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The Busch Doctrine: Tilting For Windmills
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Are Assault Rifles Strictly Weapons of War?
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Off Target
January 16, 2013 | 93 comments
A Further Perspective
Dimon on Display
Our ad hoc Congress is out of its depth again going after JPMorgan.
Normally, government should not concern itself with a business’ operations, but when taxpayer money and the public welfare are at risk, it has a responsibility to investigate. That was the premise of Senate Banking Committee Ranking Member Richard Shelby’s (R-Ala.) opening remarks during a recent hearing where JPMorgan Chase Chairman and CEO Jamie Dimon answered questions about trading losses totaling over $2 billion sustained by his firm late this spring.
As Shelby noted, Congress was concerned that the incident may illustrate a threat to the financial system and to the economy as a whole. Multiple federal agencies, including the FBI, are investigating. And many commentators have been pointing to the losses as evidence that more financial industry regulation is needed.
However, before they rush to impose more rules, lawmakers need to consider three key questions. Was this a case of systemic risk? Were taxpayers at risk? Does this episode indicate a market failure or illustrate a need for greater regulation? The answer to all of these questions turns out to be “No.”
As Dimon explained in his opening statement, JPMorgan Chase had created a small division within its Chief Investment Office (CIO), to manage risk and guard against a possible “systemic event”—such as a bank failure—by overseeing a “synthetic credit portfolio” of derivatives.
However, as Shelby noted, at least some employees within this division had multiple conflicting mandates, to use trades to not only manage risk but also turn a profit, which they referred to as, “the icing on the cake.” In short, changes in risk modeling and a lack of managerial oversight along with human error put the division in a bad position.
JPMorgan Chase appears to have reacted the best way it could. As trading losses mounted, Dimon chose to publicly disclose the episode on May 10. At the hearing, Dimon said that even with the losses fully accounted for, JPMorgan Chase expects to report billions of dollars in earning for the second quarter 2012. He also noted that the firm has replaced the leadership of the CIO, comprehensively reviewed risk management procedures, and implemented revisions universally. Its Board is currently conducting an independent investigation as well.
JPMorgan Chase’s enormous size—it loaned well over $1.5 trillion to businesses and entrepreneurs in 2011—helped it weather this storm. The losses were easily absorbed by cash reserves and did not affect the many other areas of its business. There was never any possibility the Federal Deposit Insurance Corporation would need to step in, never mind require a taxpayer bailout. Likewise, no systemic risk was posed. The bank sustained the hit as well as any organization could be expected to.
The decline of the firm’s stock price reflects concern about managerial judgment and procedures, not its diversified, rather conventional business model. That the bank lost money is a sign that market discipline still holds some relevance in the post-meltdown, bailout-era financial sector. We have a profit and loss system, as Milton Friedman always emphasized.
This was a big deal to JPMorgan Chase, obviously, but it should not be the concern of the government. The most troubling aspect of the hearing was the detailed, technical nature of the frankly unqualified Senators’ questions about the firm’s practices, Dimon’s knowledge and decision-making processes, the intricacies of structured finance, and the operations of the CIO. Micromanaging any industry, never mind financial services, creates uncertainty that impairs its basic functioning. And in any case, lawmakers’ should not be trying to read CEOs’ minds.
Jamie Dimon and his team have already managed, analyzed, learned from, and moved beyond their business’ private crisis. That process was well underway before anyone outside the company knew what was happening. The Senate, the regulatory agencies, the FBI, and government in general are behind the curve. All they can do at this point is unnecessarily interfere.
About the Author
Luca Gattoni-Celli is an editorial intern at The American Spectator and a D.C.-based journalist focusing on economic policy, information technology, and government accountability. He graduated from the College of Charleston in May of 2012 with a degree in economics.
TLP| 6.20.12 @ 8:10AM
Let me see if I've got this right.
The guys who are running Trillion $ Defecits, every year, have gotten us Downgraded, for the 1st time in our History, Have STOLEN our Social Security Money, Bankrupted Medicare, Amtrak, and the Post Office, have no real plans to make things better, and haven't done even the most Basic of their Constitutional Requirements - Passing a Budget - in almost 4 Years, are puffing out their chests, and coppin a tide, against a loss by a Firm, that amounts to a Rounding Error (Morgan has more than a Trillion in assets) while JOHN CORZINE sits in the White House, and BUNDLES CAMPAIGN CONTRIBUTIONS for the POS in the White House?
