Fox Finds The Villain Of JPMorgan Chase's $2 Billion Loss: Regulation
Research ››› ››› MARCUS FELDMAN
In the wake of a $2 billion trading loss sustained by the bank JPMorgan Chase, many economists have advocated for the strengthening of financial reform to prevent against reckless behavior. Not Fox, however, which has argued that the problem is too much regulation of Wall Street banks.
JPMorgan Chase Reveals $2 Billion In Trading Losses
NY Times: "JPMorgan Discloses $2 Billion In Trading Losses." From a May 10 New York Times article:
JPMorgan Chase, which emerged from the financial crisis as the nation's biggest bank, disclosed on Thursday that it had lost more than $2 billion in trading, a surprising stumble that promises to escalate the debate over whether regulations need to rein in trading by banks.
Jamie Dimon, the chief executive of JPMorgan, blamed "errors, sloppiness and bad judgment" for the loss, which stemmed from a hedging strategy that backfired.
The setback for JPMorgan may strengthen the hand of regulators in Washington who are now writing the rules for Dodd-Frank -- in particular the Volcker Rule, which restricts banks from trading with their own money.
JPMorgan's setback "casts doubt on Jamie's opposition and adds fuel to anyone who has been pushing for greater regulation," said Mike Mayo, an analyst with Credit Agricole Securities. "Oh, how the mighty have fallen." [The New York Times, 5/10/12]
Fox Argues That JPMorgan's Loss Shows That Financial Sector Regulations Don't Work
Fox's Cavuto Calls The Dodd-Frank Act A "Swamp" And A "Very, Very Expensive And Regulatory-Laden Law That Didn't Work." On the May 11 edition of Fox News' Your World, host Neil Cavuto interviewed Jim LaCamp of Macro Portfolio Advisors to discuss the JPMorgan Chase loss:
CAVUTO: It is weird if you think about it. I'm not condoning or forgiving -- getting a handle on what happened at this firm. But I guess I'm worried about the wrong people policing it.
LaCAMP: Yeah. I mean the last thing we need is another big bill, another new piece of regulation. They need to fix the one they have. They don't even understand the one they have. This administration has a history of putting together big bills with lots of news clips that put vague powers in the hands of unnamed regulators. They still don't even know what the Volcker Rule is. So rather than get all up in arms about this loss that isn't really going to hurt anybody but JPMorgan, how about clarifying the laws that we have? All it's done is make the big banks bigger, which is they were trying to prevent, and it's also driven up credit card fees for consumers, and driven up debit card fees for consumers. So they need to fix what they have first, and then worry about any new legislation.
CAVUTO: Alright. We have plenty of legislation and new rules that kicked in with Dodd-Frank, the new financial law that was supposed to, among other things, address errant or wild trading as it's known, one of the features that led to this JPMorgan fiasco. It gets kind of in the weeds, and I want to step out of that and just look at the swamp here. And the swamp is a very, very expensive and regulatory-laden law that didn't work.
LaCAMP: It didn't work at all, and they really just didn't define anything very clearly at all. Again, a lot of the rules that are in play -- put in place by Dodd-Frank put really vague powers in the hands of unnamed regulators. Nobody knows what's going on. The foxes are still running around the henhouses, but they are a lot smarter than those that build the henhouses. [Fox News, Your World with Neil Cavuto, 5/11/12, via Media Matters]
Fox's Gasparino On JPMorgan Loss: "Regulators Never Catch This Stuff. Regulators Are Bad At Regulation." On the May 14 edition of Fox News' Happening Now, co-host Jenna Lee interviewed Fox Business correspondent Charles Gasparino on the JPMorgan loss:
LEE: A quick final question though Charlie since you know Jamie Dimon. He has repeatedly said this was a stupid mistake.
LEE: A really stupid mistake. So how do you regulate stupid, even if it's in a smaller bank?
GASPARINO: My point is this: You're never going to regulate stupidity, right? It's always going to happen. Banks will take losses. By the way they lose a lot more money on other things they do that -- has nothing to do with Dodd-Frank, including lending to people. Here's why -- here's what you -- and by the way regulators never catch this stuff. Regulators are bad at regulation. Here's what the taxpayer should be worried about: How do we make these mistakes smaller? You make them smaller by not having such tremendous financial institutions.
