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JP MORGAN BANK – TOO BIG TO FAIL – OR SUCCEED?

October 18, 2013

JP MORGAN BANK – TOO BIG TO FAIL – OR SUCCEED?

JP Morgan Bank, whose CEO is Jamie (aka James) Dimon, is the largest of the Wall Street Banks. It is lately also the most fined one. I have blogged on prior occasions that Dimon, however successful he has been in making money for his bank’s shareholders in the past, is the epitome of arrogance. He was not so successful at even making money last quarter; the bank had a loss (described as “rare” by the business press, the chief apologist for Wall Street banks and their near-criminal antics).

I became acquainted with Dimon’s reputation in his bank’s bruising and (to date) successful lobbying fight to prevent implementation of the Dodd-Frank law (a law which, among other things, calls for regulation of the big banks designed to prevent another 2008 disaster). I became even better acquainted with his reputation last year and have blogged on multiple occasions about his bank’s loss of over 6 billion dollars as a result of reckless trading by a trader on the bank’s London desk known as “the whale.” The loss arose from trading in derivatives, the very same product that Wall Street banks oversold in 2008 that nearly brought the world (including you and me) into economic depression. Dimon’s bank has since been charged with several other and different irregularities and is now discussing (as the Wall Street Journal puts it) “a staggering $11 billion payment to settle a welter of government investigations into its handling of mortgage-backed securities.”

There is no indication that Dimon (in a show of continuing arrogance) is going to resign. It’s all “the government’s” fault, you know. Leave “free enterprise” alone, you over-regulating socialists! (But stand by with bailout money if we throw craps in our casino, our fellow Americans.) It’s still a “heads I win, tails you lose” situation; you and I remain at risk but are told that our government cannot regulate the big banks to reduce our exposure to another 2008. Apparently we (with bailout money in hand) are to continue to reduce the exposure of banks too big to fail, but not our own exposures. The inverted logic of this situation says that reducing the banks’ exposure with corporate welfare is a good thing but that reducing public exposure to loss (a la 2008) is an exercise in socialism and a bad thing. What? Huh?

Rana Foroohar in Time.com, notes that “An $11 billion fine would be the largest settlement by a single company with the Justice Department ever.” Felix Salmon in Reuters.com notes that when Barclays was hit last year with a $450 million fine for its role in the Libor scandal, the British bank’s CEO promptly resigned. So will Dimon resign with an $11 billion dollar fine on the horizon? Not a chance. The Wall Street Journal (which hates Dodd-Frank’s meager regulation of big banks) won’t let him.

WSJ’s take on the $11 billion dollar proposal? It’s all a government witch hunt. Nothing in the WSJ’s response finds fault with Dimon’s bank; apparently the entire fault for the bank’s woes are due to being singled out for extinction by the Obama administration. WSJ says that “. . . Dimon’s main sin is that he keeps deviating from the Obama script by criticizing the Dodd-Frank Act’s wrongheaded financial reform measures. Clearly our feckless politicians hope to teach a painful lesson “to any banker who dares to disagree with his Washington bosses.”

I take issue with the above assertions. First, it’s the bankers who are the bosses in Washington – note that Dodd-Frank has been on the books for years but is less than half-implemented because of fierce lobbying of Wall Street banks, so who is “bossing” whom? Secondly, Dimon’s “main sin” has nothing to do with Obama or so-called “overregulation,” it has to do with reckless buying and selling in the derivatives market and playing games with mortgage-backed securities. Thirdly, such massive losses by Dimon’s JP Morgan bank point up the obvious need for more regulation, not less, more even than that authorized by Dodd-Frank, which remains unimplemented due to over a billion dollar lobbying attempt by Wall Street banks to defang its terms.

The New York Post says that it doesn’t matter to the “Obama administration and its cronies  that Dimon has the strong support of the bank’s board and investors, or that he has led the firm to record stock prices. For them, JP Morgan is worth nothing but scorn, class-warfare envy, and lots and lots of fines.”

The Post comment apparently puts making money over everything else, even if a bit of recklessness and fraud are involved in making that money. Felix Salmon (and I) disagree with that conclusion. Salmon writes in Reuters.com that Dimon’s supporters cling to the view “that profits cleanse all sins, and that so long as you’re making money, nothing else matters,” and that that may be a good reason for shareholders to approve of Dimon, but “the public has every reason to want the individuals running JP Morgan to be held accountable when it gets into serious regulatory trouble over and over again.” He is right; the public needs protection since the public provides federal insurance to these banks, and for other good reasons, like not being defrauded when taking out mortgages or refinancing of homes.

Foroohar writes that “a fine ($11 billion) of that magnitude – roughly half of JP Morgan’s annual profits – sends an odd message. For me big penalties are poor substitutions for better regulations. No settlement can make up for the fact that, five years after the financial crisis, we still don’t forbid large federally insured institutions from doing the sort of risky proprietary trading that got JP Morgan in trouble.” We need rules to prevent the next banking fiasco, not fines for the last one.

She is right; we would obviously all be better off if 2008 had never happened, and with better regulation of big banks that sorry and still painful event would never have happened. It was the chaos and bailouts and forced mergers of 2008 brought on by the Wall Street banks that gave us the Dodd-Frank Act in an attempt to protect America and the world from the excesses of Wall Street banks, so now what are the big banks spending over a billion dollars to lobby against? The Dodd-Frank Act! The big banks (with the aid and assistance of the Wall Street Journal and the New York Post) are effectively telling us that they will do as they please and will not be regulated to prevent a recurrence of a nearly catastrophic 2008.

The Barclays Bank CEO promptly resigned after a loss of $450 million, but Dimon with a large loss in the billions last year and billions upcoming this year will, I predict, not resign, even though such huge losses prove that Dimon is not in control of his bank.

I suppose that banks that are too big to fail may be simultaneously too big to succeed. They may feel  constrained to fudge and cheat in order to meet each quarter’s demand for better profits than last quarter’s results. Wall Street banks are not banks anyway, not as most people understand them. They are rather casinos, and their CEOs are in charge of the crapshoots. Ordinary banking such as community banks do is boring and unexciting to the big banks; big profits are elsewhere. It seems that big profits are in trading, not financing, which may explain why our economy remains in the doldrums, a victim of listless demand. Conclusion: You threw craps again, Mr. Dimon. Do the right thing. Resign.  GERALD  E

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