Elizabeth Warren is tearing up the airwaves this morning with her call for JPMorgan CEO Jamie Dimon to resign from the NY Fed. (Readers will no doubt recall that the institution charged with controlling our money is owned by the banks in part. The New York Fed, primus inter pares, is controlled in part by JP Morgan.)
See her on CNN and CBS. Huffington Post has the story here. Warren:
After JP Morgan CEO Jamie Dimon’s Meet the Press interview today about the company’s recent $2 billion loss, consumer advocate Elizabeth Warren renewed her call for stronger financial regulations on Wall Street, and greater accountability, asking Dimon to resign from the Board of Directors of the New York Federal Reserve Bank and demonstrate to the American people that Wall Street will take responsibility for its risky gambles.
And Scott Brown? Busy no doubt collecting money from Wall Street to advance their interests, and making fake videos of himself playing basketball.
bostonshepherd says
If this is what counts as economic and regulatory analysis, Warren is a blithering idiot:
I haven’t heard such blatantly political red meat since, since….Ted Kennedy. It’s a Mix Master of logic:
(1) Banks are IN THE BUSINESS to take risks. Like writing commercial and residential real estate loans. Like providing businesses with credit. Like facilitating complex global financial transactions. Like making a market in various equities, fixed-income securities, and commercial paper. It’s all risky. And there is little way to regulate it all (see: Bernie Madoff.) Dodd-Frank/the Volker Rule are unworkable, unmeasurable, and unverifiable. And now unaccountable, too (see: CFPB.) APPL lost billions in shareholder value recently. Where’s the outrage?
(2) It’s the government (Treasury and the Fed) that uses taxpayer money to bail out the banks, like insuring deposit accounts up to $250,000, so someone need to regulate government’s slush fund. It’s like the bartender yelling at an alcoholic to quit drinking.
(3) Lobbying is a political, Congressional creation, regulated by them, too. Stop telling us we need more regulation but fewer lobbyists because regulation CREATES lobbyist. Progressive proposal: 100% regulation, 0% lobbyists? Result: North Korea.
Someone needs to reintroduce moral hazard to the marketplace. The world of finance and banking is too complicated to fine tune to the satisfaction of progressives like Warren; She couldn’t do it if she had an office next to Dimon’s. She’d ban scissor if she could so kids would never again run with them in hand.
Make it simple. Want to underwrite and hold complicated derivatives too complicate to value and market to market? Go ahead. Knock yourself out but you can’t use the FDIC or FSLIC to insure deposit accounts. Message to banks, shareholders and depositors, you’re on your own.
I’d quickly think twice about keeping uninsured checking at B of A (I may move it anyway to avoid the fees.)
petr says
.. that doesn’t make the rest of us complicit.
Banks are in the business of UNDERSTANDING risk. This is clearly different that a knee-jerk willingnes to simply take risks. This understanding they then use to make decisions. What is clear, besides your lack of clarity on the issue, is that banks have been thoroughly incompetent at their core competency: UNDERSTANDING RISK. You don’t, for example, lose 2billion at a pop if you properly understand risk.
You’re so precious. First you simply simplify with your “Banks are IN THE BUSINESS to take risks” then you say there are complexities beyond the ken of progressives. bigot.
David says
it sure seems as though banks were remarkably stable, and the economy relatively crisis-free and generally on a positive trajectory, for the decades during which Glass-Steagall was in effect. The only times this century when we’ve had crisis-level economic problems due to banks falling apart was a few years before Glass-Steagall was enacted, and a few years after it was gutted. But I’m sure that’s total coincidence.
bostonshepherd says
but the invention of derivatives makes comparing pre- and post Glass-Steagall hard if not impossible.
That said, I think my suggestion that derivative trading should be prohibited if the bank doing the trading wishes to hold federally-insured deposit accounts. That would bifurcate the banking industry much like Glass-Steagall did. Without all the regulatory uncertainty.
petr says
… on on using a regulation to avoid…er… ah… regulation?
The mind, it reels. The gob, it is smacked. The lurch, we are left in it.
bostonshepherd says
as long as it is easily followed, is easily enforceable, and serves some purpose, say, oh, like bank capital requirements.
