JP Morgan's $2 Billion Tumble Renews Call: 'Break Up the Big Banks'

Wall Street titan JPMorgan Chase on Thursday admitted that poorly positioned trades cost the bank $2 billion in losses. The news sent stocks of other big banks tumbling and raised the alarm once again over the tenuous nature of the financial system and the role of 'too big to fail' banks in the world economy.

Much of the focus since the news broke has been on JPMorgan's CEO Jamie Dimon, one of the staunchest opponents of the so-called 'Volcker rule' which would require big banks to keep their risky investment trading separate from their commercial banking divisions.

"This puts egg on our face," Dimon said.

Asking why average Americans should care about the news, Rolling Stone's Matt Taibbi, answers: "because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance. If the bank fails, someone will reach into your pocket to pay for the cleanup. So when they gamble like drunken sailors, it's everyone's problem."

"It's a simple concept: you either get to be a bank, or you get to be a casino. But you can't be both. If we don't have rules to enforce that concept, we ought to get some." --Matt Taibbi

"The debacle at J.P. Morgan Chase reaffirms my view that the largest six banks in this country, including J.P. Morgan Chase, which have assets equivalent to two-thirds of our GDP, must be broken up," saidSenator Bernie Sanders on Friday. "This is important in order to bring more competition into the financial marketplace and to prevent another 'too-big-to-fail' bailout. At a time when 23 million Americans are either unemployed or underemployed, huge financial institutions should not be involved in 'making wagers or high-stake bets.' They should be investing in the productive economy creating jobs and improving our standard of living."

William K. Black, professor of economics and the author of "The Best Way to Rob a Bank is to Own One," argued today that JP Morgan was making wild speculative gambles and could still be at further risk. "The experience demonstrates the importance of the Volcker rule, the largest banks' efforts to gut and evade the rule, and the continuing refusal of bank regulators to say 'no' to practices of the systemically dangerous institutions or SDIs (the roughly 20 'too big to fail' banks) that are unsafe and unsound."

Reuter's columnist David Rohde cited the news as simply more evidence for the need to 'break up the banks.' Before the financial crisis in 2008, he writes, "the biggest banks' holdings amounted to 43 percent of U.S. output. Today, they are roughly twice as large as they were a decade ago relative to the economy."

And continues: "The result is a half-dozen massive banks that remain so large that their collapse would cripple the U.S. economy and force another government bailout. As a result, the behemoths function as a de facto oligopoly. The sheer size of the banks - and the theoretical government backing that they enjoy - make it impossible for the country's roughly 20 regional banks and 7,000 community banks to challenge them."

Dimon admitted on a conference call that part of the reason the losses were so great is that the trading positions weren't properly monitored. Naked Capitalism's Yves Smith argues this "failure of supervision strengthens the case for the Volcker Rule, although [Dimon] also argued the strategy was Volcker rule complaint... Banks that are backstopped by the public should not be taking proprietary trading bets, period. Hedge funds are the format for that sort of activity."

* * *

Matt Taibbi in Rolling Stone: Jamie's Cryin: Dimon, J.P. Morgan Chase Lose $2 Billion

If you're wondering why you should care if some idiot trader (who apparently has been making $100 million a year at Chase, a company that has been the recipient of at least $390 billion in emergency Fed loans) loses $2 billion for Jamie Dimon, here's why: because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance. If the bank fails, someone will reach into your pocket to pay for the cleanup. So when they gamble like drunken sailors, it's everyone's problem.

Activity like this is exactly what the Volcker rule, which effectively banned risky proprietary trading by federally insured institutions, was designed to prevent. It will be argued that this trade was a technically a hedge, and therefore exempt from the Volcker rule. Not only does that explanation sound fishy to me (as Salmon notes, for Iksil's trade to be a hedge, this would mean Chase had an equally giant and insane short bet on against corporate debt, which seems unlikely), but it's sort of immaterial anyway: whether or not this bet technically violated the Volcker rule, it definitely violated the spirit of the law. Hedge or no hedge, we don't want big, federally-insured, too-big-to-fail banks making giant nuclear-powered derivatives bets. [...]

If J.P. Morgan Chase wants to act like a crazed cowboy hedge fund and make wild exacta bets on the derivatives market, they should be welcome to do so. But they shouldn't get to do it with cheap cash from the Fed's discount window, and they shouldn't get to do it with money from the federally-insured bank accounts of teachers, firemen and other such real people. It's a simple concept: you either get to be a bank, or you get to be a casino. But you can't be both. If we don't have rules to enforce that concept, we ought to get some.

