The JPMorgan Chase scandal -- and yes, it
is a
scandal -- shows us why we need to break up the big banks as quickly as possible.
But that won't happen unless we can get our hands around the real scope of the problem, which is probably far greater than we're being told. That means cutting through the enveloping shroud of jargon, euphemisms and double talk -- "crap," if you will -- that keeps us from seeing the situation as it really is.
Here's why we need to do it, and here's how.
Talk Talk
Two images come to mind when considering too-big-to-fail banks like JPMorgan Chase: The first is of the gigantic spaceships hovering over all of the world's cities in Independence Day, leaving the citizenry in shadows and the world in fear and uncertainty.
The second image is of an old New Yorker cartoon which shows a husband and wife chatting with guests over drinks and h'ors d'oeuvres while an enormous monster scowls in the corner. The caption reads: "We deal with it by not talking about it."
Most politicians are either talking about tighter regulations for too-big-to-fail banks, or about the virtues of self-regulation and the so-called "free markets." But the real problem isn't how to manage too-big-to-fail banks, which are inherently unmanageable. The real problem is that they exist, an everpresent menace that hovers over our economy while we go about our daily lives.
They deal with that problem by not talking about it.
Monster Mash
JPMorgan Chase is either our largest or second-largest bank, depending on when and how you ask the question. News stories often point out that it has $2 trillion in assets, which sounds impressive. But they usually fail to mention that it has liabilities of more than $2 trillion, too, leaving it roughly $183 billion in the black.
That ain't bad -- but it's not much more net worth than you'll see sitting around the table when Mitt Romney's super PAC friends get together for lunch.
And we can't trust those numbers. We now know that these risky London deals weren't accurately conveyed in last year's annual report. What else don't we know about JPM's liabilities?
All of our big banks were on the hook for hundreds of trillions of dollars in the run-up to the financial crisis of 2008. And now they're bigger than ever. How big? We don't know for sure -- and that's a big part of the problem.
Our four largest banks have
95 percent of the total exposure to derivatives. Two years ago we
analyzed the raw data and found that JPM alone held 44 percent of that risk -- and JPM has grown since then.
Because they intend to keep right on growing. As Jamie Dimon promised
shareholders, "I want to assure you that your company will be bigger and stronger and better a year from today."
If that doesn't frighten you, you haven't been paying attention.
Bigger ≠ Better
Here's an example of what we mean when we say it's time to "cut the crap" when we talk about big banks:
Writers should no longer be allowed to tell us, even in
passing, that "I agree we need large institutions" unless they tell us
why we need them.
Jamie Dimon was leading the chorus of bankers saying that their large size leads to increased efficiency and economies of scale. Okay, Mr. Dimon: Where are they? Is the cost of borrowing cheaper at JPM than it is at community banks? Are ATM fees lower? Are loans easier to get?
"Economies of scale" work well for customers -- when you're manufacturing toasters. But banks like JPM aren't in the toaster business. They're not even in the customer business anymore. Ordinary clients at the big banks are like cannon fodder in a colonial army: They're there to be used and discarded, not to be served or respected.
(John Reed's
interview with Bill Moyers offers an enlightening glimpse into this shift in banking culture.)
So let's stop repeating the mantra that big institutions have anything to offer us -- anything, that is, except moral hazard. We did fine without them for centuries, and we'll be better off once they're gone.
Gaming the Numbers
Here's something else that needs to stop: When a bank deceives its investors, reporters need to stop saying only that it "changed its risk model." That makes it sound arcane. What JPM really did was mislead everyone.
The bank told investors that they had begun assessing internal risk in a new and more effective way. But reports say that the unit which made these hazardous trades reported directly to Dimon, bypassing the bank's other executive and risk management channels. And despite what they told the public -- including investors -- the bank did not use its new risk model to assess these trades. They used an old model which dramatically understated the risk involved.
Listen, I know this kind of talk confuses some people, but if there's one thing I learned after working in risk management it's this: The more jargon you hear, the less trustworthy the source.
If reports are true, then Chase was deceiving the public and it was deceiving investors. That's not "changing its risk model." It's lying. And it's very possibly fraud.
Byline Creep
And while we're in the crap-cutting business, here's something else that needs to stop:
Just because Jamie Dimon described the loss as "stupid" doesn't mean that you have to believe him, or use the same language. Listen, writers: He's the architect of this charade, not an observer.
If this disaster should tell you anything, it's to stop letting Jamie Dimon write your copy for you.
Something Stupid
Executives at Chase and the other big banks live in confidence that they'll reap the profits for risky betting and leave the losses to you. That may be many things -- venal, selfish, greedy -- but it's not stupid.
What's more, as long as nobody is indicted for Wall Street's ongoing criminality, they can keep breaking the law knowing they'll never pay the price for that either.
