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Andrew Ross Sorkin doesn’t think that Glass-Steagall would have prevented JPMorgan’s botched hedges, losses that the Independent says could hit more than $7 billion. But it’s now clear that JPMorgan needed to be saved from itself.

There are two big-picture views of what went wrong in JPMorgan’s infamous CIO office. The first is organizational: The NYT points to a rift between Ina Drew, the CIO head, and her London-based deputy Achilles Macris, whose traders, including Bruno “the London Whale” Iksil, were much more comfortable embracing risk. “No one could sufficiently push back against Achilles, so he and Bruno could do what they wanted,” a former trader said. In this view, Drew, who took an unfortunately timed medical leave because of Lyme disease, simply lost a power struggle with London traders.

The second view is that JPMorgan’s CIO office – which was meant to manage the bank’s risk – was chasing returns in a way that its rivals simply weren’t. Bloomberg breaks down JPMorgan’s outsize love for corporate bonds:

About half of the $381.7 billion in JPMorgan’s chief investment office portfolio is in company bonds, asset-backed securities and mortgage debt not backed by the U.S. government, according to a March 31 filing. That compares with 7.7 percent at the end of 2007. The amount, $188.1 billion, is more than the holdings of such securities by its three biggest competitors combined. It exceeds the total assets of Atlanta-based SunTrust Banks Inc., the 10th-biggest U.S. lender…

JPMorgan has about 30 percent of its holdings in U.S. Treasuries and bonds issued or guaranteed by U.S. government-backed agencies, according to its filings. That compares with 87 percent at Bank of America, 50 percent at Citigroup and 47 percent at Wells Fargo.

This is “an indication that they’re searching for yield like other money managers,” an analyst told Bloomberg. But JPMorgan is not your average money manager; there is, for one, the sticky issue of what a too-big-to-fail (TBTF) bank does with your deposits (other than lend). And whether JPMorgan was hedging or doing something a bit more like prop trading, as Deus Ex Macchiato puts it, JPMorgan is just “too big”, and as a result “simply finding a reasonably safe home for that $400B is quite difficult.” – Ryan McCarthy

On to today’s links:

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If you’re a European politician, there is no bank run in the euro zone. It may be more accurate, as Mohamed El-Erian says, to call this a slower “jog” rather than a full-on run, but it’s getting increasingly hard to ignore charts like these which Felix found last week.

Gavyn Davies has an equally disturbing chart looking at cross-border flows in the euro zone. The trend is stark: The ECB’s interventions have not stopped depositors from moving their money to Germany en masse. This slow-motion bank run, Davies writes, is particularly tricky to stop because it isn’t just about worries of bank failures. It’s about fears that the euro will crumble altogether, leaving Europeans holding their own country’s devalued currency.

The euro zone crisis, Jeffrey Sachs writes, is now a very immediate banking crisis; Greece, like Spain, is mainly suffering from “chronic lack of working capital.” Adam Posen thinks Europe’s problem isn’t Greece, it’s undercapitalized banks.

All of this comes as we learn that Europe’s “growth agenda” isn’t set to arrive until June. And European officials have for the first time publicly confirmed that they’re making contingency plans for a Greek exit from the euro zone, which could include a debt time-out for Spain and Italy. Here’s the WSJ:

The euro zone’s financial “firewall” may need to be boosted to reassure markets that neither Spain nor Italy would be allowed to default on their debt during any market panic that might follow an eventual Greek exit, they said. The bloc’s bailout fund has unused lending capacity of €500 billion ($635 billion), only enough to finance Spain and Italy, widely seen as the next two dominoes that could fall in the euro-zone crisis, for a few months.

And on to today’s links:

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At a time when it’s facing an ultimatum from Europe, Greece has given up its “nine-day hunt for a government.” New elections are on the way in June, and Greece’s anti-austerity left is expected to win.

