Jamie, is that a threat or a promise?

June 10, 2011

James Saft is a Reuters columnist. The opinions expressed are his own.

Jamie Dimon is just doing his job, which is why it is more important than ever that Ben Bernanke do a better job at his.

Dimon, JP Morgan Chase & Co Chairman and CEO, staged an unusual confrontation with the Federal Reserve Chairman at a conference in Atlanta on Tuesday, drawing a line between tighter banking regulation, heavier capital requirements and slow growth and joblessness.

“Has anyone bothered to study the cumulative effect of all these things?” Dimon asked.

“And do you have a fear, like I do, that when we look back and look at them all that they will be a reason it took so long that our banks, our credit, our businesses and most importantly, job creation, started going again?”

Well Jamie, I have other fears that outweigh yours; that you, your bank and others like it will use your positional advantage to extract wealth from the economy which exceeds, on a risk-adjusted basis, the value you add. What’s more, you will do so by arbitraging a government guarantee that will allow you to make profits all the while building risks that, when they explode, will become taxpayer liabilities.

The very nature of his question, with its overtones of holding the economy hostage, are evidence of the unsavory and unacceptable relationship between finance and the rest of the economy.

Dimon was reacting not just to the patchwork of new regulation enacted since the crisis, but to recent proposals for higher capital weightings. Fed Governor Daniel Tarullo last week said the Fed was considering capital requirements that could end up being more than double those envisioned under the international Basel III plan. Also on the table is some form of extra capital weightings that would penalize banks based on their size. This, meant to encourage too-big-to-fail banks to slim down, is a dagger aimed directly at Dimon and J.P. Morgan’s unfair advantage.

It would impair his profits, and, as Dimon argues, would hit the economy.

He’s exactly right, of course: higher capital requirements and better supervision will crimp economic growth, perhaps imposing a lower ceiling on the booms we have grown to love and fear. After all, the freely available credit of 2006 created many jobs, from originating no-doc mortgages to fitting marble bathroom fixtures.

There are two problems with this type of growth; it is a wasteful misallocation of resources, and also the growth is ephemeral. Financial crises are hugely damaging, and as we are seeing, the recovery is long and painful. That is an illness which more bank intermediation will not cure.

It’s Bernanke’s job to recognize that he is not charged with creating growth at any price, but at fostering sustainable growth. That means tough banking regulation, aggressively enforced.

HOW MUCH FINANCE IS TOO MUCH?

Even beyond the issue of too-big-to-fail there are real questions over how large a financial system is actually beneficial to an economy. Because the U.S. subsidizes finance, through deposit insurance, mortgage support and in many other ways, this is an appropriate area for government control.

A recent paper by economists Jean-Louis Arcand, Enrico Berkes and Ugo Panizza explores the relationship between the effects of financial development and economic growth.

While there is little doubt that finance is important in an economy, the authors found that after a certain point the effects of more financial intermediation are actually negative for growth. The high-water mark is when credit to the private sector is 110 percent of GDP; after that our banks are, in effect, a tax, privately levied but publicly paid.

All of the major economies are above that 110 percent threshold. The U.S. is among the most debt-ridden, with credit to the private sector at more than 200 percent of GDP in 2009, according to World Bank data.

On that basis, higher capital requirements and tighter regulations are an unalloyed good. Growth may be lower at times, but there will be less of the ruinous ups and downs. Importantly too, the fruits of growth will be more fairly shared out, between industry and government, among industries and among individuals.

“They’re concerned about their return on equity, and I’m concerned about the safety of the banking system and the American depositor and taxpayer,” Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, told American Banker.

“All the safety net has done is allowed them to leverage up to their advantage on the backs of the American taxpayer. I have a hard time as a person, who is more concerned about the safety of the system and the taxpayer, to worry about their position.”

