Jamie Dimon, the chairman and chief executive of JPMorgan-Chase, was until recently one of the few high-profile bankers who had both the credibility and the nerve to oppose stricter regulation of Wall Street. He had credibility because JPMorgan had managed to weather the 2008 financial crisis better than most of its rivals, emerging as the nation’s largest bank. As for nerve, Dimon has always been blessed with an abundance of it. He is the sort of man who doesn’t hesitate to describe regulatory proposals of which he disapproves as “anti-American” or “infantile.”
Dimon’s self-confidence may be unshakable, but his credibility as a critic of financial reform took a hit last month when he disclosed that JPMorgan’s chief investment office in London had lost at least $2 billion by selling the same kind of credit derivatives that nearly sank the U.S. economy four years ago. He attributed the loss to “errors, sloppiness, and bad judgment,” while lamenting that the news would play “right into the hands of a bunch of pundits out there.” (About that, at least, he was not wrong.) Dimon was quick to add that JPMorgan still expected to earn $4 billion this quarter—a point echoed by the financial industry’s defenders on Capitol Hill. At a House Financial Services Committee hearing the following day, Spencer Bachus (R-Ala.) tried to dampen the uproar over Dimon’s announcement, pointing out that the bank remained “one of the most profitable financial institutions in the country” and insisting that “there is no risk from this loss to depositors or taxpayers.”
That is beside the point. Next time the situation could be much worse—involving greater losses or a bank less able to absorb them—and without strong, well-enforced regulation, there is almost certain to be a next time. The nation’s biggest bank-holding companies, which have grown since 2008, are still free to make risky bets with federally insured money. If bankers win these bets, they get rich (or richer); if they lose too much, the government will bail them out in order to protect the economy from collateral damage.
It was to prevent the need for more such bailouts that Congress passed the Dodd-Frank Bill in 2010. Ever since then, lobbyists, including many from JPMorgan, have been trying to delay or dilute Dodd-Frank’s provisions. The financial industry has been especially intent on weakening the so-called Volcker Rule, which would forbid institutions that benefit from federal deposit insurance from speculating with depositors’ money. Lobbyists have argued that an exception to this rule should be made for hedging (that is, trading intended to offset the risks of a bank’s other investments). Dimon has said that the trades that lost JPMorgan so much money were part of a hedging strategy and so may not have been prevented by the Volcker Rule, as if that were an argument against the rule itself. In fact, it’s only an argument against making an exception for hedging—an exception Dimon supports. As Noam Scheiber of the New Republic put it, “If the classic definition of chutzpah is killing your parents and then pleading for mercy as an orphan, then Wall Street’s version is gutting a regulation and then claiming it’s pointless because it didn’t stop you from screwing up.”
Lobbyists have also tried to scuttle the Dodd-Frank rule that would require derivatives to be traded on transparent exchanges, allowing regulators to spot a big trading loss before it punches a hole in a bank’s balance sheet. The banks would prefer to keep such trading out of sight, which is one reason they now do much of it overseas. Gary Gensler, chairman of the Commodity Futures Trading Commission, has introduced a proposal that would apply Dodd-Frank’s new regulations to the foreign subsidiaries of U.S. banks. Together with the new transparency requirements, such a cross-border rule would probably have saved JP Morgan from its multibillion-dollar error.
Even more could be done to discourage banks from making dangerous bets. A financial-transaction tax, for example, would help curb reckless speculation by slowing it down. (It would also raise some needed revenue: Congress’s Joint Committee on Taxation estimates that a tax of just 0.03 percent on all transactions would bring in $350 billion over ten years.) Better still, Congress could simply go back to the defunct Glass-Steagall Act, which, by completely separating commercial from investment banking, prevented major financial panics for more than sixty years.
The real danger now is that Dodd-Frank will suffer the same fate as Glass-Steagall. Republican lawmakers and presidential candidate Mitt Romney have vowed to repeal it, and this is one campaign promise they are likely to keep. For them, and for too many Democrats, people like Dimon really are the masters of the universe: not infallible, perhaps, but smarter than politicians, regulators, and the ordinary consumers whose money they gamble with. The GOP is counting on voters either to forget what happened on Wall Street in 2008 or to remember it as a one-off event that no one could have predicted or prevented. But JPMorgan’s recent blunder is yet another sign that there are worse crises to come if Washington continues to let Wall Street write its own rules.