For now, Greece’s lame-duck transition government can’t respond to Germany’s open threats to accept crippling budget cuts or leave the euro zone. This is happening as Greece’s deputy prime minister is warning that his country could run out money in six weeks, the Greek stock market fell 4.5% in seconds – and have we mentioned a Greek leader is now warning about civil war?

Quite suddenly, we’re back to last summer: pondering the implications of (another) Greek default and dealing with (another) potential debt-ceiling standoff in America.

This time, in Europe at least, is actually a bit different. After days of speculation about euro officials pondering a Grexit, IMF chief Christine Lagarde admitted that an “orderly” Greek exit from the euro zone is a possibility. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider,” she told France24. (Lagarde left the door open to examining “the details” of Greece’s bailout program.)

There are also some very specific ideas of the costs involved if Greece exits the euro. Losses for French banks could reach $25 billion; German banks could see a $6 billion loss, according to one estimate. JPMorgan estimates the immediate costs for Europe could be $513 billion. UBS figures that leaving the euro zone could cost a country like Greece $12,000 to $14,000 per citizen and lead to a 50% drop in its volume of trade.

Much harder to tabulate is the longer-term domino effect a Grexit could have. James Bianco, building on Paul Krugman’s reasoning, pictures a bleak scenario: freaked-out bank depositors moving their money from Greece, then from Spain and Italy, raising these countries’ borrowing costs and necessitating more bailouts.

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By now, most of us are familiar with a sovereign debt crisis – Greece being the prime example of a highly indebted country unable to pay its bills. But the European crisis is being fought on several fronts at once. Today, S&P warned of a “perfect storm” of maturing debt for European companies – there’s some $46 trillion in debt coming due in the next five years. While this amount is global, S&P says poses a big problem for the Europe’s non-financial companies in particular. As the NYT reports this morning in a look at construction titan A.C.S. Grupo, Spain’s private sector may already be struggling with this type of problem. “The problem in Spain is not government debt, it’s private sector debt,” Jonathan Tepper of Variant Perception told the NYT.

In Spain, there are questions about the accuracy of the government’s estimation of its problem. Bloomberg’s Yalman Onaran, building off a report from the Centre for European Policy Studies, has a disturbing report of his own:

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

At FT Alphaville, Lisa Pollack dives into the analyst reports and wonders if Spain’s housing market has even bottomed out yet. If it hasn’t, banks will need significant additional capital. But instead of acting quickly, Nouriel Roubini says that a “bailout for Spanish banks has been postponed until the very last minute”. The private-debt problems in Spain risk worsening the country’s public-debt problems, especially in the context of an economy where the stock market is hitting a 9-year low and the government has just partially nationalized one of the country’s biggest banks. – Ryan McCarthy

On to today’s links.

TBTF JPMorgan announces suprise $2 billion loss - WSJ The FDIC is about to explain how it will save us from “too big to fail” banks – WSJ Confessions A trader’s reason for choosing his occupation: “actually, money is quite important” – Guardian

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Should the government speed up the pace of the economic recovery in the short term? Economists have a way of making simple questions quite complicated.

The current debate among a handful of top economists centers on whether the problem with Western economies is cyclical – the result of the economy’s normal ups and downs – or more structural. Ezra Klein calls this divide “Larry Summers vs. the long-termers.” The latter camp includes Raghuram Rajan, who’s out with a new piece in Foreign Affairs. To Rajan, the crisis is a “wake-up call” on our high levels of personal and public debt. The only way to fully reverse a decades-long slump in middle-class incomes, he says, is through longer-term solutions like worker retraining and education reform. In the short term, this effectively means some degree of continued suffering for the unemployed.

One problem with this, to Summers, Krugman and others in the cyclical camp, is that cyclical unemployment quickly becomes structural. Adjusting for demographic trends, Brad DeLong looks over April’s 342,000 labor force dropouts and comes to a depressing conclusion:

…that is a gap of 0.7%-1.1% points of the adult population: people who really ought to be in the labor force right now, but who are not. Are they now part of the “structurally” non-employed who we will never see back at work, barring a high-pressure economy of a kind we see at most once in a generation? Probably.

