Are JPMorgan’s Losses A Canary in a Coal Mine?

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That sound of shattered glass you’ve been hearing is the iconic portrait of Jamie Dimon splintering as it hits the floor of JPMorgan Chase. As the Good Book says, “Pride goeth before a fall,” and the sleek silver-haired, too-smart-for-his-own-good CEO of America’s largest bank has been turning every television show within reach into a confessional booth. Barack Obama’s favorite banker faces losses of $2 billion and possibly more – all because of the complex, now-you-see-it-now-you-don’t trading in exotic financial instruments that he has so ardently lobbied Congress not to regulate.

Once again, doing God’s work — that is, betting huge sums of money with depositor funds knowing that you are too big to fail and can count on taxpayers riding to your rescue if your avarice threatens to take the country down — has lost some of its luster. The jewels in Dimon’s crown sparkle with a little less grandiosity than a few days ago, when he ridiculed Paul Volcker’s ideas for keeping Wall Street honest as “infantile.”

To find out more about what this all means, I turned to Simon Johnson, once chief economist of the International Monetary Fund and now a professor at MIT’s Sloan School of Management and senior fellow at the Peterson Institute for International Economics. He and his colleague James Kwak founded the now-indispensable website baselinescenario.com. They co-authored the bestselling book 13 Bankers and the most recent book, White House Burning, an account every citizen should read to understand how the national deficit affects our future.

Bill Moyers: If Chase began to collapse because of risky betting, would the government be forced to step in again?

Simon Johnson: Absolutely, Bill. JPMorgan Chase is too big to fail. Hopefully in the future we can move away from this system, but right now it is too big. It’s about a $2.5 trillion dollar bank in terms of total assets. That’s roughly 20 percent of the U.S. economy, comparing their assets to our GDP. That’s huge. If that bank were to collapse — I’m not saying it will — but if it were to collapse, it would be a shock to the economy bigger than that of the collapse of Lehman Brothers, and as a result, they would be protected by the government, by the Federal Reserve. They are exactly what’s known as too big to fail.

Moyers: I was just looking at an interview I did with you in February of 2009, soon after the collapse of 2008 and you said, and I’m quoting, “The signs that I see, the body language, the words, the op-eds, the testimony, the way these bankers are treated by certain congressional committees, it makes me feel very worried. I have a feeling in my stomach that is what I had in other countries, much poorer countries, countries that were headed into really difficult economic situations. When there’s a small group of people who got you into a disaster and who are still powerful, you know you need to come in and break that power and you can’t. You’re stuck.” How do you feel about that insight now?

Johnson: I’m still nervous, and I think that the losses that JPMorgan reported — the CEO Jamie Dimon reported — and the way in which they’re presented, the fact that they’re surprised by it and the fact that they didn’t know they were taking these kinds of risks, the fact that they lost so much money in a relatively benign moment compared to what we’ve seen in the past and what we’re likely to see in the future — all of this suggests that we are absolutely on the path towards another financial crisis of the same order of magnitude as the last one.

Moyers: Should Jamie Dimon resign? I ask that because as you know and as we’ve discussed, Chase and other huge banks have been using their enormous wealth for years to in effect buy off our politicians and regulators. Chase just had to pay up almost three quarters of a billion dollars in settlements and surrendered fees to settle one case alone, that of bribery and corruption in Jefferson County, Alabama. It’s also paid out billions of dollars to settle other cases of perjury, forgery, fraud and sale of unregistered securities. And these charges were for actions that took place while Mr. Dimon was the CEO. Should he resign?

Johnson: I think, Bill, there should be an independent investigation into how JPMorgan operates both with regard to these losses and with regard to all of the problems that you just identified. This investigation should be conducted separate from the board of directors. Remember that the shareholders and the board of directors absolutely have an incentive to keep JPMorgan Chase as a too-big-to-fail bank. But because it is that kind of bank, its downside risk is taken by the Federal Reserve, by the taxpayer, by the broader economy and all citizens. We need to have an independent, detailed, specific investigation to establish who knew what when and what kind of wrongdoing management was engaged in. On the basis of that, we’ll see what we’ll see and who should have to resign.

Moyers: Dimon is also on the board of the Federal Reserve Bank of New York, which, as everyone knows is supposed to regulate JPMorgan. What in the world are bankers doing on the Fed board, regulating themselves?

