HARPER: JP MORGAN CHASE SCANDAL IGNITES SUPPORT FOR GLASS STEAGALL

The shocking admission on May 11 by JP Morgan Chase CEO Jamie Dimon that the bank had suffered a $2 billion loss on a bad derivatives bet at their London office has served as a painful reminder that nothing has really been done, since the financial meltdown of 2008, to fundamentally change the gambling mania with "other people's money" on Wall Street.  In just one week since the original Dimon admission, the price tag on the London derivatives blowout by JPMC has more than doubled.  As of today, the bank is acknowledging $4 billion in losses, and the figure is expected to reach $20 billion by the time the complex highly leveraged bets are unraveled.
 
The JPMC revalations are particularly embarrassing to President Obama, who has publicly praised Dimon as one of the most competent bankers on Wall Street, and who had him at the top of his list of candidates to replace Tim Geithner as his Treasury Secretary, should he win reelection.  Sources close to the White House have told me that the President and the First Lady maintain their personal bank accounts with Chase.  At least the President puts his money where his mouth is.

 
Far more important, the JPMC admissions have sent long-overdue shockwaves through Capitol Hill and through leading political circles around the country, provoking a revived demand for a simple and obvious solution:  Forget the 2,000 pages of gibberish in the Dodd-Frank bill, and forget the Volcker Rules which have not yet been written, and have already been repudiated by their namesake, former Federal Reserve Chairman Paul Volcker.  The simple solution is to repeal the 1999 Gramm-Leach-Bliley bill and reinstate the original 1933 FDR era Glass Steagall Bill, which created an absolute fire wall of separation between commercial banking and all the other speculative activities.  From 1933 through 2000, the US banking system was largely crisis-free, regardless of the ups and downs of the US and world economy.  Bankers, especially Wall Street bankers, knew that they could not legally gamble with depositors money. 

A bill to do precisely this is already introduced into the House of Representatives.  HR 1489, introduced last year by Rep. Marcy Kaptur (D-Oh.), with bipartisan support, already has more than 60 co-sponsors, and a surge of additional support has been generated by the JPMC debacle.  Suddenly, the obvious is obvious:  The Wall Street mess surrounding the collapse of Lehman Brothers and IAG, the trillions of dollars in taxpayers bailout of Wall Street, has done nothing to improve the situation.  The financial fiasco is not a thing of the past.  It is now and the near future unless a more serious solution is accomplished.  Both Houses of Congress are headed back to their districts for the Memorial Day holidays, to reconvene at the end of the month.  By then, the JP Morgan crisis will have likely mushroomed, and no one can even forecast the date when the European banking and sovereign debt crisis will blow up--whether in Greece, Portugal, Spain or Italy.  The degree of Wall Street exposure to the European debt crisis is enormous but incalculable.

Comments

[r whitman]

The real problem institutions in 2008 were not commercial banks. Bear Stearns, Lehman, AIG, Fannie, Freddie, and Merril Lynch were all non-regulated financial institutions at the time. Reinstating Glass Stegall only solves part of the problem. It is the interconnectness(?) of the system.

[Babak Makkinejad]

Iagree, that horse has alreay left the barn.

[different clue]

I have long admired Marcy Kaptur as a "real" Democrat (what some would dismiss as a "legacy" Democrat). I believe a trustworthiness test for long-term federal-level Democratic Officeholders would be how they voted on the various Free Trade Agreements (Kaptur voted against them all) and I need to add to that . . . how they voted on Graham Leach Bliley, if they were there at the time. I would trust the ones who voted against it at the time.

Would a simple repeal of GLB and simple re-instatement of the good old Glass Steagall solve "all" our problems? No. But it would let us solve the problems that were artificially created to begin with by the passage of GLB to begin with.

Restore Glass Steagall and hard-separate all present banks into their separated-function components. And let die any separated component which could not survive the Hard Glass Steagall ReImposition.

[E L]

Jesse Unruh: "Money is the mother's milk of politics."

[Walrus]

Glass Steagall is essential, but I don't believe its reinstatement will be able to stave off what is coming shortly.

The problem is that no one knows how counterparty risk is distributed. Dimon said that the "net" exposure of JPM is $50 billion.