These things are bigger than countries. I mean, Jamie Dimon controls a balance sheet probably as big as France. I mean this is -- we're at a point now where it's kind of absurd that we have banks this big, this powerful, this systemic to the global economy and ours.
And the only way to deal with this, it may not be easy, it may be messy, but you got to protect the American taxpayers. You're not going to protect them through regulation. We should point out, Dodd-Frank has been in effect. Jamie Dimon has Fed officials, the Fed is their chief regulator, camped out in their offices every day. And they missed this. You want to trust them on something else? [Fox News, Happening Now, 5/14/12, via Media Matters]
Fox's Morris: "Is The Regulation Now Hindering Wall Street's Ability To Make America Stronger?" On the May 12 edition of Fox News' Fox & Friends Saturday, co-host Clayton Morris interviewed former Lehman Brothers trader Larry McDonald, and asked whether too much regulation of Wall Street had played a role in the JP Morgan Chase loss of $2 billion:
MORRIS Alright, welcome back. Well JPMorgan Chase under intense scrutiny this week after losing $2 billion in what's being called a bad bet -- have you ever made a bet like that? Now lawmakers on Capitol Hill are calling for more regulation on the big banks, but is that what we need, more regulation? Larry McDonald is a former trader at Lehman Brothers who left just before it failed, you got out at the good time. He's also the author of the book "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers." Larry, nice to see you this morning.
McDONALD: Great to be here.
MORRIS: So the question, you know some are now calling as a result of this JPMorgan Chase $2 billion bet gone bad. We need more regulation, we need more regulation so something like this doesn't happen again. What do you say?
McDONALD: Well, you know, the bankruptcy at Lehman Brothers was very devastating to the global economy. But you have to remember, Jamie Dimon in the last 60 years is the best risk manager as a CEO. He's entitled to a bad quarter. The banks are even more regulated today than they were back in 2007. So I think that's the ultimate take-away from me right now.
MORRIS: Is regulation the answer, or is something else needed to be done?
McDONALD: Right now, I mean, I was in Wall Street 2004 to 2008, right here in New York, and I'm -- went on the lecture tour, I'm back on Wall Street now. It's like night and day. The regulations are at least double, triple what they were. So we have more regulation today. I think that there's a lot of pain, and I just don't want to see an overreaction at this time.
MORRIS: Is the regulation now hindering Wall Street's ability to make America stronger?
McDONALD: In some respects, the one thing I really talk about is mortgages. In 2005, 6, and 7, there was massive amounts of liquidity and mortgage availability.
MCDONALD: Today, because of regulation there really isn't that same infrastructure that we had back then, and that's hurting lending.
MORRIS: We've been hearing that it's simply the banks that aren't lending to individuals. You want to go out and buy a home right now, interest rates are the lowest they've ever been, but the banks won't loan to you. But it's really not the banks you're saying, it's more the regulation surrounding the banks and mortgages?
MCDONALD: Yes, it's a very long story but the whole CDO thing -- right now investors in that type of mortgage product won't buy them because they are looking at the robo-signing scandals. Investors don't trust the infrastructure, so they won't buy big piles of mortgages, which means that mortgage brokers around the country and banks can't sell them as easily as they could. [Fox News, Fox & Friends Saturday, 5/12/12, via Media Matters]
But Experts Say JPMorgan's Loss Is Proof That The Financial Industry Must Be Closely Regulated
Former Director Of CFTC's Trading Division: If Dodd-Frank Is Fully Implemented, It Would Protect Taxpayers, The World Economy, And The Banks Themselves. From a May 11 CNBC guest blog by Michael Greenberger, a former director of the Commodity Futures Trading Commission's Division of Trading and Markets:
If Dodd-Frank had been in effect, these trades would almost certainly have been required to be cleared and transparently executed. They would have been priced by objective clearing operations on at least a weekly basis for purposes of collecting margin against the losing nature of the trades. As the trades lost value, margin would have been called for on a regular and systematic basis. (The losses would never have reached $2 billion without much earlier and corresponding regular calls for margin.) The losing nature of the trades would have been transparent to market observers and regulators for quite some time and the losses would not have piled up opaquely. It is almost certain that, at the very least, the Fed (not wanting to exacerbate its reputation for throwing taxpayer money at "Too Big To Fail" (TBTF) problems), would have backed JP Morgan off these trades long ago.
