Simon Johnson is Ronald a. Kurtz Professor of entrepreneurship at M.I.T. Sloan School of management and co-author of “White House Burning: founding fathers, our national debt, and why it matters to you.”
JPMorgan Chase is too big to fail. The largest bank holding company in the United States with assets approaching $ 2.5 trillion reported in standard American accounting principles, it is inconceivable that JPMorgan Chase will be allowed to collapse now or in the future. Damage to the American economy and to the world would be too large.
Perspectives from expert contributors.New trading losses of the company due to require greater public controls than will be the case for most private enterprises — and demand an independent investigation precisely what happened. (Dennis Kelleher of better markets has already called for exactly that.)
Investigation by the F.B.I. may not be enough public. Account of the strong political links between JPMorgan Chase and the administration of Obama, it is also better to have an investigation led by fully independent adviser.
I hope too-big-to-failure is not forever. Federal Deposit Insurance Corporation is working on a mechanism which would allow a return that agency to handle the “inconsistency” of the bank holding company, while the protection of creditors of the operational subsidiaries restricts the potential contagion effects.
But this mechanism is not yet in place. It does not apply to cross-border banking (remember that JPMorgan Chase losses are in London), and even F.D.I.C. Acting Chairman, Martin J. Gruenberg, is cautious, describing its likely effectiveness in a speech last week.
(Disclosure: I am the System Advisory Committee for resolution of the F.D.I.C., and I’ve worked with F.D.I.C. with certain terrain, activities intended to help the Agency receive constructive feedback for resolution. I am not paid by the F.D.I.C.)
In fact, JPMorgan Chase operate with tacit support of the Government of the United States-mainly in the form of actual and potential access to loans from the Federal Reserve, with the implication that the Treasury can provide assistance.
Effectively is backed by the full faith and credit of the Government assistance; It lowers the cost of funding the Bank, because it reduces the risk for creditors. JPMorgan Chase and other large banks in the u.s. economy are effectively Government (and subsidized) enterprises.
There is no kind of market, relating to the determination of the value for the franchise of Mega-banks; This is a government scheme of subsidies, purely and simply. People on the right side of the political spectrum, people on the left; See my blog post last week on the degree of direct partisan agreement on this matter.
I will add to this list – Mike Huckabee, former Arkansas Republican. When I receive your radio show on Monday afternoon, we were in full agreement on the need to break up or otherwise restrict the size of the large banks.
There are many sizes, questions about JPMorgan Chase losses, as well as the large volume of informed guesswork is exactly what happened. By his own account, Jamie Dimon, the Chief Executive, was unaware of what happens on the commercial Bureau, while Bloomberg News Reporters it brought to his attention.
At the time, he rejected any “TEMPEST in a teapot.” during the weeks following this implies, hedge, or strategy to reduce risk, deplete the poor.
The question is, why not a salesperson make a mistake; This can happen anywhere. The question is how this is handled and by professionals of JPMorgan Chase risk management and their systems — considered by many domestic best in business.
Here are five questions that an independent inquiry must consider:
1. What is marketing? Who approved and reviewed trade?
2. to what extent are errors encouraged or approved by the specific quantitative models — for example, those who are well known as value-at-risk? (For criticism, see Pablo Triana book, “number that kills us.”)
3. What Mr. Dimon know and when he know it? There is disclosure to the Board and shareholders at an appropriate time? This is one of the specific concerns of Mr. Kelleher.
4. the Council shall exercise sufficient depth of experience on relevant dimensions of risk management?
5. What interactions Mr Dimon or any of his colleagues to have with the Federal Reserve Bank of New York before and during these losses are made? Mr. Dimon is on Board of this institution, where his role was described as advisory. But what exactly he advise them in recent months and years, particularly in respect of risk levels of management and capital in systemically important banks?
On the one hand we hear from bankers that supervisors are watching them closely, and even affect their business. On the other hand clearly someone is not to pay attention. Why not?
This is not about the conduct of witch hunting. Is to establish the facts and understanding, if something about standard operating procedures and emergency protocols must be considered.
The right analogy is the investigations of the National Safety Council, a proposal which was made by Andrew Lo, my colleague at M.I.T., as well as its co-authors. We learn many things where companies actually becomes bankrupt; for example, Enron (see excellent book “the Smartest Guys in the room,” Bethany Mclean and Peter Elkind) and Barry (see Bankruptcy Examiner’s report).
But we must examine situations close to the incidents also.
This is awkward for White House-a look at one of white Ben of recent articles on the links between the wall and the administration of Obama. But by large banks, Wall Street makes this kind of investigation even more necessary-see the recording of Matt Taibbi for some graphic data.
Congress may also want to include, at least, to understand if the Dodd-Frank has been at all helpful. Volcker rule is still in force, but if it were, would this make a difference?
Mr Dimon does not support and has been consistent and vociferous opponent of the rule from the outset. It seems foolhardy to accept Mr Dimon view on this issue at par value. I stated in favour of the Volcker rule before the Senate Banking Committee at the beginning of 2010; Barry Zubrow, then the Chief Risk Officer of JPMorgan Chase, testified at and strongly against this.
Some people in the private sector and within the community of banking will impose, argues that this will further extend the scope of the Government vis-à-vis the legitimate private business. This misses the point — that is the people who run our largest banks, which reduce the viability of the private sector, and which threaten its future.
Fine Cam, President of the independent Community Bankers of America, showed strong leadership on this issue in the last week (you can track it in @ Cam_Fine on Twitter).
Eventually we may come to same conclusion as Elizabeth Warren, who has brilliantly seized political moment and put your opponent for the Senate seat from Massachusetts, Republican incumbent Scott Brown, protected.
Mrs Warren, seek the re-imposition of the glass-Steagall – separation of commercial from investment banking. Mr. fine has already been pushing in the same direction. This position must be attractive in political spectrum.
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