I'mahandajob's right.
We ARE over.
mike 3/505| 6.20.12 @ 8:29AM
Speaking of Iran's POS President...How can we take seriously, a guy who looks like Sonny Bono?
TLP| 6.20.12 @ 9:23AM
Actually, he's Sonny Bono wearing the Robert Hall Back to School Ensemble from 1969.
Trust me.
I know what I'm talking about.
Albert Constantine Jr.| 6.20.12 @ 7:59PM
I purchased my First Communion suit there in 1968, which was a much better year for fashion at Robert Hall.
Von Mises Jr| 6.20.12 @ 9:07AM
Let us not forget TLP that it was Freddie Mac that was created in 1970 to package Fannie Mae mortgages into CDO/CMO financial instruments that caused the Sub-prime crisis in 2008 after the Clinton/Reno Redlining and Barney Frank telling us we need a couple more years of experimentation with the markets. Stock market went from 14,000 to 6,500. They lost over 50% of the nation’s wealth in their socialist intellectual games.
It is also probably not a coincidence that JPMorgan leaked a report to its top investors warning that the $1 trillion in State and Municipal shortfall in their pension funds is really $3.9 trillion. They were off by a factor of about four times the estimate.
These people are statist totalitarians, and that clearly doesn't translate into IQ or financial prowess.
TLP| 6.20.12 @ 9:19AM
I have an idea.
Let's let them run our Health Care.
Von Mises Jr| 6.20.12 @ 10:20AM
They are. That is why Medicare is going broke in something like 2023 or sooner, and Medicaid patients cannot find a doctor.
Check out my explanation to Peter Ferarra's column on how our State's doctors are returning to free market principles and charity, my friend.
Mike G| 6.20.12 @ 10:05AM
Why does no one mention the fact that If Chase lost $2 billion, someone (or several someones) made $2 billion. If Big Brother has the power to limit what an entity can afford to lose on a business deal, Big Brother is also limiting what can be made on said deal. What business does congress have setting limits on private transactions?
Orlan| 6.20.12 @ 3:18PM
Mike, don't you see the problem here? It is that if JPM lost $2 bill, we can't tax that 2 bill of their revenue stream under current accounting standards. Gotta figure out some way to tax their $2 bill - as well as the $2 bill that someone else made. Then we're all in fat city. I believe some liburul can help us on this!
JD| 6.20.12 @ 11:59AM
If someone never earns any money in the first place, the government doesn't want ANY control over that person's life; it just wants to give them other people's money. But if you make money, then lose a tiny slice of it, they want to nationalize you, in order to "save society" from the incredible danger you supposedly represent. The only danger is to the revenue stream they want to redistribute!
Get government out of the economy-micromanaging business and the redistribution business, and we'll restore a society where people can be free to make or lose money without it being everyone else's business. "Too big to fail" is a creation of liberal policies of overdependence.
cicero| 6.20.12 @ 12:57PM
Of course, we are only witnessing the standard Congressional posturing. The government need only get out of the banking business, and let the market place work. Reduce the FDIC guarantee back to $10,000.00, and make the bank officers personally liable for any loss of depositors money. No bank should be too big to fail. If a bank fails, subject the officers and directors to shareholder lawsuits. If they are found liable, make them pay the money back.
There should be no bailouts for financial institutions. The year before AIG was declared to be in trouble, (all of its divisions with the exception of its hedge fund were profitable), they paid the guy running the hedge fund from a mountaintop in Conn. over $100 million. When the government found out that their counter party was Goldman Sachs, all at once they were too big to fail, and the taxpayers made sure they were reimbursed 100%. What was that all about, and why was there no JOD investigation? Outrageous! Ohb well, just business as usual. The bankers support the politions, the pols protect the bankers, and the middle class gets fed to the lions.
JD| 6.20.12 @ 1:08PM
You are correct in saying that FDIC insurance is a problem. When government backs something, it tells the market that it shouldn't bother scrutinizing its solvency anymore. This causes undue risk-taking that leads to insolvency to occur. The same became true of subprime mortgages once the government started backing them.
