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Friday, May 18, 2012

Banking backslide: deja vu

Special to The Japan Times

HONG KONG — The humiliating announcement of "stupid" losses of $2 billion, possibly more, by JPMorgan Chase could not have happened to a more appropriate guy, given how hard Jaime Dimon, the bank's chief executive, has argued against tougher banking regulations.

At various times in the last few months he described the Basel III rules that set stricter capital rules for banks as a recipe to "stifle growth," "extreme and excessive" and "blatantly anti-American."

He ridiculed Paul Volcker, the former chairman of the Federal Reserve and author of the so-called Volcker Rule that tries to ring-fence and protect commercial banking from risky investment banking, claiming that Volcker doesn't understand capital markets. At a JPMorgan dinner party in Dallas, Dimon astonished guests by abusing his critics as "infantile" and "nonfactual."

So, there is every reason now to re-address the hard questions about whether the TBTF (too big to fail) banks have too much power and whether and how they should be cut down to size. The biggest and toughest questions should be addressed to politicians, especially the U.S. Congress and President Barack Obama.

Do they have the guts to stand up for the public against the big bankers? Or have they, wittingly or unwittingly, sold out to the insidious power of "big bucks"?

Apologists quickly claimed that the losses were tiny in the short-term business of a $2.2 trillion mega-bank and they would hardly make a dent in quarterly profits, unless Dimon's throwaway comment that things could "easily get worse" proves to be true. The bank lost a heftier $15 billion in market value and a notch in its credit ratings. These were not losses by some "rogue trader," but were central to the bank's strategy and occurred under JPMorgan's chief investment office.

As Nils Pratley wrote in The Guardian, "This was a failure at mission control."

Matt Taibbi in the May 24 issue of Rolling Stone has chapter and verse and lots of amusing comments detailing how the "banksters" and their well-heeled lobbyist friends inside and outside the U.S. Congress have proved successful in watering down attempts to impose stiffer regulation.

In 2010 Obama hailed the passing of all 2,300 pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act, claiming that "These reforms represent the strongest consumer financial protections in history." He repeated the words, "In history" to emphasize his proud point.

Taibbi summed up the intent: "The new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy."

In short, there would be no more financial apocalypse, and even if disaster happened again — there we are hedging our bets — Obama promised that taxpayers "will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts. Period."

Yet, with regard to JPMorgan's losses, the silver-tongued Obama said if they had happened at a less stable bank, they could have required government intervention.

Unfortunately, the sad truth is that Obama has proved himself more of a patsy than his bold predecessor Franklin D. Roosevelt, who rewrote the rules of the U.S. economy after the Great Crash.

FDR single-mindedly forced the passage of a raft of laws to bring the activities of Wall Street into the light and to protect consumers via financial disclosures, proper exchange trading of stocks, commodities and futures, insurance — paid for by the banks themselves — on bank deposits, plus the Glass-Steagall Act to separate commercial banking from riskier stockbroking and investment banking. It worked for half a century.

Dodd-Frank has almost died before key parts of it have gone into effect. Michael Greenberger, a law professor and former regulator involved in the drafting of Dodd-Frank, says the campaign against the act has been "like a scorched-earth policy" of never-ending combat.

Banksters have deployed a multiplicity of interlinked techniques to undermine Dodd-Frank, particularly removing the teeth of regulations and inserting many loopholes, stalling key measures, and litigating against others. The Volcker Rule is still being written, and the Fed announced last month that it will not be implemented until 2014.

The bottom line is that, especially after the gutting of Dodd-Frank, the big banks are more dominant than ever, and it would be harder than ever for a government to let them fail.

When Obama promised that TBTF banks would never again be a threat to the financial system, the assets of America's top five banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs) amounted to 43 percent of U.S. gross domestic product; today the assets of the top five amount to 56 percent of GDP. To offer historical context, in 1970 the top five American banks held 17 percent of American banking assets. Today they hold 52 percent. JPMorgan, Goldman Sachs and Citigroup were among the top 10 donors to Obama's funds when he won the 2008 presidential election. Dare he bite the hands that feed him?

True, Obama blamed the worldwide economic collapse on "the reckless speculation of bankers" and told the assembled bankers in the White House that "My administration is the only thing between you and the pitchforks." But Obama has often proved himself finer with words than deeds. Witness the way that the administration has colluded with lobbyists in pulling Dodd-Frank's teeth.

Former International Monetary Fund chief economist Simon Johnson, an economic professor at the Massachusetts Institute of Technology, points out that JPMorgan's risk management systems were regarded as the best on Wall Street and asks, "What does the 'best on Wall Street' mean when bank executives and key employees have an incentive to make and misrepresent big bets — they are compensated based on return on equity, unadjusted for risk? Bank executives get the upside and the downside falls on everyone else — this is what it means to be 'too big to fail' in modern America."

It is time for Obama and regulators to admit that — as the JPMorgan losses prove — the big banks have become too complex even for Jamie Dimon, let alone for ordinary managers to manage.

Start by enforcing a stricter Volcker Rule, then start cutting them to size to ensure that the big banks are no longer too big to fail.

Kevin Rafferty is editor in chief of PlainWords Media.

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