What The Dimon Hearings Today Are Really About

The Senate Banking Committee long-ago proved itself to be not a truth-seeking body, but more of a combination woodshed and green room, in which distinguished financial guests get paddled mercilessly by one Party, while coiffed and flattered by the other.  Senators play at Congressional inquiry in the interest of the public good, while keeping a keen eye on the opportunity for scoring points in their internecine battles.  Today’s distinguished guest Jamie Dimon, JP Morgan Chase’s chairman and chief executive, got his chance to receive the paddle and the flatter.

In a perfect world, it’s nobody’s business whether a bank makes a mistake in risk management and loses a nominally large, but clearly manageable, amount of money.  The JP Morgan losses from the London Whale, compared to the magnitude of its balance sheet[1] as well as the magnitude of 2008-era banking write-downs[2], amount to a tiny hiccup.  In a risk management sense nobody should care[3].  In a public welfare sense as well, regardless of what the Senators say, nobody should care about the London Whale losses.

We live in a far from perfect world, however, and recent history (i.e. 2008) teaches us that large, private banks’ losses can become massive public liabilities pretty quickly.  Nevertheless, the London Whale losses are largely irrelevant.

Do not be confused by the real issues at stake here.  Nominally, Dimon was invited to respond to his bank’s recent trading losses attributed to the London Whale, which he did.  In truth, the topic is to what extent the so-called Volcker Rule, intended to limit proprietary trading by regulated banks, will be put into effect.

That debate matters, and it harks back to the central issue facing bank regulators today.  Namely, should deposit-taking banks be in the business of securities trading?  It’s a front-burner, Top 3-most-pressing-financial-issues-of-the-day question.

In other words, can we return to a Glass-Steagall Act era, in which deposit-taking banks are not also acting like hedge funds?  Those are the stakes, and they deserve serious discussion, such as we did not get today from the Senate Banking Committee.  We got lecturing and posturing but we did not get serious discussion.

Two other thoughts.

As a betting man, and as one with a view on where Senators’ bread is buttered, I think there’s no chance they have the foresight, financial independence or cojones to really roll back the union of deposit taking banks and proprietary trading banks.  We’re just not returning to the regulatory environment of the mid-1990s.[4]  It wasn’t that long ago, but the Clinton-era unleashing of these Too Big To Fail behemoths has created too many deep-pocketed interest groups.  So don’t hold your breath on that one.

Second, while it may not be obvious to everyone, Congress has a funny way of rewarding relatively positive risk management.  I don’t know Jamie Dimon and I have no reason to flatter him[5], but the firm has performed far better than most.  The London Whale losses stand out precisely because JP Morgan navigated the Credit Crisis much better than almost anyone.

I know it’s hard to ask the public in this environment of “Banking CEO = Greedy Vampire Deserving of Public Stake-Burning” to distinguish between good and bad actors, but the Senators should at least make the attempt.  The Senators do, after all, accept their campaign contributions.

So many other CEOs besides Dimon deserve the woodshed treatment.  In my opinion the most reprehensible banking CEOs (or any financial executive for that matter) are the ones who receive extraordinary personal pay before leaving massive public liabilities in his wake.  Ken Lewis at Bank of America, Sandy Weill and Vikram Pandit at Citigroup, Stanley O’Neal at Merrill Lynch, Franklin Raines at Fannie Mae, Joe Cassano at AIG, and Angelo Mozilo at Countrywide are easy examples, although there are many more.

If you can wrap your mind around good guys in the banking world, compared to that rogue’s gallery, Jamie Dimon would be one of the good guys.

[1] To give an idea of size, the approximately $2Billion loss from the London Whale trades represent less than 7% of their loan-loss reserves, 1% of their equity, and 0.5% of their investment portfoio

[2] During the Credit Crisis of 2008 many of the TBTF banks reported losses 10X this size, multiple times!

[3] Except obviously the risk management folks at JP Morgan.  When I say ‘nobody’ I mean the rest of us.

[4] that separated deposit-taking banks from securities trading banks

[5] In fact I kind of enjoyed making fun of him here.

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Another Corzine Rant

One last rant, and then I’ll rest a while on MF Global and Jon Corzine.[1]

Yesterday’s news[2] pointed out the regulators’ problem that only Corzine, and not his Treasury department subordinates like Edith O’Brien and Henri Steenkamp, had registered as professionals subject to the Commodity Futures Trading Commission (CFTC), the primary regulator of a trading shop like MF Global.  The CFTC could more easily sanction registered members of MF Global for negligence, without having to prove criminal intent,[3] but only Corzine (of those 3) is registered and therefore subject to sanctions.

This matters, and it doesn’t matter.

This matters because it potentially focuses the CFTC’s main firepower on the top, where it should aim.  If anyone is to be responsible for a $1.6 Billion customer money ‘misplacement,’ that person should be the one in line for the $12.1 million severance package.[4]

It doesn’t matter because Corzine should always be the main focus of any regulatory probe in the first place.  Not only is he the relevant figure in the enterprise, but as I explained earlier, his subordinates could not credibly have acted on their own to commingle customer funds to satisfy margin requirements.  I just don’t believe it.


Please also see Arrest Jon Corzine Now

and Update on Jon Corzine by the MF Global Trustee

[1] At least until he’s arrested, or proven innocent.

[2] Sorry, it may be behind a pay wall, but I’ll summarize for you.

[3] This is somewhat analogous to OJ Simpson losing his civil case to the family of his murdered wife, while remaining ‘innocent’ in criminal court.  The standards of proof are WAY easier.

[4] Which Corzine declined following the bankruptcy filing of MF Global, to his credit.  But still.

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