$2 billion JP Morgan loss latest argument for regulation

Posted: May 19, 2012

EVEN THOUGH we hoped it had been neutralized, a grave threat to national security still exists.

No, it’s not al Qaeda and it’s not Iran. Short of acquiring a stray nuke, neither one of those entities could do nearly as much damage as the reckless gambling by big banks that almost blew up the world economy three years ago.

But even now when the danger has been revealed, some people want to ignore it.

That’s the message from Jamie Dimon, the swaggering CEO of JP Morgan Chase, the nation’s biggest bank. Last week, Dimon announced that JP Morgan had lost $2 billion — maybe $1 billion more — on investments that he called “hedges” (insurance) but that are no different from the wagers you place in a casino.

Sure, Dimon admitted that the bets were the result of “errors,” “sloppiness” and “bad judgment.” But he continued to insist, as he has for years — and backed up with millions for lobbying — that there is no need for government rules that would have saved JP Morgan from making the disastrous investment — or would ensure that the nation is spared a replay of the 2008-2009 near-meltdown.

After all, Dimon notes, JP Morgan made $19 billion in profits last year, way more than the loss. So it’s essentially none of the public’s business.

Wrong, so wrong. The JP Morgan experience shows that unless big banks are prevented by law from making high-risk bets, they won’t stop doing it. Dimon (and the heads of other big banks) know that if they get into trouble, the federal government will have to choose between bailing them out (again) and risking an economic catastrophe. If they lose, they are protected by federal depositors’ insurance or even a bailout — and if they win, they get to keep the profits. So why not roll the dice?

For those who have forgotten the near-death experience of three years ago, a refresher: For nearly 70 years, the United States was protected from a repeat of the Great Depression by the Glass-Steagall Act, which separated the functions of commercial banks (which take deposits from customers) from banks that make investments. The law was repealed in 1999, allowing for the functions to be consolidated, and exactly what the Glass-Steagall Act was created to keep from happening, happened: The banks’ bad bets threatened to bring down the entire financial system, and taxpayers paid $700 billion to bail them out.

But Wall Street banks continued to resist regulation, and the Dodd-Frank financial-reform legislation passed in 2010 was weaker than it should have been. Not satisfied, the banks have been waging what consumer champion Elizabeth Warren calls a “guerrilla war” to successfully delay implementation of parts of the law, in particular the Volcker Rule, (named for former Fed Chairman Paul Volcker), which supposedly would restrict risky investments. Even at full strength, the Volcker Rule would be a pale imitation of what’s really needed: An updated Glass-Steagall law that breaks up the big banks. That way, if they wanted to gamble, they can do it on their own dimes, not ours.

The JP Morgan Chase story is a warning that our national security is still threatened. This time, though, the “smoking gun” just might come in the form of economic collapse. n

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