This is exactly the approach Bernanke should take.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

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אורי פרייס, משרד עורכי דין
Uri Praiss, Law Offices
רחוב אחוזה 17, רעננה 43208 טל’ 050-5573697, 054-7569760 פקס למייל
17 AHUZA ST. RA’ANANA43208 TEL (972)-54-7569760, 50-5573697 FAX-MAIL
praiss.uri@gmail.coml; praisuri@netvision.net.i E- mail:

June 8, 2011 U r g e n t!!

Dear Opinion / ED- OP Editors,

I am honored to file my Updated full version as follows:

Re: How Should Bernanke Answer JPM’s Dimon

Author: Uri Praiss, Attorney at law (Israel, since 1990)
Law & Economics lecturer

Dear Jamie, first I want to suggest “L.D.L.” “What?” L.D.L. – Let’s Discuss Live. Everybody knows. Better for you. During the S.E.C.’s investigation we first met this secret “Investment” banking code.

When Fabrice Tourre defined (by e-mail) those mortgage “investments” (“bombs”) as “a way to distribute junk that nobody was dumb enough to take first time around”, to his team-mate, one Jonathan Egol, Before the manipulative criminal “Big Short”, coordinated with Rating companies’ downgrade, he was answered at once: “LDL.”(“Shut Up!!” in French). Your security rules are stricter than an Iranian Nuclear Station.

Second, I appreciate your creative and brilliant defense speech, but legally I am not sure that I’m allowed to answer, while N.Y. A.G., Eric Schneiderman, as well as Cyrus Vance Jr., Manhattan District Attorney, have just started to subpoena and interrogate you, your dear friend Mr. Blankfein and many others concerning Manipulations (remember the “Big Short” and many little shorts?) Insider Trade (I know, Rajaratnam wasn’t an insider either) Fraud, and so.

“What for, It’s over” You’ve already said in Davos last year.
Today I’ve heard you might find some calculation and spelling mistakes at Levin’s Committee report.

Well, at least for manufacturing, “distributing” and pushing these “mortgage-loans-bombs-”securities”, that caused millions of jobless, homeless and hopeless miserable families, at least for few more years.

Third, yesterday I’ve seen on T.V. former S.E.C. Chairman, Arthur Levitt, now as a “policy adviser for Goldman”(!!) discusses the reports Goldman Sachs Group Inc. has been subpoenaed by the Manhattan District Attorney’s office, opening a fresh front legal, after recently subpoenaed also by N.Y. A.G. Levitt Said “These Subpoenas Mean nothing for Goldman.” I wonder if that’s legal, and how much Levitt’s wage and bonuses are.

Forth, you know S.E.C. was founded as one of the most important lessons of The Great Depression .We forgot the other most important lesson – Total Separation between Banks, Trade so called “Investment”, Advisors, Underwriters, IPOs, etc. I know you preffer 5 Dodd – Franks. You know, even basic New York Martin Act, 1921 was almost forgotten.

The S.E.C. was created, as a rearmed special force, to defend us against the Robber Barons, or Huns, after they caused, stretched for 6 years and used that horrible national disaster, caused by another greed financial crisis (and Manipulative panic / pessimist Short Selling, though not advanced as your nowadays’ Algorithmic “Nuclear” HFTs.
But sooner than later they’ve found you and the other handsome Huns’ generous attitude (like the wolf after swallowing Red Riding Hood’s Granny) as Mr. Levitt, not to mention the Exchanges, orthodox and modern biased scholars, “experts”, bankers, conservative politicians and officials, research budgets, presentations, conservative parties and rich contributors.

So the Exchanges and S.E.C. went to sleep many years before 2007, allowing the Huns to create and traffic those bombs or drugs “securities”, “Big Short”, “Regular daily shorts”, you name it. Look the other way. Tell the S.E.C. and Exchanges “Liquidity, bigger trade volume, market diversification”, count the fees, etc.

