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<span class="cpf-viewbox-statusbar-content-pagination"> <a href="http://www.cnn.com/2012/05/14/opinion/black-jpmorgan-banks/"><span class="cpf-viewbox-statusbar-help"></span></a></span></div></div></td>
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<div class="cpf-deletable cpf-printOut-header-title"><font size="6"><b>Why JPMorgan gets away with bad bets<br></b></font></div>
<div style class="cpf-deletable cpf-printOut-header-byline">By William K. Black , Special to CNN<br><br></div>
<div style class="cpf-deletable cpf-printOut-header-dateline">updated 5:39 AM EDT, Tue May 15, 2012</div>
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<img alt="" class="cpf-printOut-body-content-img" src="http://i2.cdn.turner.com/cnn/dam/assets/120512022509-c1-j-p-morgan-sign-story-top.jpg"></div>
<p style class="cpf-printOut-body-content">
<span><span>Editor's note:</span> William K. Black is an associate
professor of economics and law at the University of Missouri-Kansas
City. A former senior financial regulator and a white-collar
criminologist, he is the author of "The Best Way to Rob a Bank is to Own
One."</span>
</p>
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<span>(CNN)</span> -- JPMorgan Chase can be considered a systemically
dangerous institution, which means that it is "too big to fail" because
the government fears that its collapse would cause a global financial
crisis.</p>
<p class="cpf-printOut-body-content">It is simply irrational to allow such an institution to exist, especially when it can easily incur a $2 billion trading loss.</p>
<p style class="cpf-printOut-body-content">Banks are more efficient
when shrunk to the point that they can no longer endanger the world
economy. But because JPMorgan and similar banks are the leading
contributors to Democrats and Republicans, neither political party has
the courage to order them to reform.</p>
<p style class="cpf-printOut-body-content">The Volcker Rule, which
aims to prevent insured banks from engaging in speculative bets, was
passed as part of the Dodd-Frank Act over the objections of Treasury
Secretary Timothy Geithner and almost the entire Republican
congressional delegation.</p>
<p style class="cpf-printOut-body-content">CNNMoney: JPMorgan investment chief out</p>
<p style class="cpf-printOut-body-content">Back in 2008 when the
financial crisis hit us hard, a host of large institutions were
destroyed. AIG, Merrill Lynch, Bear Stearns, Lehman Brothers, Fannie
Mae, Freddie Mac, Washington Mutual and Wachovia all suffered massive
losses on their toxic derivatives, particularly collateralized debt
obligations (CDO) and credit default swaps (CDS), better known as "green
slime." One would think everyone has learned a lesson. Jamie Dimon,
JPMorgan's CEO, now agrees that banks should not invest in derivatives.
But government subsidies have a way of encouraging fraud and
speculation.</p>
<p class="cpf-printOut-body-content">JPMorgan, the nation's largest
bank, receives an explicit federal subsidy (deposit insurance) and a
much larger implicit federal subsidy. It's improper for the megabank to
use these subsidies to speculate in derivatives. And yet it can do so
with hardly any serious regulatory consequences.</p>
<p class="cpf-printOut-body-content">
<span><span>Follow</span></span><span><span>and</span></span>
</p>
<div class="cpf-printOut-body-content">
<img alt="" class="cpf-printOut-body-content-img" src="http://i2.cdn.turner.com/cnn/dam/assets/120514054858-crowley-jpmorgan-the-hill-00002710-story-body.jpg"><span><span>Capitol Hill reacts to JPMorgan's loss</span></span>
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<div class="cpf-printOut-body-content">
<img alt="" class="cpf-printOut-body-content-img" src="http://i2.cdn.turner.com/cnn/dam/assets/120515120100-exp-sen-corker-calls-for-jp-morgan-hearing-00002320-story-body.jpg"><span><span>Sen. Corker calls for JPMorgan hearing</span></span>
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<div class="cpf-printOut-body-content">
<img alt="" class="cpf-printOut-body-content-img" src="http://i2.cdn.turner.com/cnn/dam/assets/120514121227-exp-point-bair-jp-morgan-00002001-story-body.jpg"><span><span>Sheila Bair on JPMorgan's loss</span></span>
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<p class="cpf-printOut-body-content">Financial institutions such as
JPMorgan love to buy derivatives because they are opaque, create
fictional income that leads to real bonuses and when (not if) they
suffer losses so large that they would cause the bank to fail, they will
be bailed out.</p>
<p class="cpf-printOut-body-content">The Dodd-Frank Act's Volcker Rule was designed to solve the problem.</p>
<p class="cpf-printOut-body-content">However, JPMorgan led the effort to
gut the Volcker Rule and the provision that requires transparency.
