JP Morgan Chase CEO Jamie Dimon frequently boasts about what he calls his fortress balance sheet — an impenetrable wall of well-hedged risk. But after a $2 billion trading loss stemming from a derivatives bet made in the bank’s London office, he may have to admit that his strategy isn’t quite as failsafe as he would like to think. More importantly, the law that is designed to prevent this sort of thing from happening to depository institutions, the Volcker rule, might be too weak to do its job.
The bank’s Chief Investment Office, in London, lost $2 billion under somewhat vague circumstances. It appears the CIO, in an apparent attempt to hedge the costs of one position in credit default swaps — the position itself a hedge against credit risk on another position in risky bonds — issued credit default swaps of its own on safer investments in order to generate revenue, and the position went south. Not only does this strike at the heart of Dimon’s strategy for his bank, but it is also reminiscent of the events of 2008, when banks had massive and supposedly unforseeable risk on their balance sheets — balance sheets that had been designed, in theory, to mitigate risk.
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Will the Volcker rule, when it is finally implemented, do anything to prevent governmentally-backstopped institutions like JPM Chase from making American taxpayers essentially assume its risk? Occupy the SEC says no. The organization, an offshoot of the Occupy Wall Street movement (which MyBankTracker spoke with a few months ago), submitted a detailed and thorough letter to the SEC earlier this year about the proposed version of the Volcker rule, highlighting the various loopholes that banks can — and they believe, will — exploit in order to continue to take risky positions with depositors’ funds. We spoke with Akshat Tewary of Occupy the SEC to find out why the organization believes JPM’s trading loss illuminates the problems inherent in Volcker.
JPM’s $2 billion trading loss, said Tewary, “highlights what banks will do to get around the rule.” The CIO, he said is “guised as some sort of risk-mitigation office,” not a fund that seeks profit through taking on risk of its own. The Volcker rule in its current form, he said, has all sorts of exceptions to the proprietary trading ban, including market-making and hedging, both of which are massive loopholes that could potentially be exploited.
It “opens up the opportunity for banks to say ‘I’m hedging here’ — but it’s not a hedge,” said Tewary. The CIO was selling insurance on a credit index fund — that’s not a hedge on any particular position, said Tewary. Indeed, commentators are suggesting the position was taken to boost revenue, not hedge credit risk.
JPM will be able to, in the future, take on substantial amounts of risk under the guises of hedging risk.
One might reasonably suspect that Dimon had to face the music at a JPM shareholders’ meeting in Tampa on Tuesday, but that was not the case: shareholders not only approved Dimon’s compensation package, they also voted down a proposal that would have cut back on his duties at the bank by splitting the CEO position from the Chairman position, reports ABC News. But not everyone is happy with Dimon.
Elizabeth Warren, financial regulation crusader and candidate for U.S. Senator in Massachussets, has called for Dimon to step down from his position at the New York Fed, according to Bloomberg. Dimon, as a member of the Federal Reserve Board of New York, is essentially regualting his own industry, which is not so much a conflict of interest as much as outright regulatory capture. Senator Bernie Sanders has echoed Warren’s concerns, reports Bloomberg.
All this brings us back to the same problem: banks cannot necessarily be trusted to regulate themselves. For all the whining the industry does over the Dodd-Frank Act, it still has a great deal of control over how it conducts its business.
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