On Wednesday, JP Morgan Chase CEO Jamie Dimon faced questions from the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He released his testimony early, explaining the billions of dollars of losses out of the bank’s London office as a mistake in hedging strategy. But is it even possible for Dimon to explain these incredibly complex risks in ways that humans would understand? Humans that he has donated money to?
Dimon’s explanation for how the loss happened is straightforward: while JPM was reducing risk on its books to meet Basel III capital requirements, the London-based Chief Investment Office instead created new positions “that it believed would offset the existing ones.” Instead they created “a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage-risks.”
Since the $2 billion loss, Dimon says that JPM has “taken a number of important actions to guard against any recurrence,” which are somewhat vague. Their new risk analysis system, he explains, “does not preclude future losses [but] it does reduce the probability and magnitude of future losses.” As though JPM was comfortable with a $2 billion loss prior to its occurrence!
But according to a law professor at the University of Texas, Henry Hu, it’s possible that JPM has no way of understanding the risk on its books because our financial system has grown so complex, according to this brief and interesting piece in the Financial Times by Gillian Tett. “Technological advances and financial innovation have not only made financial flows and instruments so complex that they are hard to depict,” writes Tett, “but also [banks] themselves are so complex that they are ill-placed to make sense of shifting information flows.”
“The real danger today is that financial institutions and markets are becoming ‘too big to understand’ — and thus need to be shrunk and simplified.”
One suspects that the Senate Banking Committee isn’t the crowd to do something like that, according to this Open Secrets story. JPM, through its PACs, has given money to all but six of the 22-member committee. Dimon himself has given money to the ranking Democrat and Republican on the committee — Tim Johnson and Richard Shelby, respectively — and he has even donated to two members’ current election campaigns: Bob Corker and Mark Warner.
If you were to conceive of a group of people to impartially tell Mr. Dimon what he should or should not do with shareholder money and a massive implicit taxpayer backstop , would it include 16 people who have benefitted materially from his largesse and six who have not?
Unlike the question, “Should I put billions of dollars in CDX IG 9 to offset credit risk?” the answer to the question above is simple.