JPM Chase Chairman, Jamie Dimon, the Whale Man, and Glass-Steagall

It was fitting that while President Obama and his Hollywood apostles broke fundraising records at a sumptuous $40,000 per plate dinner at George Clooney’s place, word of JPM Chase’s ‘mistake’ rippled through the news. Not long ago, Dimon’s name was batted about to become Treasury Secretary.  But as lines are drawn and pundits take sides in the Jamie Dimon ego deflation saga – or, as I see it - why big banks should be made smaller and then, broken up into commercial vs. speculative components ala Glass Steagall – it’s important to look beyond the size of the $2 billion dollar (and counting) beached whale of a trading loss.

Yes, $2 billion in the scheme of JPM Chase’s book and quarterly earnings is tiny, a ‘trading blip’ as it’s been called by some business press. But that’s not a mitigating factor in what it represents. In this era dominated by a few consolidated and complex banks, the very fact that it’s a relatively small loss IS the red flag. 

First - because the loss could (and will) grow. Second, because even if it doesn’t, it’s a blatant example of a big bank incurring un-due risk within barely regulated, highly correlated financial markets. It only takes another Paulson hedge fund, or a trading desk at Goldman Sachs, to short the hell out of the corporates that JPM Chase is synthetically long, or take whatever the other side really is, to create a liquidity crisis that will further screw those least able to access credit – individuals, small businesses, and productive capital users.

We know this. We’ve seen this. We're in this. There’s no such thing as an isolated trading loss anymore. And yet Jamie Dimon, seated atop the most powerful bank in the world, has smugly led the charge to adamantly oppose any moves to alter the banking framework that allows him, or any bank, to call a bet - a hedge or client position or market-making maneuver  - with central bank, government official, and regulatory impunity.

Flashback to the unimaginable in 1933

It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR.

Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments.  Fellow bankers hated him.

His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.)

Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of  Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank.  It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives. 

It is the size of a bank holding company’s deposits that dictates the extent of the risk it takes, risk ‘models’ not withstanding: the more deposits, the more risk, the more potential loss. JPM Chase is not alone in using its position as deposit taker to increase speculation, but it has more to play with.

And the more access to other people’s money, the greater the gambling incentive. The largest banks hold deposits (our deposits) hostage in the global game of financial warfare. Related access to capital and bailouts are enabling weaponry in the fight for worldwide insitutional supremacy.

The Alleged Hedge

Now, consider JPM Chase’s alleged ‘hedge’ itself; a trading position taken in the London department, the chief investment office,  set up to allegedly protect the bank’s overall book and ‘invest’ its excess capital.  Any investment is a bet. A hedge is supposed to mitigate loss if the bet fails. An investment is not a hedge.

Let’s pretend for a moment that banks were about simple conventional - banking – taking deposits and making loans. In that context, it would be nonsensical to hedge loan risk by pouring on more loan risk, or put out a fire by pouring fuel on its flames.

In other words, if a bank lends money to, say Boeing, it accepts a rate, in return,  more or less related to its assessment of the risk involved in getting its money back, which translates into an interest payment. To hedge that payment, a bank could purchase ‘insurance’ or ‘protection’ from a counterparty solvent enough to make good on any shortfall in Boeing’s ability to pay its interest, or in the event of an Boeing default.  What is not a hedge for the loan, is further exposure to the risk that Boeing could default.  Yet, in a more complex manner, that’s exactly what happened here.

By engaging in a trade that tied up 15% of its assets, or $350 billion, no matter what label that trade received, the Whale man and his managers (leading up to Jamie Dimon), went long credit risk by shorting an index of synthetic credits, thereby placing the bank in the position of paying out, or losing money, if those credits deteriorate. In effect, and super-simplistically, it doubled down. In its more complex form, the firm took a short position in an index of credit default swaps representing 125 North American investment grade corporations (including Boeing), called the CDX.NA.IG.9. The index reference of underlying corporates has been diving in price, hence the loss - and mounting loss to JPM.

Deception and Delusion

Going long the corporate credit market while still immersed in the fallout of having been long the European sovereign and US real estate market, demonstrates the same cluelessness about the economy and financial system prevalent in the media and in Washington every time the words ‘slow recovery’ rather than something to the effect of ‘prolonged, continued, enduring depression’ are uttered.

In such a charade, why wouldn’t JPM Chase, a bank existing on an array of federal largesse, and Jamie Dimon who was re-voted to Class A NY Fed Director, the position he held during the 2008 crisis, in early 2010 – rubber stamp a bet that corporate economic health is a foregone conclusion.

It was under that same misplaced, other people’s money optimism and hubris that MF Global stole (or for the apologists, ‘mistakenly took’) $1.6 billion of its segregated customers' money to stay in a bad bet. Former MF Global CEO, the ‘honorable’ Jon Corzine’s bet was that certain European sovereign credits would improve. Only they didn’t. Not in time for his margins to hold out.

It’s more than ironic, that JPM Chase, the bank still entangled with MF Global customer money, took the same bet, albeit with different credits and is trying to pawn it off as an ‘egregious’ mistake, a blip on the radar of an otherwise pristinely risk-managed bank.

It’s also supremely annoying that Dimon is right about something, that the Volcker Rule wouldn’t necessarily apply to this ‘hedge.’ There’s nothing particularly wrong with the Volcker Rule; it will mitigate some fraction of risk, though given the SEC and Fed’s inability to understand what risk is, it’s unlikely they’ll take the mental leap to segment trades as mitigating it, or not. Yet, the Volcker Rule will not change one fundamental pillar of global systemic risk – as long as banks are not segregated ala Glass Steagall along deposit-taking  / loan-making vs. speculation lines, they will have access to capital to burn. And burn it they will.  

