The People vs the Big Bucks
Losses announced by JPMorgan Chase last week have raised again unsettling question of whether the TBTF (too big to fail) banks have too much power and whether and how they should be cut down to size. More disturbing, the losses raise questions of whether global financial authorities have the knowledge or the understanding of what is going on to do their regulatory jobs properly.
The biggest and toughest questions should be addressed to politicians, especially the US Congress and President Barack Obama: do they have the guts to stand up for the public against the big bankers? Or have they, wittingly or unwittingly, sold out to the insidious power of Big Bucks?
This humiliating announcement of losses could not have happened to a more appropriate guy, given how hard and hardball Jamie Dimon, JPMorgan's chief executive, has played the game against tougher banking regulations.
Yet here he was admitting losses of US$2 billion. The bank lost a heftier US$15 billion in market value and a notch in its credit ratings after admitting the losses.
The important point is that these were not losses by some 'rogue trader', but were central to the bank's strategy and occurred under JPMorgan's chief investment office.
As Nils Pratley wrote in The Guardian: 'This was a failure at mission control.'
Matt Taibbi in the May 24 issue of Rolling Stone has lots of amusing bad-ass comments detailing how the banksters (a deliberate portmanteau word linking bankers to 1930s-style gangsters) and their well-heeled lobbyist friends inside and outside the US Congress have proved successful in watering down attempts to impose stiffer regulations.
The essential lesson is that when a law is passed, it is by no means set in stone. So in 2010, Obama hailed the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, all 2,300 pages of it.
Taibbi summed up the intent: 'The new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy.'
In short, there would be no more financial apocalypse, and even if disaster happened again - there we are hedging our bets - Obama promised that taxpayers 'will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts. Period.'
Unfortunately, Obama has proved himself more of a patsy than his bold predecessor Franklin Delano Roosevelt, who rewrote the rules of the US economy after the Great Crash. Dodd-Frank is almost dead before key parts of it have gone into effect. Michael Greenberger, a law professor and former regulator involved in the drafting of Dodd-Frank, says the campaign against the act has been 'like a scorched-earth policy' of never-ending combat.
The banksters have deployed a multiplicity of interlinked techniques to undermine new regulations.
According to Taibbi, the first step is to strangle laws in the womb by removing the teeth of regulations and inserting loopholes. This was done with large areas of swaps and by defanging the Consumer Financial Protection Bureau, including putting it under the Federal Reserve System, instead of being a watchdog of the Fed.
The next step is to sue, to challenge rules in the courts, 'pulling one fingernail at a time' as Taibbi terms it.
Another technique is to bully the regulators. Republicans in congress have been assiduous in doing their budget-cutting duty by trying to cut the funds of the regulatory bodies, including 25 per cent from the Securities and Exchange Commission and 33 per cent from the commodities commission, just as commodities markets rose in value from US$40 trillion to US$340 trillion.
If all else fails, there is always the tested technique of introducing a gazillion new loopholes, a creative process in which lobbyists and their friends in congress excel. There are nine bills going through the US House of Representatives that would essentially roll back the force of Dodd-Frank and force the taxpayer to pick up the bill for any disaster.
The bottom line now is that Dodd-Frank has been largely gutted and the dominance of the big banks is greater than ever. When Obama promised that TBTF banks would never again be a threat to the financial system, the assets of the top five US banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs) amounted to 43 per cent of US gross domestic product; today the assets of the top five amount to 56 per cent of GDP. To offer historical context, in 1970 the top five US banks held 17 per cent of US banking assets; today they hold 52 per cent.
Another powerful factor is that JPMorgan, Goldman Sachs and Citigroup were among the top 10 donors to Obama's campaign when he won the 2008 presidential election. Dare he bite the hands that feed him? Obama has often proved himself finer with words than deeds: witness the way that his administration has colluded with lobbyists in pulling Dodd-Frank's teeth.
It is time for Obama and regulators to admit that - as the JPMorgan losses prove - the big banks have become too complex even for Jamie Dimon, let alone for ordinary managers, to manage. Start with enforcing a stricter Volcker Rule, and then do something to ensure that the big banks are no longer too big to fail.
This is the proportion of US GDP that is accounted for by the assets of the top five American banks