I must admit to having a soft spot for J.P. Morgan. Not JPMorgan Chase & Co., the largest bank
in the United States with assets of $2
trillion.
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| Jaye P. Morgan |
I am talking about Jaye P. Morgan who served during the 1970's as a celebrity
judge on “The Gong Show”.
The Gong Show was an amateur talent contest that was similar to
today’s "America’s Got Talent" but it was a whole lot weirder.
After an act that consisted of two teenage girls consuming popsicles in
a sexually suggestive manner Jaye P. Morgan famously quipped.
"Do you know that's how I started?"
"Do you know that's how I started?"
Jaye P. was sexy,
funny and crazy.
 |
| the other J.P. Morgan |
Unfortunately this blog
is about the other JPMorgan who are none of those things but who may be
up to a sexual act with the U.S. taxpayers.
In
a stunning flashback to the 2008, another “too big to fail” bank lost a
gazillion dollars while engaging in highly risky suspect derivative trading. The left hand (the CEO whose 2012 compensation totaled $41.99 million dollars) didn’t know what
the right hand (his company) was doing.
Recently after lawmakers finished work on the new
financial regulatory law, a team of JPMorgan Chase lobbyists rushed in. They tried to obtain special breaks that would allow banks to
make big bets in their portfolios, including some of the types of trading that
led to the $2 gazillion dollar loss.
 | |
| I don't know. I couldn't see the back of the shirt |
It has also since been learned that JPMorgan CEO Jamie Dimon was
lobbying regulators to create a loophole in the law, known as the Volcker Rule.
The Volcker rule was designed to limit
the very kind of proprietary trading that JPMorgan was seeking. Even after the Volcker rule was enacted JPMorgan and other banks continued their efforts
to avoid limits.
Banks that are too big to fail are much more of a threat to
our national security than AL-Qaeda is.
In fact while writing this I referenced the Financial Times
and found out that a Morgan Stanley research team estimated that Dimon’s crap-shoot
will cost 5 billion by years end more than doubling the initial disclosure. Hence the gazillion dollar estimate.
Since this has all happened I have heard some financial talking heads complaining about possible regulatory backlash and bad legislation.
Complaining that Democrats are going to run to the bank with this….
How can any sane person argue against instituting financial regulations to prevent a recurrence of 2008 you say... well funny you asked.
Rep Spencer Bachus (R-AL) Chair of the Financial Services Committee recently said.
Rep Spencer Bachus (R-AL) Chair of the Financial Services Committee recently said.
“We are again hearing um from some of our colleagues that we
need a law that will essentially prevent a company losing money or taking risks and no such law can do that, nor should a law attempt to
prohibit a company from taking risks.”
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In 2008, Bachus traded in options at least forty times,
making money from betting against the market as it collapsed that year.
|
Rep Bachus is either missing the point or intentionally
protecting financial institutions to the detriment of the American
taxpayer (his boss). This is not a purely
capitalist system where the only people who stand to lose are the people who knowingly
engage in the speculative financial shell games. These shell games involve deposits backed by
the federal government. The last time
this meltdown occurred the cost were staggering. Should it fail this type of risk could pull down the whole
economy.
According to the Pew Charitable Trust
The financial crisis cost the U.S. an estimated $648 billion
due to slower economic growth.
The Troubled Asset Relief Program (TARP) will result in a
net cost to taxpayers of $73 billion
The U.S. lost $3.4 trillion in real estate wealth from July
2008 to March 2009
The U.S. lost $7.4 trillion in stock wealth from July 2008
to March 2009
5.5 million more American jobs were lost due to slower economic
growth during the financial crisis than what was predicted by the September
2008 CBO forecast.
Other estimates totaled losses as high as 8.5 trillion.
As Paul Krugman pointed out in
The point, again, is
that an institution like JPMorgan — a too-big-to-fail bank, not to mention a
bank whose deposits are already guaranteed by U.S. taxpayers — shouldn’t be
engaged in this kind of speculative investment at all. And that’s why we need a
return to much stronger financial regulation, stronger even than the Dodd-Frank
regulations passed back in 2010.
How I wish Chuck Barris and the crew would come back just
one more time and bang the gong sending JPMorgan and their tired old act
packing.
I too have been considering corporate risk taking lately and this post further stimulated my thinking. What do we mean when we say a company takes risks? Essentially, in business, a small group of people makes decisions that affect the entire company, which then succeeds or fails in degrees based on those decisions. So when a guy who makes $300k/yr makes a poor decision that results in people making $30k/yr losing their jobs what does the company owe those people? What does society at large owe those people? Or, to take an example with which I am intimately familiar, when a company decides to send workers to work in a hazardous environment (e.g. excessive VCM monomer causing liver problems and cancer) because it is cheaper to pay for their death than fix the problem is that a valid business decision? And exactly how does the market regulate this behavior? If the market says it is cheaper to let folks die than fix the problem is that an acceptable business decision?
ReplyDeleteAll to often, my experience has been that those most affected by management decisions literally have no input to those decisions but bear all or most of the consequences. It is also my experience that they get little when a decision turns out to be good.
M64 additionally there is a widely held view that if we can remove all government financial involvement i.e FDIC than companies should be allowed to assume whatever risk they want to tolerate and the risk is assumed by the buyer. what isn't considered in that view in the case of the too big too fail - is that their failure can severely impact the overall economy far beyond their own scope. it still boils down to a select minority who can in the short-term profit by selling risk to others often without duly notifying them of the actual nature of the risk.
ReplyDeletehow anyone can argue against not only regulation but ensuring that the magnitude of the risk is controlled as well.
I realize Ayn Rand was a genius beyond compare, but I've never heard any deregulation advocate properly explain The Tragedy of the Commons http://en.wikipedia.org/wiki/Tragedy_of_the_commons. If you look at the US and the people in it as "The Commons" then it seems pretty obvious that we need to have various levels of regulation to ensure that there is still a commons 100 years from now (I won't segue to my normal subject). Private enterprise works great for certain things, but like everything else it does not have all the answers - your post describes one of the failings very well.
ReplyDeleteAs far as all those wall street banksters go. I say lets exchange those three piece suits and briefcases for a good pick a shovel a bucket and some good old fashion pinstripes.
ReplyDelete