Looking at the Beveridge Curve, David Kotok finds more reasons to believe in the structural unemployment story. Laura Tyson isn’t as convinced, but worries that technology is making our labor problems worse.

But the structural vs. cyclical debate may not be a binary choice. Klein, like the IMF, suggests things like spending and worker retraining could be immediate and budget cuts could be phased in as the economy recovers. “If ever there was a false choice, this is it,” as Jared Bernstein puts it. – Ryan McCarthy

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Another month, another troubling jobs report. The summary: 115,000 jobs created in March, 8.1% unemployment, 342,000 people leaving the labor force and a labor force participation rate that hasn’t been this low since 1981. (Felix has the rundown of the worrisome implications of people deciding to simply stop looking for work.)

The NYT has a nice Storify of the Twittersphere’s reactions; HuffPost has an even more in-depth liveblog. The award for the most apt reaction to the report goes to the NYT‘s @BCAppelbaum: “What if these are the good times?”

The reaction from analysts and economists, who predicted we’d see about 160,000 jobs created in April, was muted, with a few saying that a warm winter essentially just pulled forward spring hiring to earlier in the year. Ray Stone of Stone & McCarthy (no relation, sadly) suggested some of the shrinking workforce could be chalked up to austerity:

We suspect the decline in the labor market participation rate is in part an artifact of the exhaustion of extended unemployment benefits, and the related shortening of benefit periods in some states.

The idea of government cutbacks as a drag on the labor market became something of a theme:

@Reddy: “Government jobs down by 607,000 since Obama took office, all due to state & local cuts. Federal govt jobs up by 31,000. http://on.wsj.com/JwQ7xQ”

@JustinWolfers: “When 106% of jobs lost since January 2009 are in the public sector, should we conclude the stimulus failed, or we never really tried it?”

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Remember financial reform? It’s been two years since the passage of the Dodd-Frank Act and nearly as long since Basel III arrived. Thankfully, two speeches yesterday by central bankers give us an indication of where we are.

In a speech in New York City, Fed Governor Daniel Tarullo argues that the financial crisis revealed two main problems. First, financial firms, including those not directly regulated by the Fed, became too big to fail and required bailouts. Second, the shadow banking system, including those infamous derivatives, grew to become enormous and unstable, threatening the safety of the economy.

Tarullo says that we’ve done a lot about the first problem. Regulators now have power to oversee all systemically important firms, Tarullo says, capital requirements have been raised, and the FDIC now has “liquidation authority” and power to impose losses on creditors. This won’t “solve” the too-big-to-fail problem, Tarullo says, but it’ll help.

But fixing the shadow banking system hasn’t been going as well:

Although some elements of pre-crisis shadow banking are probably gone forever, others persist. Moreover, as time passes, memories fade, and the financial system normalizes, it seems likely that new forms of shadow banking will emerge. Indeed, the increased regulation of the major securities firms may well encourage the migration of some parts of the shadow banking system further into the darkness – that is, into largely unregulated markets.

In a much less wonky speech delivered on the same day, Mervyn King, the governor of the Bank of England, has an interesting notion: In the UK, at least, newly empowered central bankers may get a lot more vocal. Here’s how King describes his financial crisis do-over:

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Nothing amplifies like the Internet. Witness the latest arguments over whether we’re in another tech bubble that have set off an echo chamber of self-interest, defensiveness and conjecture.

Last week, NYT tech reporter Nick Bilton slammed the “no revenue” formula for startup success. (Instagram, you’ll recall, made no money and was sold to Facebook for $1 billion last month.) In its “Human’s Guide To The Tech Bubble,” Buzzfeed attempted to explain why we’re in a bubble:

Because companies that make no money are being given lots of money for reasons that make no sense to normal people. This is not inherently bad or wrong – there are ways a company can be valuable in the long term beyond making money right now – but when this happens a lot and very suddenly, it means there’s a bubble. When Evernote gets valued at a billion dollars, it’s a bubble. When failed startups get picked up for tens of millions of dollars, it’s a bubble. Basically, when strange and inexplicable things start happening every day, it’s a bubble.