Johnson: This is a terrible situation, Bill. It goes back to the origins, the political compromise at the very beginning of the Federal Reserve system about a hundred years ago. The bankers were very powerful back then, also, and they got a Federal Reserve system in which they had a lot of representation. Some of that has eroded over time because of previous abuses, but you’re absolutely right, the prominent bankers, including most notably, Jamie Dimon, are members of the board of the New York Federal Reserve, a key element in the Federal Reserve system. And he should, under these circumstances, absolutely step down from that role. It’s completely inappropriate to have such a big bank represented in this fashion. The New York Fed claims there’s no impropriety, there’s no wrong doing and he doesn’t involve himself in supervision and so on and so forth. Perhaps, but why does Mr. Dimon, a very busy man, take time out of his day to be on the board of the New York fed? He is getting something from this. It’s a trade, just like everything else on Wall Street.

Moyers: He dismissed criticism of his dual role yesterday by downplaying the role of the Fed board. He said it’s more like an “advisory group than anything else.” I had to check my hearing aid to see if I’d heard that correctly.

Johnson: Well, I think he is advising them on lots of things. He also of course meets with some regularity with top Treasury officials, and some reports say that he meets with President Obama with some regularity. The political access and connections of Mr. Dimon are second to none. One of his senior executives was until recently chief of staff in the White House, if you can believe that. I really think this has gone far enough. Under these kinds of circumstances with this amount of loss of control over risk management, what we need to have is Mr. Dimon step down from the New York Federal Reserve Board.

Moyers: He told shareholders at their annual meeting Tuesday — they were meeting in Tampa, Florida — that these were “self-inflicted mistakes” that “should never have happened.” Does that seem reasonable to you?

Johnson: Well, it’s all very odd, Bill, and I’ve talked to as many experts as I can find who are at all informed about what JPMorgan was doing and how they were doing it and nobody really understands the true picture. That’s why we need an independent investigation to establish — was this an isolated incident or, more likely, the breakdown of a system of controlling and managing risks. Keep in mind that JPMorgan is widely regarded to be the best in the business at risk management, as it is called on Wall Street. And if they can’t do this in a relatively benign moment when things are not so very bad around the world, what is going to happen to them and to other banks when something really dramatic happens, for example, in Europe in the eurozone?

Moyers: Some of his supporters are claiming that only the bank has lost on this and that there’s absolutely no chance that the loss could have threatened the stability of the banking system as happened in 2008. What do you say again to that?

Johnson: I say this is the canary in the coal mine. This tells you that something is fundamentally wrong with the way banks measure, manage and control their risks. They don’t have enough equity funding in their business. They like to have a little bit of equity and a lot of debt. They get paid based on return on equity, unadjusted for risk. If things go well, they get the upside. If things go badly, the downside is someone else’s problem. And that someone else is you and me, Bill. It goes to the Federal Reserve, but not only, it goes to the Treasury, it goes to the debt.

The Congressional Budget Office estimates that the increase in debt relative to GDP due to the last crisis will end up being 50 percent of GDP, call that $7 trillion dollars, $7.5 trillion dollars in today’s money. That extraordinary. It’s an enormous shock to our fiscal accounts and to our ability to pay pensions and keep the healthcare system running in the future. For what? What did we get from that? Absolutely nothing. The bankers got some billions in extra pay, we get trillions in extra debt. It’s unfair, it’s inefficient, it’s unconscionable, and it needs to stop.

Moyers: Wasn’t part of the risk that Dimon took with taxpayer guaranteed deposits? I mean, if I had money at JPMorgan Chase, wouldn’t some of my money have been used to take this risk?

Johnson: Again, we don’t know the exact details, but news reports do suggest that yes, they were gambling with federally insured deposits, which just really puts the icing on the cake here.

Moyers: Do we know yet what is Dimon’s culpability? Is it conceivable to you that a risk this big would have been incurred without his approval?

Johnson: It seems very strange and quite a stretch. And he did tell investors, when he reported on first quarter earnings in April, that he was aware of the situation, aware of the trade — he called it a “tempest in a teapot,” and therefore, not something to worry about.

Moyers: He’s been Wall Street’s point man in their campaign against tighter regulation of derivatives and proprietary trading. Were derivatives at the heart of this gamble?

Johnson: Yes, according to reliable reports, this was a so-called “hedging” strategy that turned out to be no more than a gamble, but the people involved perhaps didn’t understand that or maybe they understood it and covered it up. It was absolutely about a bet on extremely complex derivatives and the interesting question is who failed to understand exactly what they were getting into. And how did Jamie Dimon, who has a reputation that he burnishes more than anybody else for being the number one expert risk manager in the world — how did he miss this one?

