To JPMorgan shareholders who have witnessed a $25 billion drop in market value since the “London Whale” gambled away $2-plus billion: Look on the bright side. Think of this as a public service investment in sound financial policy education. As Congress continues with hearings on JPMorgan and CEO Jamie Dimon himself takes the stand tomorrow, many reforms now enjoy an urgent new argument. This expensive episode means we should act now on a number of reforms.
Implement a strong Volcker Rule
Banks shouldn’t gamble with a taxpayer backstop. This is why a strong Volcker Rule is needed. JPMorgan’s gambling partners allowed the bank to risk so much because they knew the U.S. taxpayer would make good on extraordinary losses. Within the details of the rule, JPMorgan’s ability to continue such betting in the future boils down to the interpretation of two words in the Wall Street reform law statute: “aggregate position.” The Senate authors explain that this means the bank can hedge a specific position, such as a single bond, which the bank purchased at various times, at various prices. JPMorgan believes this means an entire portfolio, such as its ownership of 130 separate bonds. The Volcker Rule must be tightened, implemented and enforced.
Break up big banks
Failure of a bank JPMorgan’s size could cripple the economy. At some point, banks become too large to manage. Detail-focused CEO Jamie Dimon failed to catch what he subsequently called a “badly conceived” gamble. Federal Reserve Bank presidents in Dallas and St Louis have called for a break-up. Sen. Sherrod Brown (D-Ohio) introduced legislation recently to reduce bank size. The bill could even garner bipartisan support, as Sen. Richard Shelby (R-Ala.) voted for the same legislation two years ago, along with 32 other senators. In the House, Reps. Brad Miller (D-N.C.) and Keith Ellison (D-Minn.) introduced a parallel bill.
Increase bank capital
Even industry apologists who oppose reducing bank size and limiting risky activities agree that bank capital—what shareholders invest and lose when loans or gambles go bad—must be high. Fortunately, JPMorgan exceeded minimum capital standards, though many think mandatory levels should be doubled. Sen. Pat Toomey (R-Pa.) supports higher bank capital, a view he voiced at the both the May 22 and June 6 congressional hearings on the JPMorgan fiasco.
Reform banker compensation
The now-terminated chief investment officer earned 94 percent of her pay from “incentive compensation.” No wonder she swung for the fences, as Gary Gensler put it at the May 22 hearing. Gensler chairs the Commodity Futures Trading Commission, the primary financial gambling regulator. The Wall Street reform law specifically bars pay that promotes “inappropriate” risk-taking, but regulators are now more than a year late finalizing it.
Stop derivative deregulation
Wall Street shills, as Rep. John Tierney (D-Mass) labels some of his fellow members in the House, are moving nine bills. Of varying danger, one of them leaves offshore derivatives trading, such as JPMorgan’s London trades, free of basic regulation. Rep. Frank Lucas (R-Okla.), chairman of a key committee, cancelled a vote on two problem bills.
Bank officers should not oversee themselves
CEO Jamie Dimon sits on the New York Federal Reserve Bank, which supervises his bank. U.S. Sens. Barbara Boxer (D-Calif.) and Bernie Sanders (I-Vt.) introduced a bill May 22 that prevents active bankers from serving on the federal supervisory agencies. Massachusetts senatorial candidate Elizabeth Warren and former New York governor Eliot Spitzer think Dimon should step down from the New York Fed.
Good financial laws, unfortunately, require a disaster, such as the failed JPMorgan bet, or the 2008 crash, which has been an enormous cost to Main Street. That’s because of massive spending by Wall Street, which collectively spends $1.5 million a day lobbying. Let’s hope that the unintended investment by JPMorgan in reform advocacy secures substantial reform.