Jamie Dimon’s Shameful Spouting about ‘anti-American’ Basel III regulations

There are few things more cringe-inducing than a government-subsidized bank CEO spouting self-serving, entitlement-laden idiocy to the world just because he and his bank might be subject to some extra constraints. That hasn’t stopped JPM Chase CEO Jamie Dimon from acting like a spoiled, sociopathic brat while characterizing proposed Basel III capital requirements and regulations as ‘anti-American’ at every opportunity.

They are not ‘anti-American’ but globally risk-mitigating in a time of widespread economic Depression, a point lost in the haze of Dimon’s megalomania.

Basel I and II enabled European banks and townships and pension funds to purchase AAA securities extensively. American banks went into manufacturing over-drive to oblige, creating 75% of the $14 trillion of mortgage-related assets between 2003-2008. Related risk and loss continue to proliferate the globe. Basel III goes further towards refining capital requirements to contain damage.

Dimon doesn’t want a capital surcharge for big banks, or higher capital requirements for US mortgage securities, because that might entail further examination of his bank holdings, not because the excess capital would be a hardship. Nearly $1.6 trillion of excess US bank capital is sitting on the Federal Reserve books right now, doing nothing productive or job-producing.

Here’s what’s really anti-American – big banks receiving extreme federal assistance while the rest of the country is crushed, loan refinancing and other foreclosure reducing negotiations are anemic, and both private and public sectors can’t finance enough job growth to alter our horrific unemployment or poverty situation.

JPM Chase had the government back its Bear Stearns purchase (we’re still on the hook for $29 billion related dollars) in March, 2008 and facilitate its acquisition of Washington Mutual that fall.  It took advantage of $40 billion of FDIC debt guarantees in early 2009, and received $25 billion in TARP money that was only repaid after its trading profit got a big enough boost.

The toxic asset and derivatives pyramid that emanated from Wall Street and spread to Europe continues to brutalize the global economy from the United States to Iceland, Norway, Greece, Italy, Spain, Portugal and Ireland.

American banks similarly catalyzed the 1930s Great Depression, forming shady trusts and fraudulent assets (the 1929 version of the CDO) to puff up values galore as the biggest banks cashed out leaving everyone else holding the bag.

The difference is that back then banks were slapped with more than additional capital requirements. The 1933 Glass-Steagall Act forced banks (including the Morgan Bank and Chase) to chose between commercial and investment banking focus, whereby commercial banks received FDIC backing for their customer deposits and access to Federal Reserves loans, but speculative, asset-creating firms were on their own. To be sure, there have been currency and debt crises since, but none reached today’s level, in the wake of Glass-Steagall repeal and government subsidy overload.

Sitting in his prime position as a Class A NY Federal Reserve director before, during and since the fall 2008 crisis period (he was re-elected in 2010, the same year he bagged a $17 million bonus), Dimon’s callous attitude toward global and domestic risk and the banks’ role in it, is particularly heinous.

This summer, JPM Chase settled (with no admission of guilt) fraud charges for its CDO practices for $153.6 million. There are a plethora of class-action suits in the pipeline. No matter. Old habits don’t die without being killed.

So far this year, JPM Chase is the world’s top creator of securities backed by commercial loans (or CMBS) with 19.5% of the market. Absent stricter regulations to the contrary, such as resurrecting the 1933 Glass-Steagall Act, it also happens to be the top loan contributor (or supplier of loans) for CMBS deals. Lending and packaging loans in the same bank is an obviously perilous mix. And if you think CMBS won’t be another subprime, guess again. CMBS delinquencies are at record highs. More dangerous, JPM Chase is second only to Goldman Sachs in credit derivatives exposure and runs a $73 trillion derivatives book.

In other words, Jamie Dimon should be worried about other things besides some extra capital requirements from Basel III. He should shut up and watch his mortgage and derivatives portfolio. And we should be glad there’s even the remotest opposition to his drivel. Basel III isn’t at all perfect. It’s not a new Glass-Steagall. It doesn’t alter the way banks do business and the structure in which they operate. It doesn’t stop the careless outpouring of money from central banks and entities into the hands of eager banks and their investors at the expense of the world’s citizenship and economic security. But, if anything makes Jamie Dimon this irate, you know it can’t be bad.

(Note: A shorter, gentler version of this comment appeared in the NYT Room for Debate section on Sept. 29)  

Break up the Megabanks: My take in the New York Times debate

Across the globe, we continue to feel the repercussions of negligent, reckless, and dangerous banking practices rewarded for screwing up so broadly and decisively. And it's far from over. Here in the US, the biggest banks are bigger, riskier, bloated with federal subsidies, and more of a threat to us than ever before. Thank you, Ben Bernanke, the Fed, Tim Geithner, Hank Paulson, the Treasury Department, Barack Obama, Larry Summers, George Bush, Jamie Dimon, Lloyd Blankfein, John Thain and all the other pillagers who took part in this national and international travesty. 

We aren't done with this crisis. It's just in remission given the epic stimulus the big banks received. We shouldn't have to wait for the other shoe to drop to pull a Glass-Steagall. 

Read the rest of my comment, along with those of Simon Johnson, William Black and others, in the New York Times Debate Forum.