This week the news cycle is still playing catch up on the fallout from a big story about an all too familiar crisis. Early last week came the news that JPMorgan Chase had lost $2 billion on a risky trading scheme. Tomorrow JPMorgan CEO and Chairman Jamie Dimon faces the wrath of his shareholders at his company's annual meeting, but his failing draws only vague promises of government investigation. Certainly this story serves as a reminder of the 2008 economic meltdown. So why are billion dollar losses on suspicious trades still happening again after four years and the passage of new financial reforms?
The always blunt and slippery chairman of JPMorgan made an appearance on NBC's Meet the Press this weekend to explain his bank's $2 billion mistake and more subtly to defend against further Wall Street reforms. Rather than delve into the complex derivatives trading that led to the loss, Dimon basically blamed it on a hedge gone wrong, an unfortunate mistake. What Dimon neglected to point out is that this brand of risky trading in complex derivatives by megabanks like JPMorgan is exactly what led the economy into recession in 2008.
Despite some half-hearted financial reforms with little regulatory teeth, Washington still seems unable to prevent the big Wall Street banks from taking their billions to the derivatives casino rather than lending it back into the sputtering US economy where it is really needed. The Volcker Rule, one reform which has yet to be enforced, may have prevented this kind of loss. However, Dimon is desperately trying to avoid letting his opponents in Washington use this incident as an excuse to hasten its enforcement. Passed as part of the Dodd-Frank Wall Street Reform, the Volcker rule would prohibit banks from making risky trades with their own money for the sake of their own profit rather than the benefit of their customers. The rule is set to go into effect in late July, but bonus-hungry, too-big-to-fail bank execs and their friends in Congress are already voicing their opposition, while Federal Reserve Chairman Ben Bernanke has said he is unprepared to enforce it according to the current timeline.
The $2 billion JPMorgan loss shows observers of the US economy that two things have not changed since 2008. First, big banks continue to unapologetically engage in derivatives trading that potentially puts the whole banking system at risk. Second, even after four years of promised financial reform, the government seems unable or unwilling to impose any punishments for irresponsible, highly lucrative trading schemes.
Consider disgraced former CEO of MF Global, John Corzine who inexplicably "lost" $1.6 billion of his own customers' money by placing bad bets on European debt back in November. A former Democratic governer of New Jersey, Corzine has supposedly been under investigation by the Justice Department for six months now, but not surprisingly, Eric Holder has not filed any charges against this significant potential donor and fundraiser to Obama's re-election campaign.
Comparing the JPMorgan incident and the MF Global debacle, President Obama's tough words on Wall Street reform are inconsistent with his actions. On a recent appearance on ABC's The View, the President described why the JPMorgan loss highlights the need for the Wall Street reform passed during his first term. Certainly reform was and still is needed, but what good is Dodd-Frank if one of the biggest banks can still shock us by posting a one day $2 billion loss in derivatives trading? President Obama has a back up plan though, saying,
"This is the best, or one of the best managed banks. You could have a bank that isn't as strong, isn't as profitable making those same bets and we (the government) might have had to step in..."
After four years of nothing but scandal from the financial sector, what good solutions other than tough talk can the President turn to anyway? Despite the passage of Dodd-Frank, Obama and Congress still have to be held accountable for the lack of effective regulations of the kind that could have prevented this enormous loss. Instead, the President assumes that the American people will just accept it as precedent that government has the authority and power to incur trillions in taxpayer debt by bailouting his cronies on Wall Street. It's this unacceptable assumption that government should and will just step in with endless cash that keeps men like Jamie Dimon in the job.
According to Dimon and the President though, JPMorgan is a great bank with the best management, except for a little mistake here and there. In the real world where the rest of us live, a person who loses billions of dollars is not saved by the Federal government and allowed to keep their job or to go on to help Obama re-election campaign fundraisers like John Corzine. In the world of the 99 percent, losing $2 billion or a small fraction thereof results in swift, dire consequences.
So after four years of economic hardship, why hasn't the fiscal fantasy world of Jamie Dimon, John Corzine, or the President been brought back down to Earth when things have been pretty real for the rest of us? During the last depression, Congress passed the Glass-Steagall Act which severely limited commercial banks from securities trading. Yet in 2012 we no longer have Glass-Steagall and we are still waiting on the Volcker Rule. Even Obama's mere suggestion that the government may have to once again overspend the nation into bankruptcy with another banker bailout is scary. Let's not wait until the next crash; rather let's elect some leaders who aren't afraid to choose the good of the country over JPMorgan's balance sheet.