billion, but just as importantly, it does what 2,300 pages of the Dodd-Frank Act, 400 new regulations, over two thousand newly-hired federal regulators, and more than 24 million hours of compliance have failed to accomplish – it ends the bailouts. A bailout fund doesn’t end bailouts – it guarantees them. We’re telling big banks that if they make risky bets and bad decisions, they’re on the hook, not the taxpayers. No more bailouts, period,” said Congressman Bachus, who spoke during debate on the floor.
Spencer Bachus described his role as Chairman of the House Financial Services Committee this way in 2010:
Spencer Bachus finally gets his chairmanshipIt sounds like Baucus forgot he was taking to a reporter and not a bank lobbyist and then thought better of it later. Both Dimon and Baucus probably are in agreement that our whole country is there to serve them and the Big Banks.
By Mary Orndorff -- The Birmingham News
Bachus, in an interview Wednesday night, said he brings a "main street" perspective to the committee, as opposed to Wall Street.
"In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks," he said.
He later clarified his comment to say that regulators should set the parameters in which banks operate but not micromanage them.
Hat tip to DSWright.