Moyers: I’ve been reading a lot of stories today about members of the House, Republicans in particular, saying this doesn’t change their opinion at all that we’ve got to still diminish regulation. What do you think about that?

Johnson: I think that it is a recipe for disaster. Look, deregulating or not regulating during the boom is exactly how you get into bailouts in the bust. The goal should be to make all the banks small enough and simple enough to fail. End the government subsidies. And when I talk to people on the intellectual right, Bill, they get this, as do people on the intellectual left. The problem is, the political right largely doesn’t want to go there because of the donations. I’m afraid some people, not all, but some people on the political left don’t want to go there either.

Moyers: The Washington Post reported that the Justice Department has launched a criminal investigation into JPMorgan’s trading loss. Have you spotted — and I know this is sensitive — but have you spotted anything in the story so far that suggests the possibility of criminality? Dodd-Frank is not in existence yet, so where would any possibility of criminality come from?

Johnson: Well Dodd-Frank is in existence but the rules have not been written and therefore not implemented. So yes, it is hard to violate those rules in their current state. And many of those rules, by the way, violation would be a civil penalty, not a criminal penalty. If you violate a securities law — if you’ve mislead investors, if there was material adverse information that was not disclosed in an appropriate and timely manner — that’s a very serious offence traditionally.

I have to say that the Department of Justice and the Securities and Exchange Commission have not been very good at enforcing securities law in recent years including and specifically since the financial crisis. I am skeptical that this will change. But if they have an investigation that reveals all of the details of what happened and how it happened, that would be extremely informative and show us, I believe, that the risk management approach and attitudes on Wall Street are deeply flawed and leading us towards a big crisis. We need to make the banks small enough and simple enough to fail. We need to have a lot more equity financing and less debt throughout our financial system, particularly for these megabanks that pose risk to the entire system.

Moyers: So what are people to do, Simon? What can people do now in response to this?

Johnson: Well, I think you have to look for politicians who are proposing solutions, and look on the right and on the left. I see Elizabeth Warren, running for the Senate in Massachusetts, who is saying we should bring back Glass-Steagall to separate commercial banking from investment banking. I see Tom Hoenig, who is not a politician, he’s a regulator, he’s the former president of the Kansas City Fed, and he’s now one of the top two people at the Federal Deposit Insurance Corporation, the FDIC. He is saying that big banks should no longer have trading desks. That’s the same sort of idea that Elizabeth Warren is expressing. We need a lot more people to focus on this and to make this an issue for the elections.

And I would say in this context, Bill, it’s very important not to be distracted. I understand for example, Speaker Boehner, the Republican Speaker of the House of Representatives, is proposing to have another conflict over the debt ceiling in the near future. This is the politics of distraction. This is refusing to recognize that a huge part of our fiscal problems today and in the future are due to these risks within the financial system that are allowed because the people running the biggest banks hand out massive campaign contributions across the political spectrum.

Moyers: Are you saying that this financial crisis, so-called, is at heart a political crisis?

Johnson: Yes, exactly. I think that a few people, particularly in and around the financial system, have become too powerful. They were allowed to take a lot of risk, and they did massive damage to the economy — more than eight million jobs lost. We’re still struggling to get back anywhere close to employment levels where we were before 2008. And they’ve done massive damage to the budget. This damage to the budget is long lasting; it undermines the budget when we need it to be stronger because the society is aging. We need to support Social Security and support Medicare on a fair basis. We need to restore and rebuild revenue, revenue that was absolutely devastated by the financial crisis. People need to understand the link between what the banks did and the budget. And too many people fail to do that. “Oh, it’s too complicated. I don’t want to understand the details, I don’t want to spend time with it.” That’s a mistake, a very big mistake. You’re playing into the hands of a few powerful people in the society who want private benefit and social loss.

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  • JonThomas

    I know that many people who are reading and listening to this have things to protect, but in order for humans to find our place on the Earth the dinosaurs had to die and become extinct.

    “Too big to fail” is a concept that ignores fundamental problems. It conceals the underlying logical conclusion that we, as potentially rational beings, are on the wrong track and need to evolve.

    I’m sure the big dinosaurs, and every part of that exticnt world would have liked to continue… and would, if they could, have fought powerful tooth and nail to keep things as they were, but these upheavals are not just symptoms, they are consequences.

    Let the big banks fail. If that means the end to a way of things, then so be it, let it happen.

    Perhaps then, the “looked down upon” seemingly insignificant people, like the 99% of us will evolve and take our rightful place. We’re tired of being told we (us “rodents” who are stealing their “hard earned incomes”) depend on these over-sized, gas filled tyrants. They keep telling us we need them, let’s see if that’s true.