For the record, you know S.E.C.’s Investigations focus mostly on “Fishing under the Lamppost”, that gossipy piping Insider Trade Offences, by big billionare Rajaratnam or even this miserable Nelson Obus, hunted for 10 years (and 2 obsessive appeals) because of that “Investi-Mad-Dog”.
By the way, you surely know that “Insider Trading” offences were pushed and demonized by Wall Street’s Traders and Analysts’ Lobbyist Cartels? That is not even theft. Just populist over -reacting. There is no victim except some righteous vague envy.
In most civilized Securities (Non U.S.) Laws, Manipulations, Fraud, Attempt of Affecting Rates by Short and /or concerted / HFT “Selling Efforts” are much “heavier” offences than famous and juicy “Insider Trade”. The Anti – social and economic damages as well as risks (!!) are much heavier. So is the “Mens Rea” and the punishment is more severe.

Meanwhile, S.E.C. and Exchanges try, maybe they can’t refuse, to rescue JPM and Goldman Trading “Bank”, by $ 550 Million’s S.E.C. selective “plea – bargain” fine. That appears Ex – Post as a gift – their “Gold Mine Windfall” – approximately 1 day’s total income, and let’s pretend It’s over. Nothing happened.
GS and you report $100 Million daily net trade profits easily (how exactly?!) Now you buy Tokyo’s Exchange and threat to fire employees, so i’ve read. You were just tickled to laugh by those twisted illegal secret highly – organized, 15 or so, $1 Million State – fines. “Partial-but-final rehabilitation-immunity-bargains’” ridiculous fines (as lately urged in New Jersey and Massachusetts) which N.Y.A.G. Schneiderman refused to accept, as was reported here.

S.E.C., JPM and GS would help also Moody’s and S&P.”One for all and all for one” Musketeers and Robin Hood’s Lady Gaga’s Charity Tax Deductable evening. Till N.Y.A.G. and N.Y.D.A. shall come between you.
Remember classic “Prisoners’ Dilemma”, maybe most popular Economics’ Game Theory? Let’s invent 500 pages of new Rating Rules’ wasteful cover up, so maybe they won’t face Criminal and Civil Fraud and Conspiracy charges plus (Gross) Negligence huge law suits.

But you won’t guess what really worries me the most. The very bad news and the unhappy end (for now) is neither S.E.C. nor Robber Barons haven’t learned anything yet.

Vice Versa, the Huns have already found, use (on a daily basis) and develop their new “nuclear” arms, at least a year. Almost all financial and real markets, firms and households suffer daily doldrums, stagnation, waste and loss of potential growth and employment.

These are caused mainly by manipulative advanced Hi-Tech and Algorithmic HFT daily trade (by whatever “machines”?!), including Short selling, combined with endless fearful, false and as if professional daily negative economic excuses (Greece’s Debts? Portugal?) Not to mention serial scary “Flash Crashes” S.E.C. and Exchanges don’t want to see.

Yesterday I’ve read about your amazing Ms. “Commodities” Masters’ profits. What a waste. I wonder what is the economic loss all of you cause, and on whose account. Many a $ Trillions. Today I’ve seen OPEC’s resolution and the $ hundreds of millions net profit your HFT speedy algorithmic traders did today.

Tell me, Jamie, the stocks are dead for that, right? Stagnation and Degeneration by daily illegal obssesive greedy HFT. I’e watchedyou from last years “Sell on May, stupid and fade away”. Sound like Broadway. What about Greece, Portugal, Deficit, Friday 13th ? You really name it.

Last question – you know I’ve made for decades a deep research on The Great Depression, but only these days I’ve understood that those manipulative short traders, over years of fears and greed, caused these long time Depressions and Recessions. Do you get it, Mr. President, Secretary, Politicians, Economists, Hard working and unemployed citizens?!
Now please excuse me, I need to file some urgent formal complaints

Sincerely yours,

Uri Praiss, Attorney at law
Law & Economics Lecturer

Posted by Anonymous | Report as abusive

Nice article. IMHO “Too big to fail” should be zapped from our lexicon. No losers? Then capitalism died at the height of it’s glory. Just as freedom makes a circle around the globe, we self-destruct free markets. IF Jamie wants cumulative effects, tell him to study the 1% tax on transactions in HR 1125. We’ll always desire fair taxes and still expect Dimons.