The problem with 2,000 pages of Dodd-Frank is that it has none of these attributes. It’s unfathomable. The Volker rule cannot be put to paper because, like pornography, it’s in the eye of the beholder. That’s not an effective regulation because it is discretionary.
Sorry, good intentions don’t count.
bostonshepherd says
Yes, banks must UNDERSTAND risk; I never implied otherwise. But they still are in the business of taking them. That’s how they make money. If they don’t understand them, they go bankrupt. Like Fannie and Freddie next to whom Jamie Dimon looks like Nostradamus.
And if Dimon’s shop can’t calculate the derivatives they hold, and they go broke, what’s it to you? As long as the taxpayer is not put at risk, and losses are not socialized, the potential for failure should temper their risk taking.
Dodd-Frank does exactly the OPPOSITE.
sabutai says
Banks are in business not to make, or understand risk.
They are in business to make money.
In the 20th century, that meant understanding risk. In the 21st, in means buying those politicians that can be bought, paying to replace that can’t, and hiring a bunch of lawyers to acquire a patina of legitimacy. Banks are very good at what they do, which is why everyone who isn’t a bank official gets screwed during times like these.
Mr. Lynne says
… from Jared Bernstein, quoted from Ezra today (emphasis mine):
bostonshepherd says
What Bernstein writes is likely true, and I am not arguing against regulation of the banking industry. That’s why we have the federal reserve banking system, state banking commissions, and the Basel Accords.
The reason for all this risk-taking is that the banking industry has no fear of failure. No more moral hazard. No more ruined careers, worthless bank stock, and wiped-out shareholders. Depositors, as long as their accounts are “guaranteed,” similarly do not care.
Compare and contrast with faltering Yahoo, bankrupt Kodak, or soaring Apple. They mind their high-wire acts, and perform without a net. Why should derivative-trading banks be any different?
Mr. Lynne says
… ‘fear of failure’ and would concede that the moral hazard of taxpayer bailouts contribute to it. I’d also say that the system has forgotten how to asses value in longer time-frames and that this creates a moral hazard that mere failure can’t ameliorate. I think we’ve systemically gone beyond the ‘fear of failure’ methods that make free markets theoretical meritocracies by their consequentialism and that these mechanisms just don’t work anymore. Failure certainly hasn’t done much to repress CEO pay for example.
Why should derivative-trading banks be different? Because the entire system happens to be leaning on them, putting the whole of all of our financial well-being subject to risks we can’t even ascertain because of the lack of transparency in that market. Moreover, the participants in that market can’t even properly assess the risk in their participation because of the same opaqueness. An opaqueness deliberately designed by the participants and actively protected with regulatory capture thanks to insane campaign finance laws. There is more money to be made in such a system because positions are more easily leveraged when risk, which is already hard to assess, becomes nearly impossible to assess. When it is said that there were regulators who ‘saw this coming’, what they ‘saw’ wasn’t the specifics of leverage (although the capitalization requirement problem was easy to see by itself for products that were essentially insurance) but that the rules as they existed were vulnerable to over extension of risk by otherwise rational actors.
More here and here.
SomervilleTom says
I’d like us to be more specific and concrete about our language here. The “fear of failure” means absolutely nothing when “failure” is at worst a few days of bad press.
There is a different way. I suggest that when an institution like JP Morgan fails like this, the principals be on the street begging for food. Take the houses. Take the cars. Take the career. Part of why these people have no fear because they have nothing to fear.
We have no problem throwing people in jail for years after minor drug violations. These same Wall Street tycoons beat the doors down to make bankruptcy inaccessible to regular people who fail. Isn’t it time for some “tough love” for bankers?
I think it’s time to put some real fear into these bankers. I think it’s time to make an example of Mr. Dimon. I want to see him pounding the streets hoping to land a $9/hour job working a register at Best Buy or pulling coffee at Starbucks. I want to see him promising the state once a week that he is diligently looking for work, in order to get the $658 his family desperately needs that week. I want him awake at nights knowing that his gifted and vulnerable children are facing a choice between no college at all and a lifetime of crushing debt.