* * *

The New York Times: A Shock From JPMorgan Is New Fodder for Reformers

JPMorgan Chase's $2 billion trading loss, which was disclosed on Thursday, could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business.

"The enormous loss JPMorgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making," said Senator Carl Levin, a Michigan Democrat who co-wrote the language at the heart of the battle between the financial and government worlds, in a statement. "Today's announcement is a stark reminder of the need for regulators to establish tough, effective standards."

The centerpiece of the new regulations, the so-called Volcker Rule, forbids banks from making bets with their own money, and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view, banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name, in this case for the purposes of hedging and market-making.

The missteps by JPMorgan could highlight that murky line between proprietary trading and hedging. The bank unit responsible for losses takes positions to hedge activities in other parts of the bank.

"This is a crucial moment in the debate," said Frank Partnoy, a professor of law and finance at the University of San Diego, who has been a longtime supporter of tighter rules for the nation's banks. "It couldn't have come at a worse time for JPMorgan Chase. After everything we went through in the financial crisis, the fact that something of this magnitude could happen shows that the reform didn't do the job."

* * *

Reuters' David Rohde: 'Break Up the Big Banks'

"Markets have come to believe that what the government did in 2008 and 2009 isn't a one-time deal," Kevin Warsh, a former member of the Federal Reserve Bank's Board of Governors, said in a March television interview with Charlie Rose. They think "that the government will somehow come to the rescue of these big financial firms."

The result is a half-dozen massive banks that remain so large that their collapse would cripple the U.S. economy and force another government bailout. As a result, the behemoths function as a de facto oligopoly. The sheer size of the banks - and the theoretical government backing that they enjoy - make it impossible for the country's roughly 20 regional banks and 7,000 community banks to challenge them.

And the country's biggest banks are getting bigger.

Five U.S. banks - JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs - held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the country's economy, according to Bloomberg Businessweek. Five years earlier, before the financial crisis, the biggest banks' holdings amounted to 43 percent of U.S. output. Today, they are roughly twice as large as they were a decade ago relative to the economy.

The four Federal Reserve presidents - Richard Fisher of Dallas, Esther George of Kansas City, Jeffrey Lacker of Richmond and Charles Plosser of Philadelphia - have expressed concern that such a concentration of assets in the banking industry threatens the financial system.

In a scathing essay published in March the Federal Reserve Bank of Dallas' 2012 annual report, Harvey Rosenblum, the bank's head of research, called for the government to break up the country's largest banks. Rosenblum argued that only smaller banks - not the increased capital requirements, stress tests and other measures in Dodd-Frank - will prevent another crisis.

"A financial system composed of more banks, numerous enough to ensure competition in funding businesses and households but none of them big enough to put the overall economy in jeopardy," Rosenblum wrote, "will give the United States a better chance of navigating through future financial potholes and precipices."

The American public, meanwhile, also feels the reforms were not enough. In a Rasmussen poll conducted last month, 48 percent of Americans surveyed said they continue to lack confidence in the stability of the U.S. banking industry. Forty-seven percent said they were somewhat confident in the system.

* * *

Naked Capitalism: Jamie Dimon Misrepresented "London Whale" Risks, Admits to $2+ Billion Loss Plus Risk Management Black Eye

...as Dimon himself volunteered, is that this failure of supervision strengthens the case for the Volcker Rule, although he also argued the strategy was Volcker rule complaint. Ahem, that says a lot about how Volcker's prescription was translated into regulations. Banks that are backstopped by the public should not be taking proprietary trading bets, period. Hedge funds are the format for that sort of activity. And the idea that it's too hard to figure out the difference between the two is nonsense. Traders can be required to flatten positions within a specified, short period, say three or four days at most. Although Value at Risk has a lot of shortcomings, it isn't a bad metric for this sort of thing. Bear Stearns had a similar rule when Ace Greenberg was in charge (and remember Bear was an investment bank and a risk seeking one at that): traders we not allowed to hold positions longer than three weeks. Greenberg monitored them and required them to be closed out.

The real upside is that this may be the first real dent to Dimon's image. The firm has gotten off scot free for dubious tactics during the Lehman and MF Global failures, and Dimon has taken to bullying central bankers and regulators (I've heard of incidents beyond the press reports of him browbeating Bernanke and later his Canadian analogue, Mark Carney). Dimon's hyperaggression may simply by apparent success stoking an already overly large ego, or it may be the classic "the best defense is a good offense" strategy, of dissuading overly close scrutiny of JP Morgan's health and practices. We'll have a better basis for judging as the year progresses, since difficult trading markets will continue to test all the major dealers.

# # #