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Dumping On The Dimon Dog

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The Dimon Dog has been eating crow for the past few days, following a very public humiliation.  The outspoken critic of the Dodd-Frank Wall Street Reform and Consumer Protection Act found himself explaining a $2 billion loss sustained by his firm, JPMorgan Chase, as a result of involvement in the very type of activity the Act’s “Volcker Rule” was intended to prevent.  Financial industry lobbyists have been busy, frustrating regulatory attempts to implement Dodd-Frank’s provisions which call for stricter regulation of securities trading and transactions involving derivatives.  Appropriately enough, it was an irresponsible derivatives trading strategy which put Jamie Dimon on the hot seat.  The widespread criticism resulting from this episode was best described by Lizzie O’Leary (@lizzieohreally) with a single-word tweet:  Dimonfreude.

The incident in question involved a risky bet made by a London-based trader named Bruno Iksil – nicknamed “The London Whale” – who works in JP Morgan’s Chief Investment Office, or CIO.  An easy-to-understand explanation of this trade was provided by Heidi Moore, who emphasized that Iksil’s risky position was no secret before it went south:

Everyone knew.  Thousands of people.  Iksil’s bets have been well known ever since Bloomberg’s Stephanie Ruhle broke the news in early April.  A trader at rival bank, Bank of America Merrill Lynch wrote to clients back then, saying that Iksil’s huge bet was attracting attention and hedge funds believed him to be too optimistic and were betting against him, waiting for Iksil to crash.  The Wall Street Journal reported that the Merrill Lynch trader wrote, “Fast money has smelt blood.

When the media, analysts and other traders raised concerns on JP Morgan’s earnings conference call last month, JP Morgan CEO Jamie Dimon dismissed their worries as “a tempest in a teapot.”

Dimon’s smug attitude about the trade (prior to its demise) was consistent with the hubris he exhibited while maligning Dodd-Frank, thus explaining why so many commentators took delight in Dimon’s embarrassment.  On May 11, Kevin Roose of DealBook offered a preliminary round-up of the criticism resulting from this episode:

In a research note, a RBC analyst, Gerard Cassidy, called the incident a “hit to credibility” at the bank, while the Huffington Post’s Mark Gongloff said, “Funny thing:  Some of the constraints of the very Dodd-Frank financial reform act Dimon hates could have prevented it.”  Slate’s Matthew Yglesias pointed back to statements Mr. Dimon made in opposition to the Volcker Rule and other proposed regulations, and quipped, “Indeed, if only JPMorgan were allowed to run a thinner capital buffer and riskier trades.  Then we’d all feel safe.”

Janet Tavakoli pointed out that this event is simply the most recent chapter in Dimon’s history of allowing the firm to follow risky trading strategies:

At issue is corporate governance at JPMorgan and the ability of its CEO, Jamie Dimon, to manage its risk.  It’s reasonable to ask whether any CEO can manage the risks of a bank this size, but the questions surrounding Jamie Dimon’s management are more targeted than that.  The problem Jamie Dimon has is that JPMorgan lost control in multiple areas.  Each time a new problem becomes public, it is revealed that management controls weren’t adequate in the first place.

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Jamie Dimon’s problem as Chairman and CEO–his dual role raises further questions about JPMorgan’s corporate governance—is that just two years ago derivatives trades were out of control in his commodities division.  JPMorgan’s short coal position was over sized relative to the global coal market.  JPMorgan put this position on while the U.S. is at war.  It was not a customer trade; the purpose was to make money for JPMorgan.  Although coal isn’t a strategic commodity, one should question why the bank was so reckless.

After trading hours on Thursday of this week, Jamie Dimon held a conference call about $2 billion in mark-to-market losses in credit derivatives (so far) generated by the Chief Investment Office, the bank’s “investment” book.  He admitted:

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored.”

At The New York Times, Gretchen Morgenson focused on the karmic significance of Dimon’s making such an admission after having belittled Paul Volcker and Dallas FedHead Richard Fisher at a party in Dallas last month:

During the party, Mr. Dimon took questions from the crowd, according to an attendee who spoke on condition of anonymity for fear of alienating the bank. One guest asked about the problem of too-big-to-fail banks and the arguments made by Mr. Volcker and Mr. Fisher.