If even the trades were not required to be cleared, they still would have had to be reported to the public and to the regulators.
Now, if and when Dodd-Frank goes into effect (and if it does, it will be over the likes of JP Morgan's huge and expensive lobbying efforts against implementation), not only will the American taxpayer and the world economy be protected, but these TBTF banks would be protected against their own concededly reckless and highly risky actions. [CNBC, 5/11/12]
Former IMF Chief Economist: "Continued Opposition To [Dodd-Frank's] Volcker Rule Invites Ridicule." Among the reforms instituted by the Dodd-Frank financial reform legislation was the enactment of the Volcker Rule, which restricts banks from engaging in proprietary trading that is not at the behest of their clients. In a May 11 blog post, Simon Johnson, a former chief economist at the International Monetary Fund, called for robust implementation of Dodd-Frank, and said that based on the JPMorgan experience, "[c]ontinued opposition to the Volcker Rule invites ridicule":
The lessons from JP Morgan's losses are simple. Such banks have become too large and complex for management to control what is going on. The breakdown in internal governance is profound. The breakdown in external corporate governance is also complete -- in any other industry, when faced with large losses incurred in such a haphazard way and under his direct personal supervision, the CEO would resign. No doubt Jamie Dimon will remain in place.
The SAFE Banking Act, re-introduced by Senator Sherrod Brown on Wednesday, exactly hits the nail on the head. The discussion he instigated at the Senate Banking Committee hearing on Wednesday can only be described as prescient. Thought leaders such as Sheila Bair, Richard Fisher, and Tom Hoenig have been right all along about "too big to fail" banks (see my piece from the NYT.com on Thursday on SAFE and the growing consensus behind it).
The Financial Services Roundtable, in contrast, is spouting nonsense -- they can only feel deeply embarrassed today. Continued opposition to the Volcker Rule invites ridicule. It is immaterial whether or not this particular set of trades by JP Morgan is classified as "proprietary"; all megabanks should be presumed incapable of managing their risks appropriately.
Dennis Kelleher and Better Markets are right about the broad need for implementing Dodd-Frank and they are particularly right about the problems that surround non-transparent derivatives. [The Baseline Scenario, 5/11/12]
Economist Jared Bernstein: Financial Markets "Will Neither Self-Correct Nor Self-Regulate. ... Therefore, They Need To Be Regulated." In a May 12 blog post, economist Jared Bernsteinsaid that although not entirely clear, "if the rules were properly implemented and enforced, Dodd-Frank would have prevented" JPMorgan's loss. Bernstein also pointed out that JPMorgan's loss constituted further evidence that the financial sector can't be trusted to self-regulate:
That's the most interesting part of this. The answer to the second question is not entirely clear, though I think if the rules were properly implemented and enforced, Dodd-Frank would have prevented this outcome. Hedge #1 would probably be legit but hedge #2 -- the one that blew up -- looks more like the type of proprietary trading the Volcker rule is intended to block. (The usually careful and reliable Allen Sloan gets this wrong today -- the facts of the case and the magnitude of the losses aren't even known yet and he's somehow determined that the case proves we don't need the protection of a Volcker rule.)
It's also possible that under Dodd-Frank transparency rules regarding derivative positions, market participants and more importantly, regulators at the Federal Reserve, would have seen that one bank -- actually one trader at one bank -- was getting cornered such that a reversal in the index had the potential to cause sudden and systemically dangerous losses.
But the fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk. Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JP's bet was unwound by the fact that the economy wasn't as strong as they thought). The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks.
And that is this: financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. [JaredBernstein.com, 5/12/12]
Reuters Financial Journalist Felix Salmon: "No Sensible Regulator Can Ever Trust The Banks To Self-Regulate." From a May 10 piece by Reuters financial journalist Felix Salmon, titled "JP Morgan: When basis trades blow up":
This time around, the basis-trade disaster has happened at JP Morgan, where the famous London Whale seems to have contrived to lose $2 billion on what was meant to be a hedging operation. And once again, although the details are still very murky, the culprit seems to be the CDS-cash basis.