    Or maybe, just maybe, we’ll see that it’s them who have been feeding on, and trampling over us to keep their luxurious positions.

  • JonThomas

     Oh, and great piece…Thank you!

  • Jaguarbeth

    There continues to be no accountability on Wall Street.  I heard the board of directors voted to keep him as CEO and allow the 23 million compenstation package to continue.  All while there are many millions who cannot find work, continue to loose their homes, etc. Who needs 23 million dollars a year as a salary?

  • forrest

    This could be said of our last 5 Presidents.  Obama, George Bush, William Clinton and Ronald Reagan.  We, the citizens, are “playing into the hands of a few powerful people in the society who want private benefit and social loss.”

    It must seem like a playground to the few psychotics who inevitably work their way to the top and dupe the trusting 9-5 crowd.  Our savings,our liberty and our sense of justice ripped out from under us by the cowbirds that replace our financial nest eggs with their own golden eggs, and even lull us into raising and nurturing them as if they were our own.  

  • Reg

    Did you really think Barney Frank and Chris Dodd (that well known “Friend of Angelo” would work to fix the system they and their political pals benefited from — and still do? The proper recourse then, and now, as Simon mentions is “The goal should be to make all the banks small enough and simple enough to fail.” Washington failed to address this and as a result has failed in their duty and responsibility to the American people. This includes the current occupant of the White House who despite his posturing continues to rake in billions from the very industry that imperils this nation. It’s time for real change. Citizens must demand fiscal responsibility from all  concerned. Failure to rein in the banks or pass a disciplined federal budget is a clear enough example of the ongoing irresponsibility.

  • Mona

    I think that the situation of our government debt bailing out a too big to fail bank is bordering on insanity.  when I go into a store to shop, I don’t set up a bet that I can pay my bill.  why should some large bank bet on an outcome we (the American Taxpayer)know nothing about.  it is our money backing up their gaming.   who do they think they are – better than everybody else.  I don’t think so.  obviously they can make mistakes.  If i make a mistake I need to own up to it.  they should also.  Jamie Dimon should resign in shame from the fed and JP.  or we the taxpayer should have the authority to throw his you know what out.  again it my tax money he is betting with – who does he think he is to use us to bail out his bad bets.  these bankers have a moral responsibility.  (are they all sociopaths).  I remember Kevin Phillips saying that he had had enouph.  I didn’t know what he ment back in 2008/9.  I can understand more where he was coming from now when he wrote ‘Bad Money’.  anyway I say hang Dimon from the highest yardarm until he is out of the picture.   

    Mona

  • http://twitter.com/thoughtfulperso jon kessler

    Our Demands (thx Syriza) 1 The immediate cancellation of all impending measures that will impoverish further (to be imposed after the Nov Elections regardless the winner) , such as cuts to pensions and salaries.2 The immediate cancellation of all impending measures that undermine
    fundamental workers’ rights, such as the abolition of collective labor
    agreements.3 The immediate abolition of a law granting congress immunity from
    prosecution; reform of the electoral law and a general overhaul of the
    political system (abolish campaign contributions over $25 per person per election cycle).4 An investigation into the banks (including the Fed and the big 5 banks that control 80% of all deposits), and the immediate publication of
    the audit.5 The setting up of an international auditing committee to investigate
    the causes of the US public deficit (7,5 trillion due to the last bailout!), with a moratorium on all debt
    servicing until the findings of the audit are published.
     

  • http://mywikibiz.com/Directory:Jon_Awbrey Jon Awbrey

    You’ve been breathing the coal gas way too long, Bill.

    All the friggin’ canaries died a long time ago.

  • Mona

    fabulous – Johnson really points out some salient points.  ‘This damage to the budget is long lasting; it undermines the budget when we need it to be stronger because the society is aging.’  what comes to mind is national security – our defense is part of it, but social security and the nets in place for people who will suffer from the kind of betting that these large banks are doing that put our society in trouble.  thank you so much for this interview.  it really points up the trouble we are in from these banks.  I think every American should boycott these banks as well as charge them the Robin Hood tax.  their contempt for the americans who play by the rules and pay their taxes is appalling.

  • davidp

    Just wondering…wondering if this is really  ”white-collar crime” in a unconscious greedy, pushing everything over the line…putting the burden on the poor taxpayer if their gamble fails.  

