Feature

JPMorgan’s losses renew calls for reform

JPMorgan Chase's $2.3 billion trading loss reopened calls for passage of the Volcker rule and pushed Wall Street reform into the electoral campaign.

What happenedJPMorgan Chase suffered a $2.3 billion trading loss last week, handing supporters of stricter banking regulations renewed ammunition in the fight over financial reform and leaving its star CEO, Jamie Dimon, with a rare black eye. The bank said the losses, which could rise to as much as $4 billion over the next year, stemmed from large bets on complex corporate-bond derivatives, made mostly by a JPMorgan trader nicknamed the “London whale” for his market-moving trades. Dimon, who has been a persistent and sharp critic of the Dodd-Frank financial reforms, blamed “errors, sloppiness, and bad judgment” for the losing strategy, but said that the loss would be offset by about $4 billion in profits this quarter. Three bank officials, including chief investment officer Ina Drew, resigned.

Dimon acknowledged that the losses would build momentum for “the Volcker rule,” a still-undefined provision of financial reform that would prohibit banks from engaging in large speculative bets. Dimon said the bank’s blunder comes at “a very unfortunate, inopportune time,” and “puts egg on our face.” JPMorgan’s embarrassing losses immediately became part of the presidential campaign. Presumptive GOP nominee Mitt Romney has joined congressional Republicans in vowing to repeal the Dodd-Frank reforms. President Obama said JPMorgan’s losses illustrate “why Wall Street reform is so important.” 

What the editorials saidHow little has changed since 2008, said USA Today. Banks continue to chase sky-high profits with casino-style betting on derivatives markets, even after their recklessness caused a global financial implosion. JPMorgan can cover this latest loss, but what happens when the next supposedly savvy trader at a less profitable bank gets in dangerously over his head?

The Volcker rule has never looked more necessary, said The Washington Post. Jamie Dimon has arrogantly dismissed former Federal Reserve Chairman Paul Volcker, who proposed the rule, as a man who “doesn’t understand capital markets.” But last week’s losses prove that “banks themselves don’t always fully understand their own complicated trading positions.” Volcker is beginning to look “like a prophet.”

What the columnists saidThat’s just not true, said Allan Sloan, also in The Washington Post. The Volcker rule sounds “wonderful and simple: Don’t let banks use federally insured deposits for risky trades.” But banks are so big and complex now that it will be nightmarishly difficult to enforce; it’s not even clear that JPMorgan’s losing trades would have violated it. Wall Street’s critics are trying to make it “a crime for a business to lose money,” said Jonathan Macey in The Wall Street Journal. “Nobody should care about JPMorgan’s loss” except its shareholders, who will barely feel a pinch, given its $2.3 trillion in assets. This is a bank that emerged from the financial crisis largely unscathed, and it will learn quickly from this misstep. Losing $2 billion is a far better motivator than any rule Washington has proposed.

Banks backed by taxpayer guarantees “have no business making such bets,” said Paul Krugman in The New York Times. Dimon, Wall Street’s own “point man” for fighting financial reform, can’t even explain how his bank just stumbled into a $2 billion loss, thereby providing a “demonstration of why Wall Street does, in fact, need to be regulated.” The fact that Dimon’s bank “more or less invented risk management” makes its losses all the more disturbing, said Felix Salmon in Reuters.com. If JPMorgan can’t police itself, “no bank can. And no sensible regulator can ever trust the banks to self-regulate,” especially as the memory of the financial crisis fades.

No regulatory scheme can solve the fundamental problem here, said David Rohde in TheAtlantic.com. Since 2008, when the biggest banks caused a crisis that “decimated the middle class,” these banks have actually gotten bigger, with just five banks controlling $8.5 trillion in assets—equal to 56 percent of the nation’s economy. These banks “remain too big to fail,” and can arrogantly continue to take big risks and throw armies of lobbyists and lawyers at regulators. “Smaller banks will be easier to regulate—and foster more competition.” Break up the big banks.

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