Of course, this loss only goes to show how weak the Volcker Rule is: Dimon is adamant, and probably correct, in saying that Iksil's bets were Volcker-compliant, despite the fact that they clearly violate the spirit of the rule. Now that we've entered election season, Congress isn't going to step in to tighten things up -- but maybe the SEC will pay more attention to Occupy's letter, now. JP Morgan more or less invented risk management. If they can't do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate. [Reuters, 5/10/12]
Economist Paul Krugman: "We Need To Restore The Sorts Of Safeguards That Gave Us A Couple Of Generations Without Major Banking Panics." From a New York Times column by Nobel-Prize winning economist Paul Krugman, titled "Why We Regulate":
Just to be clear, businessmen are human -- although the lords of finance have a tendency to forget that -- and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they're allowed to take on.
It's clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics. It's clear, that is, to everyone except bankers and the politicians they bankroll -- for now that they have been bailed out, the bankers would of course like to go back to business as usual. Did I mention that Wall Street is giving vast sums to Mitt Romney, who has promised to repeal recent financial reforms?
What did JPMorgan actually do? As far as we can tell, it used the market for derivatives -- complex financial instruments -- to make a huge bet on the safety of corporate debt, something like the bets that the insurer A.I.G. made on housing debt a few years ago. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.
But the truth is that we've just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon. [The New York Times, 5/13/12]
Former Labor Secretary Robert Reich: JPMorgan Loss "Reveals How Fragile And Opaque The Banking System Continues To Be, Why Glass-Steagall Must Be Resurrected." From a May 10 blog post by former Secretary of Labor Robert Reich:
J.P. Morgan's lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule -- creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.
And now -- only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent, pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression -- J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, and poorly-executed and excessively risky trades that caused the crisis in the first place.
But let's also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan - along with its leader's cavalier dismissal followed by lame reassurance - reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed's recent recommendation that Wall Street's giant banks be broken up should be heeded. [RobertReich.org, 5/10/12]
Professor Of Corporate And Securities Law: "This Latest Debacle At JPMorgan Demonstrates That The Banks Cannot Police Themselves." From a May 11 Huffington Post article titled "JPMorgan Trading Loss Suggests Little Has Changed Since The Financial Crisis":
"This latest debacle at JPMorgan demonstrates that the banks cannot police themselves, and should not be trusted to do so," said law professor Frank Partnoy, director of the Center on Corporate and Securities Law at the University of San Diego. "At minimum, they should be required to disclose details about their derivatives, so their shareholders can understand what risks they are taking." [The Huffington Post, 5/11/12]
Fox Has A Long History Of Fighting Financial Sector Regulation
Fox Business Host Gerri Willis: "I Think Dodd-Frank Is More Trouble Than It's Worth." [Fox Business, Cavuto, 8/17/11, via Media Matters]
Special Report: Businesses Won't Invest Because Of "Uncertainty" Caused By Health Care Reform And Financial Regulation. [Fox News, Special Report with Bret Baier, 6/30/11, via Media Matters]
Fox's Asman: Health Care Reform, Financial Regulation Are "Holding The Economy Back." [Fox News, Happening Now, 6/2/11, via Media Matters]
Dobbs, Hannity Rehash Falsehood That Financial Regulation Law "Will Guarantee Bailouts In Perpetuity." [Fox News, Hannity, 7/15/10, via Media Matters]
On Hannity, Malkin Claims Financial Regulation Bill Will "Institutionalize And Make Permanent Financial Bailouts." [Fox News, Hannity, 4/21/10, via Media Matters]
Fox Falsely Suggests Financial Reform To Blame For Market Drops. [Media Matters, 5/21/10]
Fox's Carlson: Financial Regulation Reform "Was All Timed To The President's Benefit." [Fox News, Fox & Friends, 4/28/10, via Media Matters]
Right-Wing Conspiracy Theory: Obama Administration Colluded With Security And Exchange Commission On Goldman Charges To Gain Support For Financial Reform. [Media Matters, 4/19/10]
Fox Contributor Dick Morris On Financial Regulation: "Castro Doesn't Have Those Powers." [Fox News, Hannity, 3/29/10, via Media Matters]