Jamie Dimon, the chief executive of JPMorgan Chase, can be clear as a bell when he denounces financial reform. But on an emergency conference call with analysts on Thursday to announce the bank’s stunning $2 billion trading loss, his message was frustratingly vague.
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.
It was a stunning admission from a man who led JPMorgan through the crisis relatively unscathed, but it doesn’t explain what actually went wrong.
What Mr. Dimon did not say is that the loss also occurred because of a continued lack, nearly four years after the crisis, of rules and regulators up to the task of protecting taxpayers and the economy from the excesses of too big to fail banks; and, yes, of protecting the banks from their executives’ and traders’ destructive risk-taking.
The fact that JPMorgan’s loss — which Mr. Dimon has warned could “easily get worse” — is not enough to topple the bank, is not the point. What matters is that JPMorgan, like the nation’s other big banks, is still engaged in activities that can provoke catastrophic losses. If policy makers do not strengthen reform, then luck is the only thing preventing another meltdown.
Bank regulators should start by adopting a forceful Volcker Rule. Proposed by Paul Volcker, the former Federal Reserve chairman and included in the Dodd-Frank reform law, the rule would curtail risky and speculative trading with the banks’ own capital.
Banks hate the Volcker Rule, because less gambling means lower profits and lower bonuses for executives and traders. Mr. Dimon has been especially contemptuous, saying at one point that “Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me.” Early versions of the restrictions have been ambiguous and toothless.
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.
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.
The force of Mr. Dimon’s critique of Dodd-Frank has rested on his personal reputation for smarts and on JPMorgan’s sheen of invincibility. His own admitted fallibility and the bank’s shocking stumble are the best argument in favor of strong regulation. Now politicians and regulators need to stand up to the banks.
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.
It was a stunning admission from a man who led JPMorgan through the crisis relatively unscathed, but it doesn’t explain what actually went wrong.
What Mr. Dimon did not say is that the loss also occurred because of a continued lack, nearly four years after the crisis, of rules and regulators up to the task of protecting taxpayers and the economy from the excesses of too big to fail banks; and, yes, of protecting the banks from their executives’ and traders’ destructive risk-taking.
The fact that JPMorgan’s loss — which Mr. Dimon has warned could “easily get worse” — is not enough to topple the bank, is not the point. What matters is that JPMorgan, like the nation’s other big banks, is still engaged in activities that can provoke catastrophic losses. If policy makers do not strengthen reform, then luck is the only thing preventing another meltdown.
Bank regulators should start by adopting a forceful Volcker Rule. Proposed by Paul Volcker, the former Federal Reserve chairman and included in the Dodd-Frank reform law, the rule would curtail risky and speculative trading with the banks’ own capital.
Banks hate the Volcker Rule, because less gambling means lower profits and lower bonuses for executives and traders. Mr. Dimon has been especially contemptuous, saying at one point that “Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me.” Early versions of the restrictions have been ambiguous and toothless.
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.
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.
The force of Mr. Dimon’s critique of Dodd-Frank has rested on his personal reputation for smarts and on JPMorgan’s sheen of invincibility. His own admitted fallibility and the bank’s shocking stumble are the best argument in favor of strong regulation. Now politicians and regulators need to stand up to the banks.