..But of course that assumes the counterparties don't default - which is likely. Suggestions elsewhere are that JPM has bet very bullish and very big on Europe.

We are about to watch a rise in nationalism not seen since 1914. "Globalization" will not survive it.

[Morocco Bama]

Yep, that genie's not going back in the bottle.

[Joe]

The banks will change the new Glass Steagall bill so it is ineffective. Same as they have done with the Dodd-Frank Bill that really did not do much.

We will be paying for the next bank bailout.

Joe

[Bobo]

JP Morgan needs to call in all its so called derivatives and take the hit now and if not the government needs to force them to do it. While it is quite difficult to do such it can be done as if this grows to the $50B they will be at the governments doorstep looking for our assistance amongst many others.

Glass Steagall should be instituted as it was written a number of years ago and our government needs to tell the trading houses they are on their own which hopefully reduces the risks we have seen in the past years.

Keeping these trades open is only allowing the vultures to pick JPM's bones.

[The Twisted Genius]

Is the real problem that all the billions supposedly held by the one percenters just a lot of make believe fairy dust? Is this net exposure of JPM of $50 billion just an imaginary number? Did this $50 billion ever really exist anywhere? Perhaps none of this value really exists and we're just waiting for a kid to tell us that the emperor has no clothes. Sounds like a lot of tulip bulbs to me.

[Ken Roberts]

Nice idea, but I doubt it will fly.

The acronym LCBO was in use in Fed Reserve speechmaking about 1999, and stood for "Large Complex Banking Organization". Talks given about the risks of LCBO's to the system, need to understand and regulate better, etc.

I always thought it very amusing. Hereabouts, LCBO is the name of the government owned chain of liquor stores (Liquor Control Board of Ontario).

Not much difference really! Party on, investment banking dudes!

[chimneyswift]

I have always envisioned this as a magical cloud of calculus, but yes, sounds about right to me. The real facts of the matter can be seen in how much money is in the purely financial sectors of the economy versus the real economy of producers and consumers. Somewhere in the 90's the financial side began to balloon dramatically. I looked around and found this:

"
In the past 30 years, with growth in technology and financial innovation, finance morphed from being a service agent to a self-serving principal that is larger than the real sector itself. The total size of financial assets (stock market capitalisation, debt market outstanding and bank assets, excluding derivatives) has grown dramatically from 108 per cent of global GDP in 1980 to over 400 per cent by 2009 (II) . If the notional value of all derivative contracts were included, finance would be roughly 16 times the size of the global real sector, as measured by GDP. The agent now dwarfs the real sector in economic and, some say, political power."

Here:
http://www.fungglobalinstitute.org/publications/articles/putting-finance-to-work-for-the-real-economy-the-next-reform-16.html

I don't know who the fung institute is, but I learned about this situation during my degree work. Whether this money exists or not is not moot, but it is very much up for debate. The real tell for me is that it has never once been seen as inflationary, as any growth in the real money supply would be.

[rjj du Nord]

Is it not curious that the people who actually caused the losses are immune from the usual celebrity treatment by the media?

The face on the f***up is to be Drew and Dimon (mistakes were made PLUS the buck stops .... weeellll, somewhere). Iksil and Macris, the out-of-control European dealmakers, apparently are NOT fair game. Editorial discretion, I suppose. Respect for privacy. It's not as if they hosed around with a hotel maid or, in some mistaken fit of knight errantry, killed some kid.

Seems odd, though.

[Bill H]

Does anyone acknowledge that the fundamental problem is not how derivatives are traded, who trades them, in what volume they are traded, or whose money is used to trade them, but the derivatives themselves? These pernicious frauds have been causing financial catastrophes for thirty years. Does the name Orange County, California ring a bell?

[r whitman]

It is my understanding that derivatives are a zero-sum game. If JPMC loses 2, 5 or even 50 billion USD, who gains? Do we know thw counterparties in these transactions? Good time for the IRS to come calling.

[Redhand]

Don't bet on Obama supporting a return of Glass Steagall. He's as much a Wall St. Ho as the worst Repubs. To me, Robert Reich nails it in this article, "The Dog That Didn't Bark: Obama on JP Morgan." http://robertreich.org/post/23172076059

The extent to which Wall St, even after 2008, has bought both parties is more than a scandal: it's a moral threat to both our economy and political system.