Mr. Dimon responded that he had just two words to describe them:  “infantile” and “nonfactual.”  He went on to lambaste Mr. Fisher further, according to the attendee.  Some in the room were taken aback by the comments.

*   *   *

The hypocrisy is that our nation’s big financial institutions, protected by implied taxpayer guarantees, oppose regulation on the grounds that it would increase their costs and reduce their profit.  Such rules are unfair, they contend.  But in discussing fairness, they never talk about how fair it is to require taxpayers to bail out reckless institutions when their trades imperil them.  That’s a question for another day.

AND the fact that large institutions arguing against transparency in derivatives trading won’t acknowledge that such rules could also save them from themselves is quite the paradox.

Dimon’s rant at the Dallas party was triggered by a fantastic document released by the Federal Reserve Bank of Dallas on March 21:  its 2011 Annual Report, featuring an essay entitled, “Choosing the Road to Prosperity – Why We Must End Too Big to Fail – Now”.  The essay was written by Harvey Rosenblum, the head of the Dallas Fed’s Research Department and the former president of the National Association for Business Economics.  Rosenblum’s essay provided an historical analysis of the events leading up to the 2008 financial crisis and the regulatory efforts which resulted from that catastrophe – particularly the Dodd-Frank Act.

With his own criticism of Dimon’s attitude, Robert Reich invoked the position asserted by the Dallas Fed:

And now – only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent, pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression – J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, and poorly-executed and excessively risky trades that caused the crisis in the first place.

In light of all this, Jamie Dimon’s promise that J.P. Morgan will “fix it and move on” is not reassuring.

The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that’s supposed to allow regulators to catch these things before they get out of hand?

*   *   *

But let’s also stop hoping Wall Street will mend itself.  What just happened at J.P. Morgan – along with its leader’s cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed’s recent recommendation that Wall Street’s giant banks be broken up should be heeded.

At Salon, Andrew Leonard focused on the embarrassment this episode could bring to Mitt Romney:

Because if anyone is going to come out of this mess looking even stupider than Jamie Dimon, it’s got to be Mitt Romney – the presidential candidate actively campaigning on a pledge to repeal Dodd-Frank.

Perhaps Mr. Romney might want to consider strapping The Dimon Dog to the roof of his car for a little ride to Canada.


 

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The End

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July 29, 2010

The long-awaited economic recovery seems to be coming to a premature end.  For over a year, many pundits have been anticipating a “jobless recovery”.  In other words:  don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway.  These hopes have been buoyed by the widespread corporate tactic of cost-cutting (usually by mass layoffs) to gin-up the bottom line in time for earnings reports.  This helps inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery.  The “jobless recovery” advocates ignore the extent to which the American economy is consumer-driven.  If those consumers don’t have jobs, they aren’t going to be spending money.

Although many observers seem to take comfort in the assumption that the jobless rate is below ten percent, many are beginning to question the validity of the statistics to that effect provided by the Department of Labor.  AOL’s Daily Finance website provided this commentary on the June, 2010 unemployment survey conducted by Raghavan Mayur, president of TechnoMetrica Market Intelligence:

The June poll turned up 27.8% of households with at least one member who’s unemployed and looking for a job, while the latest poll conducted in the second week of July showed 28.6% in that situation.  That translates to an unemployment rate of over 22%, says Mayur, who has started questioning the accuracy of the Labor Department’s jobless numbers.

*   *   *

In fact, Austan Goolsbee, who is now part of the White House Council of Economic Advisers, wrote in a 2003 New York Times piece titled “The Unemployment Myth,” that the government had “cooked the books” by not correctly counting all the people it should, thereby keeping the unemployment rate artificially low.  At the time, Goolsbee was a professor at the University of Chicago.  When asked whether Goolsbee still believes the government undercounts unemployment, a White House spokeswoman said Goolsbee wasn’t available to comment.