We need to help Mr. Dimon learn what FAILURE means.
Mr. Lynne says
… that I’m using it here (the operating force behind making a market ‘honest’) is to mean the failure of the market action in question. That is – in theory – what’s supposed to keep people from being stupid with money is the fear of losing it. Thus such fear is a necessary operating component to a well functioning market because its an important component to making the actors in the market rational. My point here is that the mitigating power of this fear is greatly diminished these days.
Certainly businesses fail in many other ways and fail many interested people, as you well explain above, but that’s not the fear I was referring to.
SomervilleTom says
It seems that Mr. Dimon’s personal net worth is in the neighborhood of $200M.
I suggest that Mr. Dimon, therefore, be held personally responsible for restitution of the $2B he lost, so that no taxpayer money is at risk. After he liquidates his personal holdings, he will only have $1.8B left to pay down.
He should not be allowed to discharge this obligation through bankruptcy. I’m sure he and the government can work out payment terms, similar to those offered to the average working stiffs who staff 7-11s and gas stations throughout America. Until the taxpayers are whole, he and his family should have nothing.
whosmindingdemint says
if banks remain unaccountable? There on both sides of every deal and when thing go wrong, they pull the Cleavon Little routine from Blazing Saddles:
Pay up or shoot myself in the head.
Greece is just about ready to show these Armani clad a-holes the international sign of quality.
Can’t get blood out of a stone. Oh geez, Standard and Poor might lower the rating again. Ooh, scary. They ought to be in handcuffs.
bostonshepherd says
Like any other corporation, banks and their leadership should face the consequences of mismanagement. It sounds like we both agree on that.
Except I think banks should suffer the same fate as Kodak…go out of business. How would you like banks to be “accountable?”
danfromwaltham says
Prof. Warren said “asking Dimon to resign from the Board of Directors of the New York Federal Reserve Bank” I like the Mitt Romney in Elizabeth, she likes to “fire people”. Now does she feel the same about anyone in the Obama Adm. who signed off on the taxpayer backed loans to Solyndra? Should they too, be held accountable and be fired?
From what I recall, Bush Adm. rejected the loans (only thing they got right) but Obama Adm gave the okay.
whosmindingdemint says
Program dates back to 2005
The Energy Department’s loan guarantee program was created as part of the Energy Policy Act of 2005, passed by a Republican-controlled Congress and signed by Bush.
In his signing speech, Bush lauded the bill’s support for clean technology, though he didn’t specifically mention the loan guarantees.
The loan guarantees were designed to “support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks.”
Republicans, including Bush, emphasized the program’s benefits for nuclear energy and biofuels. The president touted the new energy law in his 2007 State of the Union address. His energy secretary, Samuel Bodman, regularly mentioned the loan guarantees in speeches on renewable energy. The Energy Department issued its final rules for the program in 2007, along with a list of 16 companies that made the cut for to apply for its first round of awards, and Solyndra was among them.
House Republicans investigating Solyndra have claimed that the Bush administration ultimately rejected the Solyndra loan, but that’s not quite the case. Democrats on the House Energy and Commerce Committee and news media point out that Bush energy officials wanted to get the loan closed on their way out the door — it was listed as the first of their “three highest priorities through January 15.” (Obama took office Jan. 20, 2009.) But the Energy Department’s credit committee held things up for more analysis.
“The number of issues unresolved makes a recommendation for approval premature at this time. Therefore, the committee, without prejudice, remands the project to the LGPO [Loan Guarantee Program Office] for further development of information,” the committee said.
It noted Solyndra’s project “appears to have merit.” But the clock had run out.
That didn’t keep Bush from touting the loan guarantee program on his way out of office. On Jan. 6, 2009, in remarks on conservation and the environment from the Eisenhower Executive Office Building, he said, “We dedicated more than $18 billion to developing clean and efficient technologies like biofuels, advanced batteries and hydrogen fuel cells, solar and wind power, and clean, safe nuclear power. We’re providing more than $40 billion in loan guarantees to put these technologies to use.”
