<html><body><div style="color:#000; background-color:#fff; font-family:tahoma, new york, times, serif;font-size:10pt"><div style="RIGHT: auto"><SPAN style="RIGHT: auto">"To big to fail", is a good argument to return to smaller locally owned businesses and local credit unions. Putting more than 20%-95% of a market into one entity puts the entire nation at risk when it fails. "Don't put all your eggs in one basket" is an odd proverb forgotten. It is time to deregulate so small businesses can compete and large businesses have to play by the same rules as <SPAN style="RIGHT: auto" id=misspell-0><SPAN>everyone</SPAN></SPAN> else.</SPAN></div>
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<div style="RIGHT: auto"><SPAN style="RIGHT: auto">Just think if JP Morgan had not missed his planned voyage aboard the <VAR id=yui-ie-cursor></VAR>Titanic 100 years ago, this whole mess would have been <SPAN style="RIGHT: auto" id=misspell-0><SPAN>avoided</SPAN></SPAN>. </SPAN></div>
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<div style="RIGHT: auto"><SPAN style="RIGHT: auto"><SPAN style="RIGHT: auto" id=misspell-1>Donovan</SPAN> J. Arnold</SPAN></div>
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<DIV class="yiv181060183cpf-deletable yiv181060183cpf-printOut-header-title"><FONT size=6><B>Why <SPAN id=misspell-2 class=mark>JPMorgan</SPAN> gets away with bad bets<BR></B></FONT></DIV>
<DIV class="yiv181060183cpf-deletable yiv181060183cpf-printOut-header-byline">By William K. Black , Special to CNN<WBR><WBR></DIV>
<DIV class="yiv181060183cpf-deletable yiv181060183cpf-printOut-header-dateline">updated 5:39 AM EDT, Tue May 15, 2012</DIV></TD>
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<DIV><IMG class=yiv181060183cpf-printOut-body-content-img alt="" src="http://i2.cdn.turner.com/cnn/dam/assets/120512022509-c1-j-p-morgan-sign-story-top.jpg"></DIV>
<div class=yiv181060183cpf-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> </div>
<div class=yiv181060183cpf-printOut-body-content><SPAN>(CNN)</SPAN> -- <SPAN id=misspell-3 class=mark>JPMorgan</SPAN> 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.</div>
<div class=yiv181060183cpf-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.</div>
<div class=yiv181060183cpf-printOut-body-content>Banks are more efficient when shrunk to the point that they can no longer endanger the world economy. But because <SPAN id=misspell-4 class=mark>JPMorgan</SPAN> and similar banks are the leading contributors to Democrats and Republicans, neither political party has the courage to order them to reform.</div>
<div class=yiv181060183cpf-printOut-body-content>The Volcker Rule, which aims to prevent insured banks from engaging in speculative bets, was passed as part of the <SPAN id=misspell-5 class=mark>Dodd</SPAN>-Frank Act over the objections of Treasury Secretary Timothy <SPAN id=misspell-6 class=mark>Geithner</SPAN> and almost the entire Republican congressional delegation.</div>
<div class=yiv181060183cpf-printOut-body-content><SPAN id=misspell-7 class=mark>CNNMoney</SPAN>: <SPAN id=misspell-8 class=mark>JPMorgan</SPAN> investment chief out</div>
<div class=yiv181060183cpf-printOut-body-content>Back in 2008 when the financial crisis hit us hard, a host of large institutions were destroyed. <SPAN id=misspell-9 class=mark>AIG</SPAN>, Merrill Lynch, Bear <SPAN id=misspell-10 class=mark>Stearns</SPAN>, Lehman Brothers, Fannie Mae, Freddie Mac, Washington Mutual and <SPAN id=misspell-11 class=mark>Wachovia</SPAN> all suffered massive losses on their toxic derivatives, particularly collateralized debt obligations (<SPAN id=misspell-12 class=mark>CDO</SPAN>) and credit default swaps (<SPAN id=misspell-13 class=mark>CDS</SPAN>), better known as "green slime." One would think everyone has learned a lesson. Jamie <SPAN id=misspell-14 class=mark>Dimon</SPAN>, <SPAN id=misspell-15 class=mark>JPMorgan's</SPAN> CEO, now agrees that banks should not invest in derivatives. But government subsidies have a way of encouraging fraud and speculation.</div>
<div class=yiv181060183cpf-printOut-body-content><SPAN id=misspell-16 class=mark>JPMorgan</SPAN>, the nation's largest bank, receives an explicit federal subsidy (deposit insurance) and a much larger implicit federal subsidy. It's improper for the <SPAN id=misspell-17 class=mark>megabank</SPAN> to use these subsidies to speculate in derivatives. And yet it can do so with hardly any serious regulatory consequences.</div>