JPMorgan is the world's largest proprietary purchaser of financial
derivatives -- precisely what the Volcker Rule sought to end. The bank
claims that it does not engage in proprietary trading and that it
purchases derivatives solely to hedge. That claim is an example of what
Stephen Colbert meant when he invented the term: "truthiness."</p>
<p class="cpf-printOut-body-content">A hedge is an investment that
offsets losses in another investment. JPMorgan's supposed hedges aren't
hedges under accounting rules because they haven't been shown to perform
as hedges.</p>
<p class="cpf-printOut-body-content">JPMorgan bought tens of billions of
dollars of derivatives that increased its losses rather than reduced
them. It calls these anti-hedges "hedges" -- in other words, it
practiced "hedginess." The bank's approach to hedging is that it would
like to purchase a derivative if it deems that derivative to be a hedge
to something else and voila, it's a hedge.</p>
<p class="cpf-printOut-body-content">The draft regulations of the
Volcker Rule allow such faux hedges because JPMorgan lobbied to render
the rule useless. JPMorgan asserts that these inherently unsafe and
unsound anti-hedges are "hedges" as that term is defined in the draft
regulations implementing the Volcker Rule. But if hedginess is
permissible, the Volcker rule is unenforceable.</p>
<p class="cpf-printOut-body-content">It is a travesty for JPMorgan to be
able to create an additional $2 billion in losses through investments
that are supposed to be allowed only if they reduce losses. The
government must revise the regulations and reject JPMorgan's absurd
treatment of anti-hedges as hedges.</p>
<p class="cpf-printOut-body-content">Faux hedges are a common, dangerous
abuse and a lethal form of speculation. From 2003 to 2006, the
Securities and Exchange Commission caught mortgage giants Fannie Mae and
Freddie Mac violating hedge accounting to maximize their executives'
compensation. Fannie's faux hedges, like JPMorgan's faux hedges,
increased losses. The Justice Department failed to prosecute, and the
senior executives walked away wealthy. Their successors blew up Fannie
and cost taxpayers hundreds of billions of dollars.</p>
<p class="cpf-printOut-body-content">When a bank CEO is honest but
incompetent, faux hedges simultaneously increase risk and create a false
complacency that the hedge has offset the risk. This can cause
catastrophic losses.</p>
<p class="cpf-printOut-body-content">Dishonest bank CEOs use faux hedges
to loot the bank by creating fictional income and hiding real losses.
The fake income makes the CEO wealthy by maximizing his compensation.</p>
<p class="cpf-printOut-body-content">The current JPMorgan speculation in
derivatives weakens but will not kill the bank. If it and other
systemically dangerous institutions continue to engage in hedginess, it
is only a matter of time before we'll get a replay of the financial
crisis. And who'll lose out? Taxpayers like you and me, of course.</p>
<p class="cpf-printOut-body-content">The opinions expressed in this commentary are solely those of William K. Black.</p>
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<br clear="all"><br>-- <br>Art Deco (Wayne A. Fox)<br><a href="mailto:art.deco.studios@gmail.com" target="_blank">art.deco.studios@gmail.com</a><br>