JPMorgan Chase cooks up a recipe for another taxpayer bailout
Do you understand the recent trading debacle at JPMorgan Chase? It's no shame to admit that you're in the dark.
This stuff is complicated. Even Congress doesn't really understand it.
Imagine the big investment banks and their traders as race car drivers.
They drive around and around a track, each trying to drive faster than the others. When one of them succeeds, he -- it's usually a he -- gets a huge amount of prize money and prestige.
When he takes too many risks and crashes the car, on the other hand, you buy him a brand-new car.
You can shake your finger at the driver and admonish him to be more careful, but you'll find it very difficult to set any real limits on his behavior.
That's essentially how things work these days at big investment banks, which have shown a consistent tendency to strongly prefer bets that might make money over doing the prudent thing.
JPMorgan Chase is just one example.
Chase has emerged from the subprime debt crisis as one of the nation's biggest financial institutions (the largest, in fact, by assets). It achieved that, in part, by buying Bear Stearns in 2008, a deal that was considerably sweetened by $30 billion in Fed loans and by the Fed's purchase of $29.5 billion in Bear assets to assist in the buyout.
It took three years -- until 2011 -- for the rest of us to find out about these loans and purchases, all part of a government rescue program that saw the nation's six largest banks borrowing nearly half a trillion dollars.
The Fed says the money it lent has been paid back, but investors didn't know about the thin ice under the banks' skates. Indeed, some of their executives told the rest of us how stable and secure they were from the front door while borrowing from the Fed out the back.
Given that many banks are considered too big to fail, it's reasonable to assume that, should they run into trouble again, the taxpayers will again be asked to bail them out.
I think it's also reasonable for federal regulators to restrict the risks that banks can take, so as to keep them from getting into bailable trouble.
Financial industry executives, including JPMorgan Chase CEO Jamie Dimon, disagree.
They have steadfastly resisted stricter industry regulation. They can police themselves, they say, and so far Congress has bought that argument.
It might be a harder sell in the second half of 2012.
This spring, JPMorgan Chase assembled a complex trading position -- similar to bets that helped fuel the banking crash -- that resulted in huge losses, as much as $9 billion to date.
Federal regulators began examining the trades and asking whether the bank intended to defraud its investors by making these bets.
Firm employees reported that the bank had been making increasingly large, complex trades in the months and years leading up to these big losses, and shareholder advocates had warned JPMorgan Chase that the bank's risk controls needed improving.
In response to the crisis, the bank fired three London traders and clawed back millions in compensation it had paid them.
I'm willing to bet, though, that if this trade had succeeded -- if it had made money, or at least delivered much less catastrophic losses -- I wouldn't be writing about it and you wouldn't be reading about it.
It would never have reached public notice.
Instead, it would have encouraged traders to keep pushing the risk envelope.
Congress, are you listening?
Letting these people police themselves is a recipe for bailing them out again. It's time for stronger regulation, ideally designed by people who understand these trades in the first place.