<div class=yiv181060183cpf-printOut-body-content><SPAN><SPAN>Follow</SPAN></SPAN><SPAN><SPAN>and</SPAN></SPAN> </div>
<DIV class=yiv181060183cpf-printOut-body-content><IMG class=yiv181060183cpf-printOut-body-content-img alt="" src="http://i2.cdn.turner.com/cnn/dam/assets/120514054858-crowley-jpmorgan-the-hill-00002710-story-body.jpg"><SPAN><SPAN>Capitol Hill reacts to <SPAN id=misspell-18 class=mark>JPMorgan's</SPAN> loss</SPAN></SPAN> </DIV>
<DIV class=yiv181060183cpf-printOut-body-content><IMG class=yiv181060183cpf-printOut-body-content-img alt="" 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 <SPAN id=misspell-19 class=mark>JPMorgan</SPAN> hearing</SPAN></SPAN> </DIV>
<DIV class=yiv181060183cpf-printOut-body-content><IMG class=yiv181060183cpf-printOut-body-content-img alt="" src="http://i2.cdn.turner.com/cnn/dam/assets/120514121227-exp-point-bair-jp-morgan-00002001-story-body.jpg"><SPAN><SPAN>Sheila <SPAN id=misspell-20 class=mark>Bair</SPAN> on <SPAN id=misspell-21 class=mark>JPMorgan's</SPAN> loss</SPAN></SPAN> </DIV>
<div class=yiv181060183cpf-printOut-body-content>Financial institutions such as <SPAN id=misspell-22 class=mark>JPMorgan</SPAN> 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.</div>
<div class=yiv181060183cpf-printOut-body-content>The <SPAN id=misspell-23 class=mark>Dodd</SPAN>-Frank Act's Volcker Rule was designed to solve the problem.</div>
<div class=yiv181060183cpf-printOut-body-content>However, <SPAN id=misspell-24 class=mark>JPMorgan</SPAN> led the effort to gut the Volcker Rule and the provision that requires transparency. <SPAN id=misspell-25 class=mark>JPMorgan</SPAN> 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: "<SPAN id=misspell-26 class=mark>truthiness</SPAN>."</div>
<div class=yiv181060183cpf-printOut-body-content>A hedge is an investment that offsets losses in another investment. <SPAN id=misspell-27 class=mark>JPMorgan's</SPAN> supposed hedges aren't hedges under accounting rules because they haven't been shown to perform as hedges.</div>
<div class=yiv181060183cpf-printOut-body-content><SPAN id=misspell-28 class=mark>JPMorgan</SPAN> 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 "<SPAN id=misspell-29 class=mark>hedginess</SPAN>." 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.</div>
<div class=yiv181060183cpf-printOut-body-content>The draft regulations of the Volcker Rule allow such <SPAN id=misspell-30 class=mark>faux</SPAN> hedges because <SPAN id=misspell-31 class=mark>JPMorgan</SPAN> lobbied to render the rule useless. <SPAN id=misspell-32 class=mark>JPMorgan</SPAN> 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 <SPAN id=misspell-33 class=mark>hedginess</SPAN> is permissible, the Volcker rule is unenforceable.</div>
<div class=yiv181060183cpf-printOut-body-content>It is a travesty for <SPAN id=misspell-34 class=mark>JPMorgan</SPAN> 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 <SPAN id=misspell-35 class=mark>JPMorgan's</SPAN> absurd treatment of anti-hedges as hedges.</div>
<div class=yiv181060183cpf-printOut-body-content><SPAN id=misspell-36 class=mark>Faux</SPAN> 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 <SPAN id=misspell-37 class=mark>faux</SPAN> hedges, like <SPAN id=misspell-38 class=mark>JPMorgan's</SPAN> <SPAN id=misspell-39 class=mark>faux</SPAN> 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.</div>
<div class=yiv181060183cpf-printOut-body-content>When a bank CEO is honest but incompetent, <SPAN id=misspell-40 class=mark>faux</SPAN> hedges simultaneously increase risk and create a false complacency that the hedge has offset the risk. This can cause catastrophic losses.</div>
<div class=yiv181060183cpf-printOut-body-content>Dishonest bank <SPAN id=misspell-41 class=mark>CEOs</SPAN> use <SPAN id=misspell-42 class=mark>faux</SPAN> hedges to loot the bank by creating fictional income and hiding real losses. The fake income makes the CEO wealthy by maximizing his compensation.</div>
<div class=yiv181060183cpf-printOut-body-content>The current <SPAN id=misspell-43 class=mark>JPMorgan</SPAN> speculation in derivatives weakens but will not kill the bank. If it and other systemically dangerous institutions continue to engage in <SPAN id=misspell-44 class=mark>hedginess</SPAN>, 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.</div>
<div class=yiv181060183cpf-printOut-body-content>The opinions expressed in this commentary are solely those of William K. Black.</div></DIV>
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