Jamie Dimon called on the Washington carpet?
The rug was royal red and plush indeed -- judged by the treatment given to JP Morgan Chase’s chief executive by the Senate Banking Committee on June 13, and by the House Financial Services Committee a week later, over the bank’s synthetic credit derivatives “portfolio hedging” debacle publicly quantified at $ 2 billion on May 10.
Dimon’s agility at alternately seducing, evading and befuddling his interrogators was a reminder of the sadly limited capability of senior law-makers to bring meaningful leadership to the complex world of global-scale finance.
It may sound like a final examination essay for a graduate-school course in Government or Policy (and my students should consider themselves duly warned), but it truly matters out in the real world.
That’s because the depressing conclusion from the Dimon hearings is that the prospects for beneficial regulatory influence are dim.
As a “teaching moment,” C-Span viewing is not for the faint of heart, nor the weak of stomach. The participants performed with the character depth of a Dan Brown novel and a virtual inability to read their staff-drafted questions.
Fawning by the Senators -- Dimon’s home-town Charles Schumer (D-NY), or Jim DeMint (R-NC) or Bob Corker (R-Tenn) -- was only matched in the lower House by the embarrassing display of incompetence -- Maxine Waters (D-Cal), Gary Ackerman (D-NY), Brad Sherman (D-Cal) and Rubin Hinojosa (D-Texas) being selected egregious examples.
The proceedings showed no grasp among any of the players of some basic truths, starting with this pressing question:
If a bank so ostensibly well run through the financial crisis could incur a blow-up of such magnitude, what level of confidence should be reposed in the safety of institutions not nearly as robust?
Dimon’s straight-faced assertion -- that the multi-billion dollar wrong turn in his London-based derivatives portfolio was “an isolated event” -- aimed to finesse the break-down of oversight and controls at the bank’s highest level where, as he invoked President Harry Truman, “the buck stops.”
But to accept Dimon’s embrace of the solutions of industry-wide capital and liquidity requirements – facile for him, because at levels his own bank can meet -- is to ignore the fundamental lessons of large-scale catastrophe:
Namely, it is precisely those with potentially disastrous impact – whether Japanese nuclear plant siting or Italian cruise liner routings or permissible banking activities – that are most demanding of the highest degree of attention.
- First, financial bubbles are inflated by the aggressive huffing and puffing of bankers acting in accordance with their basic DNA, only to burst inexorably because complex systems designed and run by humans are inherently susceptible to breakdowns beyond either prediction or prevention.
- Second, the inevitable excesses of the marketplace will always outpace the efforts of legislators and regulators operating under constraints of resources, comprehension, intelligence and constituent influence.
So, because the bankers cannot be constrained from using models and other self-deceptive devices that mask or rationalize their weaknesses, what can society expect from its regulators?
Given their inability to do more than scapegoat the last outburst with show-trial hindsight rather than anticipate the next one with perception and effectiveness, a structural response must be straightforward – recognizing both that self-interested bankers will push any regulatory scheme past the point of abuse, and that the regulators themselves lack the tools to stop them.
The comparison remains apt: If hammers are allowed in the toy-room, there will be breakage by the toddlers.
It is important that “too big to fail” has no bearing. Dimon’s “London whale” could have laid on his misguided portfolio, outside the boundaries of a permissive regulatory regime, on behalf of far smaller institutions – the rogue examples include Jon Corzine at MF Global and last fall’s Kweku Adoboli at UBS, and go back to and beyond 1995 and Nick Leeson on the Singapore fringes of Barings Bank.
What it does mean is that the repeal of Glass-Steagall’s separation of investment from commercial banking has proved catastrophically costly, enabling the kiddies to run amok with their hammers.
Which, in context of the Dimon hearings’ evidence of “boys and their toys,” should be profoundly disturbing. The rules still to come under Dodd-Frank – watered down by the on-going lobbying that Dimon claimed as the bank’s “constitutional right” – leave the bankers’ undisciplined playroom wide open and effectively unsupervised.
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