  • http://twitter.com/drphilxr Philip Kousoubris

    Great points, all. But there is no ‘Moral Reserve’ on the parts of the Banks, the Fed, nor the people to enact meaningful reform. History Repeats. Ergo, it may be time to leave the US of A – if you are able to do so….

  • http://twitter.com/joely joely

    The sound is bad. Bill’s voice comes through loud and clear but Simon Johnson’s voice is attenuated to the point where it’s practically indecipherable. Please post an mp3 where you can hear Simon! Thanks. 

  • http://twitter.com/joely joely

    Thank you for fixing the sound! Simon Johnson’s voice comes in loud and clear, now!

  • http://twitter.com/joely joely

    This is crazy. The sound is OK sometimes, but not always. May be a Safari issue. OS X 10.6.8 Safari 5.1.7

  • Rae8563

    Nothing can change without strong retaliation by vulnerable citizens – ALL of us!  The national leadership has gone way out of control due to, of course, the influence of money.  We are no better than the corrupt banana republics of the ‘third world’.

  • Billandjudith

    You’re welcome. Thanks for the encouragement.  Moyers

  • David F., N.A.

    What a kawinkydink. The very first thing that popped into my head was “canary in the coal mine” when I heard President Obama say, “JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got — and they still lost $2 billion and counting.”

    Even if the FDIC does pass their 300 page version of the Volcker Rule, I, and many others, seriously doubt if it will fix anything.  When Volcker was a guest on M&Co, he admitted that it was “complicated by its nature” and that lobbyists were the reason for it having so many pages.  So, personally, I think this complexity is written into all our bills today so that the lobbyists can slip in ambiguity, which will cost time and money to be settled in our courts, and outright loopholes.

  • http://www.facebook.com/cyeberhart Cy Eberhart

    Today we’re  waiting for the same thing Will Rogers was back in 1931 when he wrote:

    “It looks like the financial giants of the world have bungled as much as the diplomats and politicians. This would be a great time in the world for some man to come along that knew something.”
    Cy Eberhart

  • Edie

    Thanks for having Tom Morello and Simon johnson on your show to discuss the biggest problems of our times of bank irresponsiblity and income inequality and how to be activists. Your guests and you always provide a more informed audience after your programs.

  • 19obert63

    Thank you Bill Moyers and Simon Johnson for providing an awareness to this very serious problem. Jamie Dimon, President Obama, no-regulation Republicans-can Elizabeth Warren
    come close to fighting these forces?Where are the Americans who don’t worship wealth and have the courage to face this corruption? Was there ever an American moral fortitude
    among our powerful or were all our courageous men on the frontlines of Normandy? I don’t know, but I do acknowledge and respect type of courage of Mr. Moyers and Mr.Johnson have displayed.

  • Songboytom

        It’s crash and burn…it’s a Spiritual problem, the refusing of very well financed and cultivated egos to see they have become, collectively, the “Antichrist,” and probably are avoiding that look in the mirror that would confirm this!
         We are all in this stage play, gambling on just what is reality, and what is the extent of our
    ability to fix a moving aircraft without it falling out of the sky.
          Jamie has to resign the Fed position, asap.  He should not resign from JPM, but agree to work this next year without pay, as well as the others involved in this little drama.
         All the Banks must be downsized, also asap, to keep as many solvent as possible, when the Euro goes bust, they’ve been doing what JPM has been doing, it’s become their ‘Football’….remember, a lot of these guys rose to their lofty positions without really learning a lot in school.
         The Ancient injunctions against ‘Stealing’ is connected to forgetting that we are one Spirit, and when one is in a position of responsibility to all his other “spirits,” to violate this in the past meant, the Gallows! In public!
          How bad did things get to in France in 1791?  Before any more money is taken by anyone in Pro Politics, they should realize, the American people will know who they are, and they will soon need to find a day job.

  • Anonymous

    One of the successes of the banks has been to organize out of the debate  the subject of Glass-Steagall.
    Mr. Johnson made a passing reference to it.  But it needs much more specific discussion.
    Let’s organize the discussion of Glass-Steagall back into the debate.

  • Judy

    I heard President Obama say that there would be no more bailouts, so why would we bail out JP Morgan?  If these banks, or any corporations, is too big to fail, then that is a flaw in our system.  We need to fully enforce the Sherman Anti-Trust laws and break them up now. This is not “free enterprise” when they can do whatever they please and if they goof up, then it’s the taxpayers to the rescue, again.  This is really, really wrong and the American people will not stand for yet another huge bail out, unless the entity is broken up, or taken over by the government in the bargain and someone goes to prison.