As Congress conducts hearings about JPMorgan Chase’s multibillion-dollar trading fiasco, the Mighty Mouse of Washington regulators, namely the Commodity Futures Trading Commission (CFTC), promises real action. Shortly, the CFTC may vote on “interpretative guidance.” Details of this unusual step will be revealed then. What’s outlined by the ambitious CFTC Chairman Gary Gensler provides hope that Morgan’s ill-fated position would have rung alarm bells well before it swelled and then erased 20 percent of the bank’s market value.
JPMorgan’s $2 billion-plus loss didn’t precipitate a taxpayer bailout. But this fire drill highlighted that banks still suffer from inferior controls. Neither JPMorgan’s CEO Jamie Dimon nor his Washington overseers saw the loss coming, a chilling replay of the housing bubble, which banks and regulators also claimed they could not anticipate.
Dimon paid attention to the trade only after reading news reports sparked by disgruntled hedge fund managers who complained of market manipulation due to a mammoth trader they dubbed the “London Whale.” The Whale’s outsized trades prolonged pricing anomalies that the hedge funds aimed to arbitrage. When Dimon examined the trade—actually, he made a few phone calls—he proclaimed the news attention a “tempest in a teapot.”
In testimony before the House Financial Services Committee on June 19, Dimon confessed to being “dead wrong” about the “tempest” comment. But confession rendered, Dimon adamantly rejected the concept that his bank should be restricted from making the London gambles that led to the loss in the first place. He grandstanded his “fortress balance sheet” of capital, conveniently ignoring the real bulwark, namely $25 billion in taxpayer bailout funds from TARP and $457 billion in cumulative cheap loans from the Federal Reserve, as documented by Levy Institute scholars. Dimon may believe JPMorgan is his car to wreck, but he forgets that Americans backstop the insurance. Dimon’s lack of contrition (other than for his shareholders) constitutes cold evidence that Wall Streeters won’t bridle gambling by themselves.
In an election year, when Wall Street constitutes the richest source of campaign funding for members of banking committees, and with Congress already paralyzed by partisan wrangling, little beyond hearings can be expected from Capitol Hill. Important reform initiatives, such as U.S. Sen. Sherrod Brown’s proposal to limit bank size, and U.S. Rep. Marcy Kaptur’s proposal to reinstate the Glass-Steagall separation between taxpayer-insured, safer (commercial) and uninsured riskier (investment) banking, remain “message” bills. At best, Congress won’t approve efforts to gut Wall Street reform, such as the effort to let foreign-based transactions such as those by the London Whale, escape American oversight. Meanwhile, industry lawsuits and lobbying stymies rulemaking to implement Wall Street reform.
Of the regulators testifying before House and Senate, Gensler – a former Goldman Sachs executive – alone promised more than an investigation. He outlined a five-part proposal that accelerates implementation of key Dodd-Frank Wall Street reform provisions. Firms and even individual trades would be subject to basic prudential rules, including reporting. Maryland law professor Michael Greenberger, a former CFTC attorney, explained that “the losing nature of the trades, therefore, would have been obvious to market observers and regulators for quite some time and the losses would not have piled up opaquely.” Regulators would see the trades directly, as opposed to through news reports of complaining hedge funds.
Dimon and Wall Street don’t want American prudential rules reducing gambling opportunities, which is why many were conducted outside the United States in the first place. AIG, to whom American’s paid $180 billion in bailout money, operated in a London subsidiary of a French bank. Lehman and Bear Stearns conducted their mischief through Cayman Islands affiliates.
But however Wall Street dresses up these alien affiliates as necessary to match foreign competition, the risk rebounds to America taxpayers. JPMorgan shareholders and thereafter American taxpayers, not the Queen of England, absorb the losses from London Whale.
The CFTC is a tiny, underfunded agency – the smallest of Washington’s bank supervisors. But if Chairman Gensler successfully garners the support of two other commissioners to advance his “interpretative guidance,” Americans may well enjoy more protection from overseas bank shenanigans.