[Vision2020] Dimon’s Déjà Vu Debacle

[Art Deco]

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May 20, 2012
Dimon’s Déjà Vu Debacle By PAUL
KRUGMAN<http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per>

Sometimes it’s hard to explain why we need strong financial
regulation<http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/index.html?inline=nyt-classifier>—
especially in an era saturated with pro-business, pro-market
propaganda.
So we should always be grateful when someone makes the case for regulation
more compelling and easier to understand. And this week, that means
offering a special shout-out to two men: Jamie
Dimon<http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per>and
Mitt
Romney<http://elections.nytimes.com/2012/primaries/candidates/mitt-romney?inline=nyt-per>.


I’ll come back shortly to the troubles at JPMorgan Chase, the bank Mr.
Dimon runs. First, however, let me talk about Mr. Romney, whose remarks
about those troubles were so off-point that they constitute a teachable
moment.

Here’s what the presumptive Republican presidential nominee said about
JPMorgan’s $2 billion loss (which may actually have been $3 billion, or $5
billion, or more, but who’s counting?): “This was a loss to shareholders
and owners of JPMorgan and that’s the way America works. Some people
experienced a loss in this case because of a bad decision. By the way,
there was someone who made a gain.”

What’s wrong with this statement? Well, suppose that someone — say, Jimmy
Stewart in the movie “It’s a Wonderful Life” — runs a bank that takes in
deposits and invests the money in various ways. And suppose that one of
those investments is a risky bet on some complex financial instrument, with
Mr. Potter, the evil plutocrat, on the other side.

If Jimmy Stewart’s bet pays off, we’re in Romneyworld: he’s made money, Mr.
Potter has lost money, and that’s that. But suppose Jimmy Stewart loses his
bet. If the bet was big enough, he no longer has enough assets to pay off
his depositors. His bank collapses, probably in a chaotic bank run that
takes down the whole town’s economy as collateral damage. Mr. Potter makes
money on the deal, but so what?

The point is that it’s not O.K. for banks to take the kinds of risks that
are acceptable for individuals, because when banks take on too much risk
they put the whole economy in jeopardy — unless they can count on being
bailed out. And the prospect of such bailouts, of course, only strengthens
the case that banks shouldn’t be allowed to run wild, since they are in
effect gambling with taxpayers’ money.

Incidentally, how is it possible that Mr. Romney doesn’t understand all of
this? His whole candidacy is based on the claim that his experience at
extracting money from troubled businesses means that he’ll know how to run
the economy — yet whenever he talks about economic policy, he comes across
as completely clueless.

Anyway, it goes without saying that Jamie Dimon is no Jimmy Stewart. But he
has, in a way, been playing Jimmy Stewart on TV, posing as a responsible
banker who knows how to manage risk — and therefore the point man in Wall
Street’s fight to block any tightening of regulations despite the immense
damage deregulated banks have already inflicted on our economy. Trust us,
Mr. Dimon has in effect been saying, we’ve got this covered and it won’t
happen again.

Now the truth is coming out. That multibillion-dollar loss wasn’t an
isolated event; it was an accident waiting to happen. For even as Mr. Dimon
was giving speeches about responsible banking, his own institution was
heaping on the risk. “The unit at the center of JPMorgan’s $2 billion
trading loss,” reports The Financial Times, “has built up positions
totaling more than $100 billion in asset-backed securities and structured
products — the complex, risky bonds at the center of the financial crisis
in 2008. These holdings are in addition to those in credit
derivatives<http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier>which
led to the losses.”

And what was going on as these positions were being accumulated? According
to a fascinating report in Sunday’s
Times<http://www.nytimes.com/2012/05/20/business/discord-at-jpmorgan-investment-office-blamed-in-huge-loss.html?_r=1&hp>,
the reality behind JPMorgan’s facade of competence was a scene all too
reminiscent of the behavior that brought down firms like A.I.G. in 2008:
arrogant executives shouting down anyone who tried to question their
activities, top management that didn’t ask questions as long as the money
kept rolling in. It really is déjà vu all over again.

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.

Will we get that kind of regulation? Not if Mr. Romney wins, obviously; he
wants to repeal Dodd-Frank, and in general has made it clear that he would
do everything in his power to set us up for another financial crisis. Even
if President Obama is re-elected, getting the kind of regulation we need
will be an uphill struggle. But as Mr. Dimon’s debacle has just
demonstrated, that struggle remains as necessary as ever.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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