Such undercounting of unemployment can be an enormously dangerous exercise today.  It could lead  some lawmakers to underestimate the gravity of the labor market’s problems and base their policymaking on a far-less-grim picture than actually exists.  Economically, and socially, that would make a bad situation much worse for America.

“The implications of such undercounting is that policymakers aren’t going to be thinking as big as they should be,” says Ginsburg, also a professor emeritus of economics at Brooklyn College.  “It also means that [consumer] demand is not going to be there, because the income from people who are employed isn’t going to be there.”

Frank Aquila of Sullivan & Cromwell recently wrote an article for Bloomberg BusinessWeek, discussing the possibility that we could be headed into the second leg of a “double-dip” recession:

The sputtering economy and talk of a possible second recession have certainly rattled an already fragile American consumer.  Consumer confidence is now at its lowest level in a year, and consumer spending tumbled in May and June.  Since consumer spending accounts for more than two-thirds of  U.S. economic growth, a nervous consumer is not a good omen for a robust recovery.

Job creation is a key factor in increasing consumer confidence.  While economists estimate that we need economic growth of 4 percent or more to stimulate significant job creation, the economy has grown at only about 2 percent to 3 percent, with a slowdown expected in the second half.

*   *   *

With governments struggling under the weight of ballooning budget deficits and businesses waiting for the return of sustained growth, it is the American consumer who will have to lift the global economy out of the mire.  Given the recent news and current consumer sentiment, that appears to be an unlikely prospect in the near term.

The same government that found it necessary to provide corporate welfare to those “too big to fail” financial institutions has now become infested with creatures described by Barry Ritholtz as “deficit chicken hawks”.  The deficit chicken hawks are now preaching the gospel of “austerity” as an excuse for roadblocking any further efforts to use any form of stimulus to end the economic crisis.  One of the gurus of the deficit chicken hawks is economic historian Niall Ferguson.  Because Ferguson is just an economic historian, a real economist – Brad DeLong — had no trouble exposing the hypocrisy exhibited by the Iraq war cheerleader, while revisiting an article Ferguson had written for The New York Times, back in 2003.  Matthew Yglesias had even more fun compiling and publishing a Ferguson (2003) vs. Ferguson (2010) debate.

At The Daily Beast, Sir Harry Evans emphasized how the sudden emphasis on “austerity” is worse than hypocrisy:

As for the banks, one of the obscenities of our time is that so many in the financial community who owe their survival to the massive taxpayer bailouts, not only rewarded themselves with absurd bonuses, but now have the gall to sport the plumage of deficit hawks.  The unemployed?  Let them eat cake, the day after tomorrow.

Gerald Celente, publisher of The Trends Journal, wrote a great essay for The Daily Reckoning website entitled, “Let Them Eat Losses”.  He pointed out how the kleptocracy violated and destroyed the “very essence of functioning capitalism”.  Worse yet, our government betrayed us by forcing the taxpayers “to finance the failed financiers”:

No individual, business, institution, nation or empire is too-big-to-fail.  Had true capitalism been allowed to function unimpeded, the bloated, over-extended, inefficient and gluttonous firms and industries would have failed.  There would have been hardships and losses but, finally rid of its financial tapeworms, the purged system could be restored to health.

No “ism” or “ology” — regardless of purity of intent or moral foundation — is immune to corruption and abuse.  While capitalism itself is being blamed for the excesses that brought on financial chaos, prior to the most recent gambling binge, in tandem with the blanket dismantling of safeguards and the overt takeover of Washington by Wall Street, capitalism was responsible for creating one of the world’s most successful and universally admired societies.

As I discussed on July 8, because President Obama lacked the political courage to advance an effective economic stimulus package last year, the effects of his “semi-stimulus” have now abated and we are headed into another recession.  Reuters reported on July 27 that Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor’s S&P/Case-Shiller Index, gave us this unsettling macroeconomic prognostication:

“For me a double-dip is another recession before we’ve healed from this recession … The probability of that kind of double-dip is more than 50 percent,” Shiller said.

“I actually expect it.”

During the last few months of 2009, did you ever think that someday you would be looking back at that time as “the good old days”?