Tuesday, May 15, 2012

JP Morgan Chase and Other Too-Big-To-Fail Banks

In thinking about the JP Morgan Chase situation, three problems come to mind immediately.

The first is the inability of the managements of these too-big-to-fail institutions to fully comprehend and monitor what is going on.

The second is the inability of the regulators to fully comprehend what is going on in an entity the size of JP Morgan Chase.

And third, and most importantly, these too-big-to-fail banks have short institutional memories. They quickly forget what led to their problems the last time it got tough for them. Eventually, they look to the US taxpayer for help when the going is tough (whether in the form of direct assistance or, what we have now, a near-zero interest rate environment to pad their profitability and capital levels at the expense of savers who need a return on their deposits).

JPMC and its likes (the too-big-to-fail banks) shouldn’t be allowed to act like hedge funds (even though in the current instance the offending transactions look more like bets than hedges against risk).

I keep seeing comments from various commentators on various websites to the effect that JPMC should be able to do what it likes with its “own” money. But this is either depositors' funds or shareholders’ money (retained earnings). What should really happen when JPMC has excess funds (i.e., those assets which aren't going be used to facilitate the growth of the nation's economy through lending activities) is the following: invest those excess funds temporarily in safe assets (US T-bills come to mind) until they can be deployed into loans or distribute the portion of those funds which are retained earnings to the shareholders who can then choose to invest in whatever asset classes they choose under their own decision regimens. If hedge fund investments are what they want, then let them make conscious decisions to invest in hedge funds, without any Federal (US taxpayer) guarantee of the investment.

But here we are again with a too-big-to-fail bank losing $2+ billion of its “own” money — and under the leadership of CEO Dimon who is one of those most vocal against limiting the banks’ proprietary trading under proposed regulation/legislation.  What did CEO Dimon learn about risk management from our most recent financial crisis?  Nothing?

The shareholders, bondholders and managers of these too-big-to-fail banks should pay the price for “mistakes” such as JP Morgan Chase’s recent fiasco. However, the US taxpayer remains on the hook just as in the 2007-2008 financial crisis.

It’s time we revisit the separation of real banking activity and everything else that banks want to do. This might eliminate, or at least restrain, much of the burden that is now placed on US taxpayers to correct the “sloppy” and “stupid” decisions (CEO Dimon’s own adjectives) that have been made by the too-big-to-fail banks in the post-Glass-Steagall era.