Posted by pHenry | Report as abusive

Well written, Mr. Saft. I’m disappointed that Mr. Dimon chose to grandstand and attempt to embarrass Mr. Bernanke. Mr. Dimon should remember that he serves not only his shareholders, but stakeholders in general, and while his shareholders may not be immediately better off with higher capital requirements that bring down return, the country as a whole will.

Posted by PhatNoodles | Report as abusive

“All the safety net has done is allowed them to leverage up to their advantage on the backs of the American taxpayer. I have a hard time as a person, who is more concerned about the safety of the system and the taxpayer, to worry about their position.”

That is a great quote.

Posted by M.C.McBride | Report as abusive

Hmmmm….perhaps a few more regulators are starting to “get it” after all this time. The hard part will involve the politicians.

Looking at the Willshire 5000, it’s return YTD is about the same as a well placed 2 or 3 year FDIC insured CD. As for B of A wow, one year return -28.8% as of 6/10/11. I’d be crabby too if I were Jamie.

There are advantages to Risk Off, including good sleep and less antacid use.

MIA

Posted by Missinginaction | Report as abusive

Jamie Dimon should be barred from any further finance positions for the rest of his life. JP Morgan is up to their eyeballs in derivative business – across the globe. Why? Because without any exchange to price their derivatives, banks are charging customers huge mark ups. There is no bid/ask just the price you get from the bank.

And furthermore, Dimon’s bank got the biggest give away in financial history when the Treasury handed over Bear Stearns to them for practically nothing and no liabilities!! One of the largest financial institutions in the USA is given away? And now Dimon is opining about the profitability of the banks and growth of the economy!!

The US economy, unlike Germany and other growing economies, has relied on 2 sectors for growth over the past 30 years: construction and finance. Now that both are busted, there is no second act for the US economy.

Posted by Acetracy | Report as abusive

They’re concerned about their return on equity, and I’m concerned about the safety of the banking system and the American depositor and taxpayer,” Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, told American Banker.

“All the safety net has done is allowed them to leverage up to their advantage on the backs of the American taxpayer. I have a hard time as a person, who is more concerned about the safety of the system and the taxpayer, to worry about their position.”
Thomas Hoenig, you should run for President. Both Bush and Obama didn’t have the guts to stand up to the banks, it seems as if you do. Thank god. At least someone from inside the system that is a Ponzi scheme and on the verge of blowing up talks some sense to the Top Capitalists receiving billions of welfare money from the tax payers to cover their bad deals.
Stick to your guns sir, while I think the debt is impossible to pay down mathematically, and is understated…thus the ship is already sinking, at least may it be said for posterity’s sake that someone threw the pirates off the ship and tried to patch the hole on the US Titanic. As for the politicians, you cut off the head(and their source of money) and they will jump off faster than rats jumping off a sinking ship. Dodd being the first to jump, Sessions being number two and those Senators in bed with the insurance companies number 3.

Not that it will work. But mark my words, America is waking up, slowly but they are waking up. Its only a matter of time before politicians of both parties actually start to feel the anger of the electorate at the polls, or via demonstrations. Only a matter of time…You 3 percenters, please fix the boat, make sure the corrupt bankers stay the heck out of the way of growth and hopefully the Fed will start talking about a single currency scenario or the gold standard, or a solid plan to get us out of this mess. Personally, unless we do either of the two things I just mentioned, I don’t see the US EVER getting out of the morass Bush and Obama put us in.

Posted by Independent007 | Report as abusive

Surely, JPM must do its own “study” and manage the bank based on its conclusions.

This blind cry for less or no regulation did not work, as even Greenspan admitted.

Posted by XRayD | Report as abusive