Tech investors, predictably, weren’t happy with Bilton’s piece. Marc Andreessen suggested revenue doesn’t matter to a big company acquiring a startup. Ubiquitous angel investor Ron Conway also denied there’s a bubble, adding, somewhat unbelievably, “the companies getting funded have sales and profits”. Paul Graham argued that high prices do not a bubble make. And Chris Dixon thinks it’s complicated – public tech companies are not overvalued, he wrote, but he admits that seed-stage valuations seem frothy.

Dave Winer suggests that the bubble talk largely applies to young companies hoping someday to make money from advertising. And Peter Kafka has found yet another unproven startup raising millions of dollars in seed funding. That one, too, is ad-based, which is interesting given that Facebook is showing signs of struggling to sell ads.

Whether you call it a bubble or not, remember this: There’s any number of well-funded startups chasing a market that’s set to explode. Some may even make real money. Total spending for online video ads is expected to triple in the next four years, mobile ad revenue may quintuple. – Ryan McCarthy

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Less than a week ago, we suggested that austerity, Europe’s great experiment in cutting its way out of an economic slump, was coming to an end. Now every bit of economic data, including today’s news that Spain, like the UK, is officially back in recession, seems to come with a gigantic Scarlet A across it.

“The tide appears to be turning” on fiscal austerity, Reuters declares, as European Central Bank President Mario Draghi has called for a “growth compact” to complement the last two years of mass budget cutbacks. The ECB’s internal markets chief agrees and, in characteristically European fashion, is calling for a plan-to-make-a-plan for economic growth.

There’s a flood of anti-austerity op-eds. Larry Summers writes that Europe’s maladies were misdiagnosed: “High deficits are much more a symptom than a cause of their problems,” he argues – and calls for the world to make EU aid contingent on a plan for growth. Mohamed El-Erian slams austerity in Spain, and calls for a focus on both “the deficit containment (numerator) and growth (denominator).” Christina Romer, former top economic adviser to President Obama, argues for a “backloaded consolidation” version of budget cuts in Europe; essentially, spending cuts and tax increases that are slowly implemented as economic growth recovers.

Of course, all of this anti-austerity talk comes much too late. But there’s some reason for optimism: The European Investment Bank may get more funds for real, growth-driving investments. Marc Chandler lays out the early speculation, noting that EIB funds could rise to $264 billion, which could go to infrastructure, technology and renewable energy.

European spending of any kind is politically fraught, and the EIB’s is definitely not a quick fix. Compare, as Reuters did, the EIB’s reported size with the 1 trillion euros created by the ECB to prop up the economy. These are baby steps during a crisis, in other words.

And on to today’s links (scroll down for readers’ suggestions for Occupy Wall Street’s future):

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Two government agencies. Two completely different narratives of the bailouts.

Roughly a week after the Treasury Department extolled the virtues of America’s crisis-era bailout measures, a government watchdog has a very different story to tell. SIGTARP, the office created to oversee the Troubled Asset Relief Program and headed by Christy Romero, has released its latest quarterly report to Congress [PDF].

If you’re struggling to understand the financial crisis and its aftermath, don’t read them back-to-back. One is a story about an against-all-odds victory; the other is about the one that got away.

Last week Treasury estimated that TARP investments, excluding its housing programs, would yield “an overall positive return for taxpayers.” SIGTARP, clearly pushing back against Treasury, says: “It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion.”

In statements to Politico’s Ben White and HuffPost’s Mark Gongloff, Treasury sticks by its story that the bailouts may turn a profit, telling Gongloff “most of the remaining projected cost [of TARP] ($46 billion) is related to foreclosure prevention aid, which was not intended to be recovered.”

It’s worth looking, then, at how foreclosure prevention money is actually being spent. In January, Treasury announced plans to significantly expand its widely maligned HAMP program for struggling homeowners.