It’s official. Just as he was voted in for a second term as Class A New York Fed director in February 2010, Jamie Dimon was reelected chairman and CEO of JPMorgan Chase yesterday afternoon. He got to keep his $23 million pay package, too. All without breaking a sweat.
This means that at each of three of the top five bank-holding companies dominating U.S. derivatives exposure, loans, assets, and deposits, the same man holds the chairman and CEO positions—at Goldman Sachs, Wells Fargo, and JPM Chase. (Bank of America and Citigroup separated those roles.). If the stock buckles under another “discovery,” shareholders can take comfort in blaming themselves, not Jamie Dimon.
Included in the proxy materials in the shareholder package that went out before the vote was a letter from Dimon to “fellow shareholders”: nestled in with earnings estimates and the explanation that “the main reason for the difference between what we are earning and we should [emphasis theirs] be earning continues to be high costs and losses in mortgage and mortgage related issues” was a wealth of negativity about regulations. The letter stressed that only two regulations would actively hurt the bank’s “competitive ability, the Volker Rule and the derivatives rules.” (JPM Chase holds nearly $70 trillion of derivatives exposure on $1.8 trillion of assets.)
This regulatory swipe, compounded with claims that lobbying Washington was JPM Chase’s “responsibility” was mixed with strains of the Dimon theme song, “We Are Great Risk Managers.”
As he wrote, “We also could add another $1 billion to our profits by increasing our interest rate exposure or credit risk. But [emphasis mine] this is not the way to build a healthy and vibrant company for the future or to produce what we would call ‘quality profits.’”
He didn’t mention that increasing interest rate or credit risk also could subtract another $1 billion (or $2 billion). Which is what happened. Because the bank takes risks. With other people’s money. And there’s no such thing as a perfect “hedge” or “bet.”
At the shareholders meeting there was no mention of the details behind the “mistake” that cost the bank $2 billion, just that it “should never have happened.” (The Titanic shouldn’t have sunk either.) Most shareholders had already voted before the loss became public anyway. Ultimately, 91 percent of them approved Dimon’s pay, and 60 percent voted for him to retain both executive positions. This makes the timing of the loss announcement, if not suspicious, then, self-serving—or self-inflicted.
A self-inflicted loss conjures up images of someone shooting himself or herself during a game of Russian roulette. Sure, the shooter might have shot the gun into his or her brain, egregiously mistaken in the belief it wouldn’t be loaded. But he or she also chose to play. It’s not so much that the $2 billion loss is catastrophic, (it isn’t) but that it happened. It can continue to bleed into JPM Chase’s books, or pop up in another form elsewhere, and be equally “surprising.”
Sure, betting mistakes happen (ask former MF Global head Jon Corzine), but it’s the characterization of the loss that’s egregious. First, because by swaggering, “we will fix it—we will move on,” Dimon has claimed dominance over global markets. (No banker who truly understands risk should be so cavalier about it.)
Secondly, the fact that after a formal announcement, a friendly Meet the Press chat, and a face-to-face with the firm’s shareholders, Dimon can still call it a mistaken hedge is ludicrous. It was a directional bet on the health of North American corporate bonds that the firm got wrong, enacted via the synthetic derivatives market to worsen the blow. To the extent that it’s betting wrong, it’s a mistake, but it’s not a hedge.
Why, oh why, can’t Treasury Secretary Tim Geithner or Fed chairman Ben Bernanke have the balls to call Dimon out on this? Show some respect to the American population?
There remains debate about whether the Volcker rule (which prevents a bank from engaging in proprietary trading that is not at the behest of its clients) would have prevented this “mistake.” But on this, from his comfy reelected position, Dimon is correct. In its current form, the Volcker rule might have prohibited proprietary trading of the firm’s own funds, true. But not if you call the trade a hedge. This camouflage ability underscores a broader issue with fractional regulation of a complex industry.
Bank chairmen, like Jamie Dimon, will claim that regulation is too complex, too anti-competitive, and too un-American (putting U.S. banks at a disadvantage against other global banks). Yet, those arguments are exactly what led a cadre of bankers, an incoming and an outgoing treasury secretary (Larry Summers and Robert Rubin) and President Clinton to, in 1999, abolish the last remnants of the Glass-Steagall banking-reform act—making it fair game for banks to grow in size and complexity, plus engage in a bevy of speculative plays under the same roof as their FDIC-insured, Fed liquidity-baked deposits and loans. And that’s exactly what they did.
If you know you will be cushioned no matter how high you jump off a tightrope, and you’re getting paid to jump, you’re going to find ways to jump. Take away the tightrope, and you won’t jump. Resurrecting a true Glass-Steagall barrier is like taking away the net.
And in response to the anti-American competition issue, the only kind of Glass-Steagall that would truly work now would be a GLOBAL one. Render the separation of speculation from deposit-taking global (and, considering that few days pass when international banks aren’t getting downgraded, now is a good time to consider this) and you put the onus of jumping off a tightrope on the clowns.
It was considered anti-competitive and difficult to maneuver a bank separation back in 1933, when Glass-Steagall was passed. And yet it was the head of the second-largest bank in the U.S., Winthrop Aldrich, of Chase Bank, who loudly, strongly, and insistently advocated for it. Why? Not because he lacked a competitive streak, but because it made sense for the greater stability of the banking system and the economy.
Pretending that it’s OK to allow dormant volcanoes of risk to remain embedded in big-bank balance sheets, supported by customer money and taxpayer guarantees, is not sensible. Nor is assuming that the Volcker rule, absent the complete segregation of commercial and investment banking, will do much more than put an interim plug in the hole of a dyke behind which surging waters wait.
Meanwhile, there are two potential outcomes that neither Jamie Dimon’s contrition, nor his ego, will alter. The first: there is no definitive restructuring of the banking system, and publications keep running banner headlines like “Is Wall Street Too Big to Regulate?” when some other “egregious” mistake permeates the likes of JPM Chase, Bank of America, or Citigroup (leaving aside the fact that Dimon’s mention of mortgage losses belies the fact that current mortgage accounting doesn’t capture the declining value of the underlying collateral). Then we have this discussion, again for 10 minutes, in the midst of greater, negative consequences.
Or, we can pull off the Band-Aid attaching the two sides of banking. We can require the commercial contingent deal with deposits and loans, and figure out a way to book profits by inhaling money at near zero percent and charging interest on it, which really isn’t that bad a business. We can allow the investment banking and speculative elements to create incestuous chain-derivatives transactions and securities in the “free markets,” by the participants who want to take the risk, without the federal safety net.
Unfortunately, the probable outcome is the first scenario—little to no structural change and more blow-ups of various sizes. As such, it’s not a question of if there will be another financial flameout, but when. It’s not whether taxpayers will pick up the tab, but in what manner. And it’s not whether those with the most power will do anything meaningful to avoid the fallout, but why we vote for their denial.