Jamie Dimon’s appearance on Capitol Hill today is a sad occasion: A top bank executive explaining how his company’s bets went bad while lawmakers grasp for ways to fix the system.
It’s been four years since the 2008 financial crisis and signs of progress are hard to find. Trading mistakes at big deposit-taking banks can still threaten the economy, and regulators still can’t do much about it, as JPMorgan Chase & Co.’s $2 billion-plus blunder demonstrates. Efforts in Congress to gut regulatory-agency budgets and weaken new financial rules aren’t encouraging.
But hope springs eternal, and we’d like to hope that Congressional questioning of Dimon helps Washington take necessary steps to repair our financial system. Here are some suggestions:
Q: Can you explain how a group of traders in London lost so much money at a large, federally insured financial institution?
Dimon’s singular focus on risk management helped JPMorgan, a behemoth with more than $2.3 trillion in assets, escape the financial crisis largely unscathed. But as Bloomberg News reports, he gave the chief investment office -- where traders managed as much as $375 billion in excess cash, some of it from depositors -- wide latitude and encouraged speculative risk-taking. The unit cycled through five chief risk officers in six years, which might help explain why huge credit-derivatives positions went unaddressed. If one of the best risk managers on Wall Street was unable to oversee such activities, one wonders what place such trading should have in any deposit-taking lender whose failure would be costly to taxpayers and the economy.
Q: Could the Volcker rule have prevented the losses, or at least made you scrutinize the trades more closely?
The Volcker rule, a central part of the Dodd-Frank financial reform law, is supposed to prevent big banks from engaging in the kind of speculative trading that landed JPMorgan in hot water. A top Federal Reserve official indicated at a Senate hearing last week that, had the rule been in place, JPMorgan executives would at least have had to monitor the trades more closely -- a process that could have led them to act differently. If the Volcker rule as currently drafted would have allowed the trades, it should be refined. There’s still time: Thanks to banks’ opposition, the rule has yet to be finalized.
Q: What kind of access and information would regulators need to spot positions like JPMorgan’s? Did they have what they needed?
Senator Bob Corker of Tennessee recently called it a “fool’s errand” to think regulators can stay a step ahead of Wall Street. He has a point: The head of the Office of Comptroller of the Currency, JPMorgan’s bank regulator, told lawmakers the OCC was unaware for months about the disastrous trades, even though 65 of its examiners were at the bank. This failure strengthens the case for the Office of Financial Research, an entity set up by Dodd-Frank, as it starts to build the data-collection systems required for regulators or anyone else to identify the kind of large, concentrated positions that can threaten market stability. If that data were made public -- a move banks oppose -- independent analysts and even journalists might help regulators do their jobs.
Q: Why do you say requiring banks to have more capital is bad for the economy, if it would help banks keep lending after losses like this?
Dimon has been a vocal foe of boosting capital levels, saying it will drive up lending costs and hurt the economy. He may be glad no one listened: JPMorgan’s Tier 1 common equity of about $128 billion, or 8.2 percent of assets weighted according to risk, is now allowing it to absorb its losses without sharply curtailing other businesses.
We’re all lucky, though, that the loss wasn’t large enough to overwhelm the capital of such a big institution. Research by economists at the Bank of England suggests that a capital level of 20 percent of risk-weighted assets would help minimize the threat of such disasters. So far, U.S. regulators are aiming no higher than 10 percent.
Q: Would losses like this be more or less likely if the U.S. exempted foreign subsidiaries from Dodd-Frank?
JPMorgan and other banks have been fighting a plan by the Commodity Futures Trading Commission to extend regulation of credit-default swaps and other derivatives to overseas trades. They say the rules, designed to shed light on the transactions and protect the system from the failure of any single counterparty, would harm their ability to compete abroad.
JPMorgan’s London trading operation demonstrates how an exemption for foreign trades would lead banks to move their speculative activities abroad, while the risk of disaster would still be borne in the U.S. JPMorgan’s losses in London, for example, will be absorbed by the U.S.-based parent company.
The larger question, of course, is can the U.S. economy absorb the shock of another banking debacle. The answer is no, which is why we should hope that today’s session puts us on course to find a balance between innovation and stability in the financial system.
Today’s highlights: The editors on the Bush family’s lessons for Republicans; Clive Crook on Spain’s pain and Merkel’s folly; Edward Glaeser on what the 1912 election tells us about 2012; Margaret Carlson on the joys and sorrows of being Jeb Bush; Emi Nakamura on how the U.S. could become like Argentina; Robert Hockett on splitting Europe in half.
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