And if laws were broken in JPMorgan Chase's case, as Dimon himself acknowledges is possible, then these deals were only "stupid" the way any crime is stupid: It's only stupid if you get caught.
It Can Be Done. Here's How.
We've been led to believe that it's politically and economically impossible to break up these banks. That's not true. How can the political climate be changed?
The first step is to push for better financial reporting, so that we see less of the mistakes described above. If people are better-informed about big banks, sentiment against them will run even stronger than it is right now.
Which gets us to the politics of big banks.
Democracy First
The commonsense
SAFE Act introduced by Sen. Sherrod Brown and Rep. Keith Ellison would end the era of too big to fail. It's a smart first step toward ridding the world of these menaces to society.
Legislation should also be introduced to strengthen and expand antitrust laws so that they can rein in out-of-control banks like JPM.
True, the SAFE Act and antitrust banking bills are unlikely to pass under our corrupt political system. But every politician in Washington should be forced to vote "yes" or "no" on this bill before the elections and let the public know where they stand on this vital issue. That's the only way Americans can make an informed decision in November.
During the drafting of Dodd/Frank financial legislation we saw something important happen a number of times: If politicians were allowed to craft deals in private, those deals always benefited the big banks. But if they were forced to debate these issues publicly, we saw a much greater consensus against Wall Street.
Public debate: It's how democracy is supposed to work. It will help us break up the big banks.
Contraptions and Elegance
The Dodd/Frank bill's reforms, while anemic, are somewhat useful. It's madness to suggest repealing them, as Republicans are trying to do. But Dodd/Frank isn't useful at all unless agencies are staffed with regulators determined to do their jobs. The Administration's record has been lackluster (or worse) in that regard, while the Republicans have made it clear that they'll staff regulatory agencies with people determined not to do their jobs.
It doesn't help that when it comes to too-big-to-fail banks the current system of financial regulation is a rickety, complicated, Rube Goldberg-ish contraption designed to work around the massive danger that they pose to the economy.
Simple solutions are usually the best, and the simple solution to too big to fail banks is: Break them up.
That may not be politically feasible right now, but it's the job of a mobilized citizenry to change the political equation with public pressure whenever possible. That means keeping the issue on the front burner by inundating elected officials from the White House on down with emails and calls in support of the SAFE Act. (More
here.)
Lead the Fed
The public needs to pres Congress about the Federal Reserve, too. The Fed is feeding the growth of the megabanks with free or very low-interest money, no strings attached. That gives megabanks the resources and the incentive to place that where it can maximize income in a stagnant, nearly consumerless economy. That tempts the banks into increasingly risky transactions and instruments like the ones that caused JPM's loss.
The Fed must also stop interfering with shareholder democracy, which cuts to the core of executive accountability. We should demand that Congress hold the Fed accountable for its actions in propping up too-big-to-fail banks.
That's not very likely to happen as long as the Federal Reserve, a creation of the United States government, is governed by boards that are dominated by bankers -- bankers like Jamie Dimon. So the public must demand that Dimon step down, and that bankers are removed from Fed boards altogether.
Shine a Light
The public has the right to know about the banks it's been coddling, spoon-feeding low interest loans to, and protecting for years. It should demand a full and complete audit of these banks by trustworthy outsiders -- if enough of them can still be found. Auditors can provide the banks with all the proprietary protections they rightfully deserve. But twe rescued them, and now we need to shine a light into their dark corners.
In addition to these general audits, we also need an immediate, extensive and transparent no-holds-barred review of the JPMorgan Chase debacle.
Simon Johnson compares this event with the near-collision of two jet airliners, which would trigger an immediate investigation by the National Traffic Safety Board. It's an apt analogy, and an excellent idea.
And bank executives must be investigated, too -- for criminal activity. That, and that alone, would discourage illegal risk-taking. It would also make them take their legal responsibilities under Sarbanes-Oxley much more seriously than they apparently do today, and would discourage them from routinely deceiving the public -- which in many cases appears to cross the line into fraud.
Declare Independence
Our national and world economies are in grave danger as long as banks like JPMorgan Chase exist in their present form. They've already left our economy in ruins once. It's only a matter of time before they do it again.
Even if we assume that JPM's current problems can be contained, we should realize that every loss of this kind has the potential to turn into a chain reaction. Each could become a cascading failure that threatens JPM or another megabank -- and which therefore threatens the entire financial system.
The megabanks pose an existential threat to our economy. They hover over our economy, our political system, and our personal lives like a fleet of giant spaceships. They serve no useful social purpose, and they only exist because we allow them to exist.
it's time to declare our independence from their domination and demand that our elected officials help us in our fight for freedom. It's time to stop living in their menacing shadow and come out into the sunlight.
It's time to dedicate ourselves to breaking up JPMorgan Chase and the other too-big-to-fail banks, and to ensuring that they never threaten the world's economy again.
