Neil Macdonald: 2 billion reasons to regulate America's banks

Fair or not, JPMorgan's surprise $2-billion loss is spurring the demand for more Wall Street oversight, and not a moment too soon, Neil Macdonald writes.

JPMorgan's surprise $2-billion loss is spurring demand for Wall Street scrutiny

Hatred of the big banks that control so much of the U.S. economy is like an opioid in this country — sickening and addictive, but deeply pleasurable.

Americans seemed to take a long, deep draught of it in the past few days, after JPMorgan's swaggering chief executive, Jamie Dimon, admitted the colossus had managed to lose $2 billion (and counting) on some complex derivative trades.

Dimon went instantly from Wall Street's great leader to its great wally, as the British would say, a One Percenter hoisted by his own arrogant petard.

The public reaction to JPMorgan's blunder was understandable.

The unrestrained, careless greed of the big banks in the years leading up to the 2008 implosion helped to wreck the American — and global — economy.

Their business model of privatizing profit and socializing loss has been especially galling.

After the meltdown, millions of Americans, jobless and losing their homes, looked to Washington and asked, plaintively, "Where's my bailout?"

Meanwhile, the smug, self-described market-makers on Wall Street were busy gambling their way back to extreme wealth, with trillions in government-provided rescue cash.

Never before had the economist's term "moral hazard" — basically, an incentive to behave badly — congealed into such a festering sore.

Too big to fail?

Of course, the banks were hardly the sole culprits in the meltdown.

They were abetted by every mortgage applicant who lied about his or her income, then borrowed crazy amounts with nothing down, maybe taking some cash at closing for a nice little vacation or a Lexus; by every shady mortgage broker who pocketed commissions from loans that obviously could never be repaid; by every home appraiser who jacked up the value of a property beyond any reasonable figure; and by every analyst at the big ratings agencies that knowingly stamped "AAA" on the securitized garbage being flogged by the investment banks.

Sometimes called Barack Obama's favourite banker, JPMorgan Chase chairman and CEO Jamie Dimon survived a shareholder push to strip him of his dual titles on Tuesday. The annual shareholders' meeting focused on the $2-billion trading loss. (Keith Bedford/Reuters)

All of them would have faced charges in a just world. But you simply can't charge millions of people.

So the government ended up prosecuting just about no one. Instead, in order to prevent ATMs from shutting down, Washington wrote rescue cheques to Wall Street's swashbuckling, anti-government, free-marketeers, JPMorgan Chase among them.

JPMorgan took $25 billion in bailout money, then paid it back with a smirk seven months later when trading profits picked up again.

Meanwhile, the Democrats, who controlled Congress at that point, set out to draft new banking regulations.

Never again, vowed Barack Obama's party, would a financial institution be allowed to become "too big to fail."


More kibble please

Fast forward four years, and the mega-banks that dominate America are even bigger, their operations still opaque. And they clearly mean to keep it that way.

Over the last three years, they've spent hundreds of millions to gut and delay financial regulation and, until now anyway, the Republicans have been right there with them, still spouting free-market rhetoric in the wake of a disastrous free-market failure.

Mostly, what these banks want is to preserve their right to make big bets on how they think the market will perform, no matter how risky, with their "excess deposits" — the cash a bank has on hand after its loans are all covered.

The fact that massive bets like this (especially the so-called synthetic derivatives that amount to bets on other people's bets) can and did endanger the whole system is of no concern to these mega-banks. They crave risk like my beagle craves his kibble.

The Democrats want to curb this sort of gambling through what is called the Volcker rule, which is to begin taking effect this summer, and which the banks loathe. (Little wonder. It would prevent them from trading for their own profit, something that has been awfully lucrative over the years.)

So, what sweet irony that Dimon, the man who led the attack on many of these banking regulations, the Volcker rule in particular, had to stuff his face with crow all this past week.

Risk and rescue

But even while apologizing, Dimon insisted all is well. A $2-billion or even $3-billion loss is significant but essentially chump change to one of the best-capitalized banks in the world, and JPMorgan has hundreds of billions in excess deposits.

What's more, he said, the loss will be absorbed by the bank's shareholders, unsecured creditors and management. Dimon, in fact, has not ruled out clawing back some of this money from the bonuses of those charged with overseeing the big bet that went wrong.

The American taxpayer will be asked for nothing. Which is as it should be.

Ah, say critics. But if JPMorgan had been a less capitalized bank, and if the bet had been much bigger, and if it had failed and threatened to wipe out the bank's equity, there would have had to be yet another bailout.

Well, if my grandmother had wheels, she'd be a school bus. Still, at this point only an idiot, or a member of Congress whose re-election campaign is funded by the financial industry, would say tougher regulation is not needed.

Banks are supposed to push the envelope of risk, within the law, and that is what JPMorgan did. Shareholders demand it. You can't have a reward without taking a risk.

Banks are also allowed to lobby. It's perfectly legal. And JPMorgan did that, too.

But if JPMorgan was making super-risky bets — and we have never been told exactly what the bank was betting on, or against — it's safe to assume its weaker siblings were doing the same.

They are the ones who will come crying to Washington if they crap out, hands extended again for more rescue money.

Further, as Simon Johnson, an Oxford-educated economist at the Peterson Institute here in Washington, told me, JPMorgan's multibillion-dollar blunder shows that even the people who invented these complex derivatives, meaning JPMorgan’s own trading mavens (who are also supposed to be super-scrutinized), don't fully understand them.

True capitalism encourages risk, but punishes the worst instincts of the market — monopolies, widespread insider trading, system-threatening risk.

But that is not the way it works here, in the nation that regards itself as capitalism's champion. JPMorgan may be guilty of nothing more than hubris, this time. But the U.S. banking system still needs fixing.