Jamie Dimon should come out swinging in Senate

June 12, 2012

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Which Jamie Dimon will appear before the Senate Banking Committee in Washington on Wednesday? The self-effacing JPMorgan boss offering apologies for his bank losing at least $2 billion on bum trades? Or the combative JPMorgan leader who just a year ago publicly challenged the chairman of the Federal Reserve over regulation? It would be best if the latter shows up.

That may sound counter-intuitive to the tar-and-feather-Wall-Street brigade. But a mealy submission from Dimon may help effectively nationalize the American banking industry for good. Consider the implicit message the senators who called Dimon before them are sending: that banks must answer to the nation for any losses they incur – and that watchdogs and regulations should somehow be able to prevent them.

It’s that kind of thinking that codifies large banks like JPMorgan as public utilities, fostering the false sense of security that they are too big to fail. The 2008-2009 bailouts first put that notion on the table, lulling shareholders and bondholders into believing systemically critical banks won’t be allowed to go under. That drives down their funding costs – especially for deposits.

The 107 U.S. banks with more than $10 billion in assets paid an average of 0.53 percent for their deposits in the first quarter, according to the Federal Deposit Insurance Corp. The remaining 7,200 had to pay 50 percent more. Compare that to five years ago when America’s largest banks shelled out about 10 percent more than the rest of the country’s banks.

Over time, this advantage is likely to squeeze out competition – and may choke off credit to small businesses and consumers. The top 107 U.S. banks already hold a record 79.6 percent of all of the country’s banking assets.

That’s why it’s important that a more assured Dimon takes the stage. He should remind senators that banking involves taking risks, which means some losses are inevitable. But as long as a firm has the wherewithal to mop up the red ink – and has written a credible will in the event of its demise – such losses should primarily be an issue for the bank’s shareholders and creditors, not politicians or the general public.

Dimon’s lax oversight of the chief investment office has swiped about $30 billion from JPMorgan’s shareholders. They, and bondholders, should be worried – and on the hook should JPMorgan fail. They ought to take matters into their hands and demand better risk management – even ask for Dimon’s head to roll if they think that would do the trick. That they’re as cavalier about JPMorgan’s risks as Dimon has been to regulators over the years is the greater public problem.

Comments

We don’t need to be reminded of how banking involves taking risks, but those risks should be reasonable. In this case, the risk involved naked hedging for profit rather than to reduce potential losses.

I don’t give a good goddamn how much money Dimon loses as long as he doesn’t expect for one second that taxpayers are waiting at his side to nationalize his losses… again.

His shareholders should be worried about 2 billion in losses. HIs bank also has a lot of exposure to Europe, so his shareholders better be hoping that JPM has properly hedged that exposure.

If JPM’s losses become so great that the bank becomes unstable again, then it should indeed be nationalized… lock, stock and barrel… not just JPM’s red ink. And if Dimon is found to have undermined/circumvented/ignored laws designed reduce the risk of collapse to the US financial system, then he and those who aided him should be prosecuted under federal RICO laws. That should result in stiff prison sentences and the forfeiture of all of the personal assets accumulated by Dimon and his band of pirates (perhaps even a few buccaneers who work with Dimon rather than for him).

If, in the pursuit of profit, they have recklessly jeopardized the financial well-being of US, they should also be tried for treason.

If Dimon comes out swinging, he risks having the tar-and-feather-Wall Street gang showing up en masse with shovels and pitchforks. If he had knowledge of what was going on (and I believe he did), he should just resign in disgrace.

Posted by breezinthru | Report as abusive
 

Mr. Cox, your premise that JP Morgan only has to answer to its shareholders assumes 1) shareholders have any power over Morgan’s leadership, 2) JP Morgan isn’t relying on tax payer institutions to back up its risky trades (FDIC, FED, etc.), 3) that derivative trading losses are just a bank taking risk. All 3 premises are completely false.

As we know, JP MOrgan’s acquisition of Bear Stearns relied 100% on the back of the US Treasury; shareholders in today’s corporation have NO say, unless you own a block of 10% or more; and derivative trading is not banking, it is gambling. However, at least most good gamblers understand and know their odds. Jamie’s lieutenants obviously don’t.

What is remarkable is how JP MOrgan’s board has been absolutely mum on Dimon’s leadership lapse. And the board is there to protect the shareholders’ interest. Not here.

And Dimon’s premise that the regs against prop trading will kill bank profitability now ring very hallow, and US Bankcrop has shown us all how traditional banking can work and payoff shareholders very well.

Posted by Acetracy | Report as abusive
 

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