The Big Picture

Wall Street’s fair-haired child has stumbled badly and, for his supporters, at a most inopportune time.  Last week Jamie Dimon, CEO of the nation’s largest and one of the most respected banks – JP Morgan Chase, disclosed a $2 billion dollar plus loss for the first quarter. 

What makes this so ironic is that Mr. Dimon has led the charge against financial reforms that could have prevented this kind of loss – both monetarily and reputation-wise, and points to the need for the kind of financial overhaul written into the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. 

A brief refresher is in order.  The crash of 1929 was caused by financial institutions taking inordinate risks with other people’s money and led to the Great Depression.  Out of that financial disaster came the Glass-Steagall Act that built a wall between commercial and investment banking.  In short, commercial banks were prohibited from using your money to trade for their account.

 After much lobbying throughout the 1980s and ‘90s, Glass-Steagall was repealed, opening the door for all sorts of speculative activities that socialized risk but privatized profits.   It also helped create the financial institutions we now call “too-big-to-fail”, conglomerations of commercial and investment banks with retail brokerage arms and insurance companies where compensation is a function of the amount of profits generated.  That led to risk taking that would otherwise have been shunned.

 Add to the mix the egos of the so-called “masters of the universe”, aggressive, young traders racking up millions of dollars in salaries performance bonuses who felt invincible and above the law.  In 1991, Paul Mozer, a trader at Salomon brothers, tried to “corner” the two-year note auction – meaning he wanted to control the supply of notes, contrary to the 35% legal limit established by the Treasury Department.  His indictment and conviction tarnished the sterling reputation of Salomon Brothers and led to its purchase by Travelers Group. 

In 1995, rogue trader Nick Leeson, based in Singapore, was responsible for the collapse of the United Kingdom’s oldest investment bank, Barings Bank.  In 1996 Sumitomo Bank of Japan lost $2.6 billion thanks to rogue trader Yasuo Hamanaka trying to corner the copper market.   In 2002 Allfirst Financial, a division of Allied Irish Bank, suffered a $700 million loss as rogue trader John Rusnak tried to hide losses incurred trading the Japanese Yen  which led to its acquisition by M&T Bank.  And in 2008, Jerome Kerviel lost $6.7 billion for Societe Generale by secretly trading derivatives.

 I, Investor 

The 2008 collapse of Bear Stearns and Lehman Brothers triggered the financial meltdown of 2008 which led to the housing collapse and the worst economic recession since the Great Depression.  In response, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in an attempt to address some of the weaknesses in financial regulation.  Contained in that Act is the Volker Rule, named after former Federal Reserve Chairman Paul Volker, which would restrict banks from speculative activities that don’t benefit their customers. 

Jamie Dimon, CEO of JP Morgan Chase, has been the leading critic of this reform nationally and globally.  He even argued against global efforts to strengthen international financial regulations as “un-American”.  Now he’s eating crow as, on his watch, his bank has lost $2 billion thanks to a rogue trader in its London office.  This loss hurts Dimon’s credibility and reputation.  JP Morgan has lost nearly $15 billion in market capitalization and shareholders are not happy.   

So maybe, just maybe, real reform will finally come to Wall Street.  Once we get all the “I told you so-s” out the way, we can address regulation suited for the 21st century and change the business-as-usual mindset.  It’s about time.  

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