Ultimately, the Bush administration program didn’t finalize a single loan guarantee.
Now, where were we, og yes, bankstas…
danfromwaltham says
This is great additional info, not sure if some of your post was cutoff….
My question is this. Are the people who gave the loan approval to Solyndra, still employed? I do not care if they are Bush people, or even Reagan or Clinton appointees. Are they still employed in the federal government and worse, is their boss still working? Let’s not have a double standard, that is all. If Dimon needs to walk the plank, so do the dummies that loaned billions to these solar companies that are going belly-up. We are talking similar losses, agree?
petr says
A loan approval is a distinctly different beast than derivative trades: wrt JPMorgan the losses could have been even greater; there’s no rule saying that they had to limit their losses to $2billion; the so-called ‘London Whale’ took such a hugeous position in the market that the rest of the market turned against him; no sane banking practices countenance such a large position; JPMorgan should never have allowed ‘the London Whale’ to get to such a position. The Whale, to date, has not been fired but his boss has stepped down.
With Solyndra there was always a chance that the company would go belly up, most startups do, and that the principle would be lost: that’s why the loans were ‘guaranteed‘. And the loss was as a specific result of managements inability to get further credit: somebody deliberately pulled the plug, probably somebody in the Obama administration, saying that they weren’t willing to risk any more money, which at the time was 500 million. That’s how banking is supposed to work: you give someone credit until they prove they can’t handle it and then you cut them off and take a loss. If they can handle it, you both win. That’s part of business. Solyndra is still unwinding through the bankruptcy process so there is a chance that creditors will see some (but most likely not all) of the 500 million loan.
bostonshepherd says
A private bank can’t/shouldn’t be allowed to place derivatives, but it’s OK for the Dept. of Energy to guarantee a loan?
“That’s part of business”? Petr, what do you do? Hope you’re not in commercial banking or private equity.
Mark L. Bail says
amount of cash reserves to be able to cover the loss. Banks shouldn’t be allowed to gamble and over-leverage to the point that they bring an entire company and the business world to its knees. There is a difference between banks and other businesses in that banks handled the life blood of the economic system. They aren’t like Apple that makes stuff that can be replaced by competitors’ products. Gum up currency, everyone suffers.
In this case, the problem wasn’t that JPM lost $2 billion. Rather it was that Dimon campaigned explicitly against regulations that might have prevented the loss. The financial system was too smart to make the same mistake twice. Well, maybe. Maybe not.
SomervilleTom says
While you’re pounding the table about a failed investment of $535M in Solyndra, you are ignoring the elephant in the room: CHINA.
The government of China invested FORTY NINE BILLION DOLLARS in renewable energy in 2010. That’s roughly TEN TIMES as much as the loss in question. While parochial right-wing anti-government pro-petroleum navel-gazers pound the table and bang the drum about one failed investment, the largest threat to American sovereignty in the world today is working hard to own the entire energy industry of the future.
The lunacy and or ignorance and or naivete of worrying about Solyndra while China locks down THE dominant role in humanity’s energy future is staggering.
bostonshepherd says
to allocate capital in an manufacturing industry whose global returns are negative. There is no magic to the manufacturing of PV panels or wind turbines, it’s like building cars, PC’s or assembling Windex spray-bottle nozzles. There’s no “locking” anything down let alone an “entire industry.” Stop hyperventilating.
If China can build a better yet less-expensive solar panel or 4-MW turbine than in the US, let’s buy them from China. We’ll sell them Boeing jets, or Caterpillar excavators. Doesn’t that make sense? Aren’t we better for that trade-off?
The problem — these are LOSER technologies because energy from solar and wind are 50 and 5 times more expensive than off KW off the grid, AND we need to parallel those sources with conventional power anyway. So from a capital allocation perspective, I’m happy to let China pour money into money-losing industries.
SomervilleTom says
Semiconductors were “LOSER technologies” until volume made them winners.
Where on Earth do you get the idea that the Chinese will allow us to buy their technology after we’ve transferred our energy addiction from crazy Arab states to China? You are apparently so blinded by your own fantasies that you don’t see the brick walls rushing towards us.
