Consider $2 billion lost on a bad bet, plus billions more as investors dumped the stock, a providential warning. When Jamie Dimon, the imperious head of JPMorgan Chase, revealed that the bank had lost so muchon a derivatives trade gone bad, it was clear warning that, four years after blowing up the economy, the big banks are still playing with bombs.
This was no rogue trader. Dimon admitted to “many errors, sloppiness, bad judgment” in “poorly executed” derivative trades. Heads may role, but these were authorized trades by the bank’s leading — and notorious — trader, Bruno Iksil, the “London whale.”
Dimon, of course, has been Wall Street’s most vociferous critic of banking reforms, deploying an army of lawyers and lobbyists — at the cost of an estimated $7.4 million in 2010 — to try to delay, dilute and disembowel the Dodd-Frank legislation. The unrelenting legal and lobbying campaign has clearly intimidated the regulators, forcing delays beyond the dates mandated by the statute. Most recently, the bank lobby seemed on the verge of defenestrating the Volcker rule that would limit commercial banks from gambling with depositors’ money. That rule, itself a pale shadow of the Glass-Steagall Act repealed during the Clinton years, might have constrained the kind of opaque, risky bets that led to the losses.
Dimon, who was paid $23 million in 2011 (up 11 percent from the year before) has a personal stake in gutting reform. But it is inexcusable for Mitt Romney and Republicans to make repeal of all the Dodd-Frank reforms part of their campaign mantra. Banking is risky, by definition. Markets don’t self-correct. Unless banks are strictly regulated, panics and excesses are inevitable and big banks make them dangerous.
Richard Fisher, the conservative president of the Dallas Federal Reserve Bank, has been raising alarms about the big banks for years. The top five banks now control 52 percent of the financial industry’s assets; they had 17 percent in 1970. The six largest banks control assets equal to 62 percent of the nation’s gross national product. They may be not only too big to fail, but also too big to save.
The biggest of them, Dimon’s JPMorgan Chase, has $2.1 trillion in assets and more than 239,000 employees.
And like all the big banks, it acts with the assumption that the government has its back if things go bad. This, Fisher argues, is a disaster in waiting. “Complacency, complicity, exuberance and greed,” he notes, are in our DNA. These “human traits and weaknesses result in market disruptions,” Fisher says, that are “occasional and manageable. . . . Big banks backed by government turn these manageable episodes into catastrophes.”
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Fisher would force the big banks to reorganize and get much smaller. And he would require “harsh and non-negotiable consequences” for any bank that ends in trouble and seeks government aid, including removal of its leaders, replacement of its board, voiding all compensation and bonus contracts and clawing back any bonus compensation for the two previous years.
Instead, we’ve seen that the Too Big to Fail Banks seem to be Too Big to Jail. As Peter Boyer and Peter Schweizer report, not one leader of the financial institutions that blew up the economy has been prosecuted. In fact, financial fraud prosecutions are at 20-year lows, despite a calamity caused in large part by what the FBI warned was an “epidemic of fraud.” When President Obama convened the financial barons two months after he took office and told them that “my administration is the only thing standing between you and the pitchforks,” it turns out he wasn’t kidding. Now, demands are growing for Dimon to resign from the board of the New York Federal Reserve, but what’s needed is an investigation as to whether laws were broken.
Wall Street plays hardball money politics. The finance committees in the House and Senate are stocked with young legislators happy to trade votes for campaign contributions. It takes courage to stand up to Wall Street.
One person with that courage, Sen. Sherrod Brown (D-Ohio), chair of the Banking Subcommittee on Financial Institutions and Consumer Protection, has just introduced the Safe, Accountable, Fair & Efficient (SAFE) Banking Act. Brown wants an absolute lid on the size of banks. His bill prohibits any bank from controlling more than 10 percent of the market, or racking up non-deposit liabilities of more than 2 percent of the GDP.
It’s hard to imagine anything that makes more sense. But the banking lobby defeated a similar amendment when Dodd-Frank was debated. Now, in the wake of the clear evidence that the big banks are playing with bombs again, one hopes that Congress and this White House might wake up.
When Dimon testified before the Financial Crisis Inquiry Commission in 2010, he said that when his daughter asked him what a financial crisis was, he told her “it’s something that happens every five to seven years.” He seems intent on validating his prediction.
But the United States went for decades without a financial crisis after the New Deal regulations shackled the banks. It was only with deregulation under Reagan and Clinton that financial crises have been inflicted on us regularly. Now Dimon’s bank’s bad bets have given us one last warning: It is time to break up the big bank.