[steve g]

To see how far the derivative markets
have come simply go to ETFdailynews.com.
There they list all the exchange traded
funds. You can "bet" on any type of
commodity. Precious metals to agriculture
products to long or short the Dow to
S&P. Some equal to or double or triple
the volatility factor of these idices. We
no longer "hedge" in the traditional sense.
Positions are now taken for price movements.
Dont like Greek or Spanish debt. Place your bet.
The volume of the contracts is staggering.

[William R. Cumming]

Bill H! Agree! WRC! There is no accurate existing estimate of outstanding derivatives world wide. In spring 1974 about to depart from IRS to another federal agency a group of young tax lawyers in the Chief Counsel's office asked the Chief Counsel, IRS, then the only political appointee in IRS other than the Commissioner to ask Main Treasury to launch a study of the taxation of derivatives. That study has yet to be conducted. The world stays afloat on the notion that the US dollar has value.

Apres US le deluge?

[Alba Etie]

I miss President George H Walker Bush . Recall in his administration many banksters went to jail . Nothing concentrates the mind perhaps as a pending indictment . Yes reinstate Glass Steagall , and also go and convict some of these criminals. The Magnetar mess would be a good place to begin searching for criminal intent . Blankfein out & out lied to Congress in testimony .
What I cannot understand is why all parts of our political spectrum cannot agree that our political proccess and governance has been subverted by monied interest in all political parties . The Tea Partyers & the Progressive Left need to find common ground here . Jamie Dimon et all are a clear & present danger to us all . ( We can all agree to disagree about abortion ,gun rights or gay marriage but surely we all need to stop the Wall Street Gangsters from ripping us off again )

[Ken Roberts]

Bill H ... I'll disagree. Derivatives are wagers, and wagering and other risk taking is basic human nature, essential for our survival.

What we need is to re-introduce some risk into the system. About 1 percent/year risk of total loss at a personally meaningfully level would be the right order. Corresponds to one major financial crash every 70 years, if risk is not allowed to occur over time. By personally meaningful, maybe jail time, not just loss of face and "other people's money".

The risk can even be random. Just need some in system. Does not have to be fair / proportional, though that is nice to have if can be accomodated as secondary objective. It is sort of like impedence matching in electronics. Life is chaotic, and we must have our financial systems including the players be similarly chaotic in their anticipations.

An interesting paper appeared when I went to a site looking for something in finance re rational actors. Didn't find that, but did find this:
http://arxiv.org/abs/1202.3025

Rather abstract, and haven't read it all, but the first couple of pages have nice diagrams which contrast a protection-buyer credit default swap vs a speculative CDS. Nice to see theoreticians are working on the system design considerations.

But on a seat of pants basis, it all comes down to re-introducing risk into the financial system which is attempting to match to the real world.

[steve g]

Matt Taibbi at Rollingstone mag online has
covered this case. JPMC used naked shorts
on some of these hedges, thus to cover their
positions they have to find a counterparty as
they did not own the underlying instrument.
If there is not enough open interest they
have to borrow whatever to close out their
position. You and I must have significant
margin requirements to even comtemplate this
because a short gone against you could go to
infinity whereas a long position only can go
to zero. This is why the large spread to cover.
Hence, the term short squeeze.

[r whitman]

Regardless of the naked short positions(this cut down on JPMC expenses by not having to borrow the underlying securities) it is still a zero sum game. Someone made $2 billion on the transactions and should be reporting a STCG to the IRS or Inland Revenue.

[Byron Raum]

Banksters went to jail then because the industry was a whole lot less powerful then. Today, banksters are the elite. None of them are ever going to jail, no matter what.

[Stephanie]

Dimon is at the center of the media storm because he runs the place and that's his job. He's also been the financial industry front man in the fight against new regulations for Wall Street. I suppose it is possible that these things went on for as long as they did without his having a clue, but I think it's unlikely. Dimon has been forthright in saying that "stupid" stuff happened but he's notably vague on the specifics of what went wrong and how. Time and further investigation will tell.

We're invariably told that some "out of control" or "rogue" trader/dealmaker(s) are responsible, but it's a question of the culture that makes such behavior possible. I suspect that they only become "rogue" when they lose......