Petroleum is a finite resource. When it’s gone, it’s GONE. The economic impact of the climate changes that result from perpetuating our addiction to fossil fuels dwarfs the numbers we’re talking about here. When China owns the sustainable energy technology of the world, America will be forced to do China’s bidding — whatever that will be.
You really don’t seem to see the big picture, especially two or three decades out. You are proposing to literally power-dive this collective aircraft into the ground.
whosmindingdemint says
AND the New York Fed.
Somehow, a double standard in firing him from the Fed just doesn’t keep me up at night.
danfromwaltham says
Does Dimon receive a salary from the NY Fed Res? If not, then u r 100 percent correct.
howlandlewnatick says
So, as I understand, JPM bets the house limit, loses between 2 and 8B and has to show how upset they are before they shake down the people through their elected representatives. So they fire a woman. Give her 16M to shut up and probably the promise of a job at another oligarch. The classic “the buck stops down there someplace” gambit.
The Democrats and Republicans on queue blame each other and will soon talk reform to the proles ’till election time is over. In the meantime the “too big to fail” chant will be sung by the media shills and party apparachiks.
What other oligarch is waiting in the wings to drop the another shoe?
And why is the youth so cynical?
“Life is a dream for the wise, a game for the fool, a comedy for the rich, a tragedy for the poor.” –Sholom Aleichem
merrimackguy says
So they took a risk and it didn’t work out the way they expected. Are depositors funds in jeopardy? No.
I’m sure they have taken other risks that netted them $2 billion. Doesn’t make the papers.
Will stockholders suffer? Yes, but if they’ve been holding since 2008 Jamie Dimon’s leadership has worked out pretty well for them.
I don’t care about the NY Fed. Wall Street has their guy Geithner sitting right there in the Treasury Department.
petr says
2Billion represents face-saving here: they were using a well leverage 100 Billion that could have lost them many orders of magnitude more than that. Absent half-serious scrutiny, they probably would.
You are the only one claiming this is no big deal. Even Jamie Dimon has publicly said that this was stupid and reckless: imagine what he’s saying in private.
bostonshepherd says
Their entire market cap is $140 billion, and their balance sheet is >$2.3 trillion. 2011 profits were $19 billion.
I would agree that a $2 billion loss from a single position is huge, but what about their other positions? Profitable? I bet.
Now is the time for regulatory restraint. The shareholders, via the board, should determine Jamie Dimon’s fate, not Carl Levin.
petr says
This was a HEDGE, that was supposed to provide insurance against the loss of riskier investments
When you lose 2 Billion (so far, the thing isn’t yet completely unwound and estimates of a possible 5 billion before its over) on a HEDGE, you’ve lost control of your investments. Simple as that.
paulsimmons says
There are intellectually-honest analyses of this from the investment community that rebut that premise, as linked below.
From Politico:
And to the point of risk:
In the absence of fiduciary responsibility market mechanisms collapse.
whosmindingdemint says
screamed to let the banks fail in Sept 2008. McCain just confirmed the great emergency and Paulson paid off.
A year later the tri-corner hat people start littering my national mall with a lot of noise about “Let ’em fail.”
You want accountability in investment banks? Break ’em up and then let the weak ones, or the corrupt one – fail.
You want to keep them from failing (i.e. save themselves from themselves)? Enforce Dodd Frank. ban derivatives, bring back Glass-Steagal.
All this will require pissing off rich people.
bluhooey says
“Well look, first of all, JP Morgan is one of the best managed banks there is. Jamie Dimon the head of it is one of the smartest bankers we got and they still lost $2 billion dollars and counting precisely because they were making bets in these derivative markets.”
— President Obama in an interview with the hosts of “The View,” a women-only chat show on ABC, praising mega-bank JP Morgan Chase and its CEO but calling for additional financial sector regulations.
If Elizabeth Warren worked for Yahoo, she would be out of a job.
David says
she’d be working for a rapidly-failing company that has made bad move after bad move and seems likely to be gone fairly soon. I’m actually surprised they’re still around – does anyone still use Yahoo as their search engine? Just sayin’.