05.11.12

JPMorgan Chase Lost $2 Billion But Dimon Lost His Golden Status

The JPMorgan Chase chief had become the self-appointed spokesman of Wall Street—and one of the biggest antagonizers of the Dodd-Frank reform bill. But that could all change with the bank’s $2 billion blunder, writes Charlie Gasparino.

Jamie Dimon’s role as Wall Street’s chief spokesman against Washington oversight took an unexpected detour Thursday afternoon when the financial world discovered, he is human after all.

The bank he runs, JPMorgan Chase, announced a huge trading loss, which is shocking only because it’s run by Dimon, hands down the Street’s best CEO because he successfully steered JPMorgan Chase away from such risk taking during the financial crisis and has since emerged as the banking industry’s chief spokesman against post financial crisis regulation.

In other words, JPMorgan Chase lost a lot of money and the banks lost their best weapon against Washington regulators.

It is, of course, hard to completely quantify how much a $2 billion trading error will ultimately cost both Dimon and the banking industry. The $2 billion loss could grow since these things are usually understated by banks. Even so, the trading screw-up will barely register on JPMorgan Chase’s balance sheet. The firm is expected to report a $4 billion profit for the second quarter—after writing down the bad trade—and it has more than enough capital to handle the financial aftershocks that might occur.

The hit to Dimon’s reputation and his quest to roll back post financial crisis reform measures is another matter. Before the disclosure, Dimon had been the crown prince of banking, and as such, he relished being the industry’s top spokesman particularly in attacking new financial reform laws that have been adopted in the wake of the financial crisis.

He earned the status: Dimon had steered his bank through the insanity of 2008 like no other. So who better to underscore the absurdity of the Dodd-Frank reforms, with their multitude of rules and regulations that force banks to curtail risk and—at least according to Dimon—fail to aim at the real reason for the financial crisis: that banks are “Too Big To Fail” and will continue to make bets that put the financial system in jeopardy.

Video screenshot

JPMorgan Chase took bailout money back in 2008 because it had to, Dimon is fond of saying, and he has a point. Regulators were engaging in a confidence-building exercise for the entire industry and giving all the big banks money meant that investors weren’t supposed to distinguish between the good ones like JP Morgan Chase and the bad ones, like Citigroup.

Both were now supported by the federal government and as such no “systemically important” bank would die. The plan wasn’t perfect—but it worked. The big banks survived the crisis and now even basket cases like Citigroup are profitable again.

Dimon’s people portrayed their boss as an executive who at a time of crisis put the country’s needs above his own. There’s some truth to that; I know that before the bailouts, JPMorgan Chase executives were drawing up plans as to which banks would crater first and weighing which one of these to buy on the cheap.

Even without completely taking over the banking world, JPMorgan Chase emerged from the crisis as the country’s largest and most powerful bank, with Dimon as the industry’s most powerful CEO. His stature came not just because he ran a bank with a balance sheet bigger than some country’s but because he could do what no other banking executive could accomplish: manage risk.

It's a skill that is both necessary and in short supply on Wall Street. Its absence was at the heart of the financial crisis, and the economic despair that followed. If there were more Jamie Dimons, the storyline went, the crisis would have at the very least smaller.

I should point out that Dimon still can manage risk far better than anyone in banking—though not good enough, it appears.

I should point out that Dimon still can manage risk far better than anyone in banking—though not good enough, it appears. You can make the point that no one can expect perfection from any leader, either in business or politics and look beyond the fact that Dimon’s famed risk management skills weren’t good enough to prevent a bunch of traders in London from rolling the dice and costing the bank and its shareholders a lot of money.

That argument is being waged right now somewhat successfully by Dimon’s people as shares of JPMorgan Chase have begin to rebound somewhat after getting crushed just following the news of the trading loss.

But that’s the Wall Street battle Dimon is waging and winning. The other battle he has been fighting is a Washington one over regulation—namely the Dodd-Frank financial reform bill. And that’s the one he’s now likely to lose.

What made Dimon so different from you average banking executive in the post-financial crisis era is how he spoiled for a fight with Washington regulators over Dodd-Frank and the reforms that were sure to follow the debacle.

That's not to say Dimon was against all regulations; he wasn’t. He's been vocal about the need for more capital so banks like his can withstand losses like the one that just occurred without causing the system to fail.

But the aspect of Dodd-Frank that’s most nettlesome to people like Dimon and his banking peers is something known as the Volcker Rule, named after former Fed chairman and Obama economic adviser Paul Volcker.

It deprives banks of massive fees at a time when they need them most by preventing them from using their own capital to make trades in the market. Dimon’s case against the rule was compelling: such activity had little to do with the 2008 financial collapse, which resulted from different kinds of risk taking activities.

And by the way, if a bank can’t trade for itself, it also can’t trade for clients whether they are Fortune 500 companies or whole countries that need financial institutions and to be ready buyers of stock and bonds.

Dimon almost single handedly began to turn the tide in Washington both among regulators and old supporters of financial reform that Dodd-Frank went too far. People began predicting a roll back of Volcker and watering down of other measures. If the Republicans retained control of the House and won the Senate and defeated President Obama, Dodd-Frank would be totally repealed.

But that was before Thursday, before Jamie Dimon lost his job as industry spokesman.