THKrupp| 6.20.12 @ 5:40PM
A big part of the problem is that these banks with hedge fund divisions are one in the same entity as the bank where your savings are depositied... These divisions should be separate so that one does not effect the other. A bank and a hedge fund should be two very different entities. When you invest in a hedge fund you go in with an understanding of increased risk. When you put your money in the bank you are assuming a certain level of conservativism in the banks investments. FDIC insurance is a good thing for the consumer. It gives a person confidence that their life savings will not evaporate tomorrow. It is insuring the consumer not the bank. The bank should be allowed to go broke but the consumer should recoup their monies up to the $200k limit. Theres nothing wrong with that.
JD| 6.20.12 @ 5:46PM
You're inventing arguments to justify the party line. They don't hold water.
When banks have government backing, no one does risk/reward tradeoffs in selecting a bank. Everyone just goes for the bank that offers the most, which is inherently the most risky one. Your "separate" argument avoids the real problem - government manipulating markets leading to bad investments. Merged banks increased the consequences of the problem, but the problem existed nonetheless.
You demonstrate ignorance of my point by suggesting that "FDIC insurance protects the consumer, not the bank." What it intends to protect doesn't matter - what it actually causes to happen matters. If we could somehow teach the liberals of this world that it is not "the thought that counts", but that RESULTS matter, we'd be so much better off.
THKrupp| 6.20.12 @ 6:06PM
Sorry Im not justifing any party line. I actually do agree with you that insurance from any entity tends to increase risk taking behavior. The safer a person feels the more likely the person will do an action. That being said we have had FDIC insurance for quite sometime without it causing problems. The problem comes from very large banks who were loaning money to people who couldnt afford to pay it back backed by government policies which encouraged both banks and people to take unnessesary risks. Everyone shares part of the blame in this. Bank regulators were not enforcing their own rules. Bankers were being paid not to care who they lent money to. People were borrowing money that they should not have been, with no down payment thinking that what they were buying was only going to go up in value. The banks were insuring themselves against loss with derivatives, thinking that someone else would be left holding the bag when the chickens came home to roost. It was not FDIC insurance that caused all this. It was a society that thought money was free and that markets would always go up.
THKrupp| 6.20.12 @ 6:11PM
I recommend that you read about the Free Banking Era of the USA. There were a lot more problems than what we have today except they were all on a smaller scale. Today all these banks are so intertwined that its like dominos. By separating the risker business from the conservative portion of the business you limit the amount of damage the risk taking portion can do to the whole.
THKrupp| 6.20.12 @ 6:37PM
If you want to point the blame at an insurance type of vehicle then I think you would be better off pointing the blame at derivatives. Those are what actually led banks to think they had their backsides covered. The problem was that they all went south at the same time.
JP| 6.20.12 @ 2:37PM
JP Morgan will turn a profit this quarter, despite the beating they took with this hedge fund. Their, sometime in the last year, saw trouble ahead. Investors can either take long or short positions. JP Morgan bet that certains investments it possessed would take losses; so, they created a hedge fund and bet that the market would go south. They were wrong. But, over-all their firm realized a $4 billion profit last quarter.
Not sure what all the fuss was about.
THKrupp| 6.20.12 @ 5:30PM
Congress was of course posturing. Its doubtful that members of congress even understand what these derivatives are. Its obvious that JP Morgan doesnt understand them as well as they like to think they do. I dont want to even pretend that I understand them. My concern is with a company that just a few years ago had large enough losses that they requested a bailout by the taxpayers yet they did not seem to learn from their mistakes. You would think as risk averse as banks are these days they would be hyper vigiliant about taking unnessesary risks. When a company is making decisions that effects the lives of every person in the country they need to be held responsible. By allowing banks to merge until they are too big to fail we are racheting up the level of risk that these decisions have on society. I dont mind people taking risks but negative effects shouldnt bring down the entire banking sector. Obviously that didnt happen in this case. Regulators have every right to be concerned about this and should investigate it. Thats their job. They werent doing their jobs before at all. The grandstanding by congress is a bit much though.
aware| 6.20.12 @ 6:08PM
The Senate is just getting a report from their banker.
5 of the members of the Banking Committee wouldn't be able to even mount a campaign, much less be (s)elected, without Jamie's money.
See: http://www.americanbanker.com/.....table=true
And it even worse when you consider their "staff".
This is just a show trial for the increasingly braindead "voters" to keep up the farce that their politicians are looking out for them.
Just watch the proceedings, Jamie is making a presentation. The entire political system is owned by the Jamie's of the world and the criminal accomplices holding office know this even if self absorbed partisans who voted for them don't.
Only a fool or a knave would write an article pretending there is an adversarial relationship between obvious partners in crime.