JPMorgan Debacle Points to Regulatory Incompetence, Corruption
Professor, Smith School of Business, University of Maryland
President Obama is shameless to cite J.P. Morgan’s$3 billion trading lossas evidence banks need more regulation.
More accurately, both may need more of a conscience, and the debacle raises serious questions about incompetence and corruption at the Federal Reserve, Treasury’s Comptroller of the Currency and Obama White House.
Those two agencies already have 110 regulators imbedded in J.P. Morgan —not just visiting occasionally to check the books but domiciled inside. Yet, the Chief Investment Office, which is responsible for the London Whale’s ill-fated trades and manages nearly $400 billion dollars, had not a single regulator inside its unit.
Senior Morgan executives convinced federal officials the CIO was merely hedging, managing cash and taking no significant risks, and naively, federal regulators believed them or were bullied into turning a blind eye.
It turns out, the unit was also taking equity positions in distressed firms, including the publisher of Ebony, which is headed by former Obama White House official Desiree Rogers.
Investing in distressed firms is work for private equity and hedge funds, not FDIC insured banks—it’s analog to Grandma cashing in her CDs to play the slot in Las Vegas.
More importantly, those bets raise questions about whether senior bank officials lied to the regulators, and political influence in Morgan investments and the self interest of Obama White House Officials.
Senior Morgan officials can and do go over the heads of resident regulators to their bosses at the New York Fed and in Washington to deny on-site regulator’s requests for information and often succeed. In addition to revelations about Desiree Rogers, Barack and Michelle Obama have between $500 and $1 million invested in a J.P. Morgan “private client” account.
Merely writing ever more complex regulations and stationing bureaucrats inside businesses—sort of like boarding an IRS agent in your house for 30 days before April 15—will not fix these problem. Taxpayers would learn how to distract the Treasury gum-shoe while they itemized deductions, and no doubt Mr. Dimon is even more imaginative.
Mr. Obama is corporatist in the French and Latin American tradition. He wants a market economy with the public interest safeguarded through strict supervision of the daily operations of oil companies, banks and the like. But the lessons of Europe and Latin America are that all this breeds is slow growth and corruption.
Mr. Dimon is a Democrat, and the employees at J.P. Morgan other behemoth Wall Street Institutions have plough billions into Democratic campaigns. Senior officials at JP Morgan assured regulators the CIO was making no risky bets when it is running a casino.
Dodd-Frank was supposed to fix the problem by hiring more regulators but that clearly doesn’t work, and it has encouraged consolidation of banks into larger and larger institutions.
The upshot—small business in Iowa can’t get loans because Wall Street is distant and doesn’t appreciate their value, and bigger banks can easily snucker regulators. When they can’t, they can fall back on the influence campaign contributions appear to buy.
It’s high time, that commercial banks were separated from Wall Street investment banks and limited making loans with deposits and the proceeds from selling loan-backed securities, and the big investment banks like J.P. Morgan and Goldman Sachs busted up so they don’t wheel so much influence.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.