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Why Jamie Dimon’s $2 Billion Gambling Loss Will NOT Speed Financial Reform

by ANDREW COCKBURN

Among the more laughable  features of  commentaries on Jamie Dimon’s recently revealed $2 billion (at least) gambling losses are earnest pronouncements that the debacle will stymie the efforts by Dimon and Wall Street in general to further deregulate the financial industry.

A scheduled vote this coming Thursday in the House Agriculture Committee should reassure Wall Street that nothing has changed.

The vote in question will be on H.R. 1838, the “Swaps Bailout Prevention Act” as  exclusively reported here back in February.  The bill nullifies one of the few positive contributions of the Dodd Frank reform act, the so-called Lincoln Rule banning any federally insured institution, such as JPMorgan, from trading derivatives, thereby forcing them to set up separately funded subsidiaries for such trading.  H.R. 1838 now enjoys bi-partisan support, has already been endorsed by the Financial Services Committee (agriculture has historic jurisdiction regarding derivatives) and will quite likely proceed on its merry way toward full enactment.

This melancholy development should come as no surprise to anyone who has followed the progress of financial reform in recent years.  The last time naked credit default swaps (naked meaning they are traded as speculative bets rather than hedges) got in the headlines was the fall of 2008, when, via the massive exposure of AIG  to these same instruments, the global financial system trembled on the brink.  Fingers were being pointed at the CDS (Credit Default Swap) market as the detonator of the disaster. There were authoritative calls for tough regulation, re-enactment of Glass-Steagall and other worthy endeavors.

Major players on Wall Street were swift to take action.  Led by Dimon’s JPMorgan Chase, nine leading financial institutions set up the CDS Dealers Consortium and hired the master derivatives lobbyist Ed Rosen, of Cleary, Gottlieb, to keep things in order.  Rosen crafted a memo suggesting that the market remain under the benign supervision of the Federal Reserve (which at that point was underwriting the banks to the tune of $7 trillion and more.)  Meanwhile Timothy Geithner at Treasury was working on his master plan for policing the CDS market.  Eventually, in May, 2009, Geithner unveiled his proposal, identical in all essential respects to Rosen’s memo.

A lot of money has flowed under the bridge and into legislators’pockets since then.   The Dodd Frank financial reform legislation finally hit Obama’s desk, laced with loopholes and riddled with exceptions.  The President is currently touting “financial reform” as one of his achievements.  Chronicles of the crash meanwhile have touted Dimon’s statesmanlike role in keeping his bank out of the knacker’s yard while other totemic institutions crumbled around him.  Dimon indeed has had the gall to claim that he had simply taken bailout money to encourage the others, telling shareholders in March 2010 that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve (only) to help motivate others to use the system,” without mentioning that at their peak, when the TAF program had been going a year, his Fed loans amounted to $48 billion, twice the bank’s own cash reserves.

Even when the bank’s secret Fed assistance came to light, the tide of flattery flowed on.  Ever predictable, PBS Frontline recently devoted most of an hour to lionizing JPMorgan for having invented naked CDS  but being prudent enough not to misuse them.  Now comes the fiasco of the bank’s $2 billion (make that $4 billion, at least) loss on a hugely stupid bet dutifully reported in the media as a “hedge.”

The Dodd Frank act has not yet come into effect, thanks to energetic work by Mr. Rosen and his fellow lobbyists.  As Professor Michael Greenberger, who as a regulator in 1998 watched the Clinton Administration clear away derivatives regulation at Wall Street’s behest, tells me, “If Dodd-Frank had been in effect, (JPMorgan’s) trades would almost certainly have been required to be cleared and transparently executed. So they would have been priced by objective clearing operations on at least a weekly basis for purposes of collecting margin against the losing nature of the trades. As the trades lost value, margin would have been called for on a regular and systematic basis. (The losses would never have reached $ 2B without much earlier and corresponding regular calls for margin.) The losing nature of the trades would have been transparent to market observers and regulators for quite some time and the losses would not have piled up opaquely. It is almost certain that, at the very least, the Fed (not wanting to exacerbate its reputation for throwing taxpayer money at TBTF problems), would have backed JPM off these trades long ago.

So it’s pleasant to reflect that if Dimon had kept Rosen etc chained up and his checkbook closed, he might not be experiencing the current unpleasantness.  Forced to give up a sunny weekend to field toadying questions from the likes of NBC’s David Gregory, Dimon must have uttered a nostalgic sigh for those innocent, simple days when it all began.

Back in 1986, Dimon was the bright young  protégé of “Sandy” Weill, when he was forced out of American Express in a coup de requin.  Master and servant made their way to Baltimore, Maryland, where Weill acquired a storefront moneylending firm called Commercial Credit.  Potted media biographies flung together since the news of JP Morgan’s massive gambling losses broke  last week put a decorous sheen on this phase of Dimon’s career.  ABC News for example described the Baltimore company as “a sleepy finance firm that catered to middle-class clients.” Weill’s former assistant, Alison Falls, got it right at the time.  “Hey guys,” she is said to have remarked “this is the loansharking business.”

As outlined in an excellent takedown by Michael Hudson in Southern Exposure in 2003, the firm specialized in preying on poor people, especially African Americans such as Johnny Slaughter, from Noxubee County, Mississippi, who not only was charged 40.92 percent on his loan in the mid -1990s but was also sold disability insurance even though he already had a disabling spinal injury.  A neighbor, Mattie Henley, was charged 44.14 percent.

Following on this ingenious and immensely profitable business model, it took the pair only a few sleazy insurance company acquisitions and the enthusiastic endorsement of Wall Street and the media, not to mention the Clinton Administration, to the creation of Citibank (Dimon and Weill parted company in 1999), the glories of subprime, and our current utterly disastrous situation.

ANDREW COCKBURN is the co-producer of the feature documentary on the financial catastrophe American Casino He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press, now also available in Kindle editionHe can be reached at amcockburn@gmail.com


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Andrew Cockburn is the Washington editor of Harper’s Magazine.  An Irishman, he has covered national security topics in this country for many years.  In addition to publishing numerous books, he co-produced the 1997 feature film The Peacemaker and the 2009 documentary on the financial crisis American Casino.  His latest book is Kill Chain: The Rise of the High-Tech Assassins (Henry Holt).

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