Ahab Finds His Whale: JPMorgan CEO Says “London Whale” Swallowed $2 Billion

CEO Jamie Dimon of JPMorgan Chase (shown left) went public with a whale of tale today about how one of its investors, Bruno Michel Iksil, known as the “London Whale” lost $2 billion in bad bets on volatile synthetic credit securities. What is most striking about the story is that Dimon was the executive who led efforts to limit reforms by the Federal Reserve after the last financial scandal. Now he says “There were many errors, sloppiness and bad judgment . . . grievous mistakes, they were self-inflicted.” Sound familiar?

Iksil is also known as “Voldemort” because of the massive power he wielded. Dimon has worked hard to prevent reforms limiting or monitoring such risk-taking enterprises. This includes opposition to the Volcker rule and related reforms.

Now Dimon is expected to blame the whale rather than his own anti-reform position. It is not the first time that a mad leader personified his own failings:

“All that most maddens and torments; all that stirs up the lees of things; all truth with malice in it; all that cracks the sinews and cakes the brain; all the subtle demonisms of life and thought; all evil, to crazy Ahab, were visibly personified, and made practically assailable in Moby Dick. He piled upon the whale’s white hump the sum of all the general rage and hate felt by his whole race from Adam down; and then, as if his chest had been a mortar, he burst his hot heart’s shell upon it.”

– Moby Dick, Herman Melville

Dimon can save time on writing his own testimony and simply take this from Melville:

Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee; from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee. Sink all coffins and all hearses to one common pool! and since neither can be mine, let me then tow to pieces, while still chasing thee, though tied to thee, thou damned whale!

He might however want to check what happened to Ahab in his final encounter with the whale.

Source: Time

50 thoughts on “Ahab Finds His Whale: JPMorgan CEO Says “London Whale” Swallowed $2 Billion

  1. “There were many errors, sloppiness and bad judgment . . . grievous mistakes” . . . like not sending you to prison for the rest of your life for your role in the CDS debacle, Jamie. Like not sending in the regulators to break up your bank. Like bailing your criminal acts of malfeasance out in the first place.

  2. Ahab lost a leg to the whale. Dimon only lost two billion. His salary and bonus won’t be effected. This is more like Dimon losing 2 or 3 hairs to the whale… He can go out and buy a transplant, no need to be upset.
    The ocean of American ignorance and apathy, is wide and deep. The Banksters have smooth seas, clear skies, and a far far horizon. The Banksters and Whales get along in “Moby Dimon” …er eh… I was going to write “Dimon Dick” and then giggle, but I’m much too mature for that.:)

  3. The headline in the Financial Times reads, “JP Morgan’s Whale Causes a Splash “. One thing for sure is that these bankers have not learned a thing. And Jamie was supposed to be one of the better ones….

  4. Dimon and Obama go way back, to the early 1990’s in Chicago. Dimon has always impressed being as being more amoral and arrogant that Lloyd Blankfein too.

  5. “Dimon and Obama go way back, to the early 1990′s in Chicago.”

    Aw, that’s so sweet. Barry has admitted to getting twisted by hanging around these types too much.

  6. Wall Street’s immunity
    Why has the Obama administration so aggressively protected the financial industry from legal accountability?
    By Glenn Greenwald


    Why Can’t Obama Bring Wall Street to Justice?
    May 6, 2012

    Despite his populist posturing, the president has failed to pin a single top finance exec on criminal charges since the economic collapse. Are the banks too big to jail—or is Washington’s revolving door at to blame? Peter J. Boyer and Peter Schweizer investigate:

    •Obama’s 2009 White House summit with finance titans, in which the president warned that only he was standing “between you and the pitchforks”

    •Why, despite widespread outrage, financial-fraud prosecutions by the Department of Justice are at 20-year lows

    •Attorney General Eric Holder’s lucrative ties to a top-tier law firm whose marquee clients include some of finance’s worst offenders

    •How Obama’s trumpeted “task force” for investigating risky mortgage lenders—announced in this year’s State of the Union speech—is badly understaffed and has yet to produce any discernible progress

  7. Jamie’s Cryin: Dimon, J.P. Morgan Chase Lose $2 Billion
    by Matt Taibbi
    May 11, 2012

    If you’re wondering why you should care if some idiot trader (who apparently has been making $100 million a year at Chase, a company that has been the recipient of at least $390 billion in emergency Fed loans) loses $2 billion for Jamie Dimon, here’s why: because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance. If the bank fails, someone will reach into your pocket to pay for the cleanup. So when they gamble like drunken sailors, it’s everyone’s problem.

    Activity like this is exactly what the Volcker rule, which effectively banned risky proprietary trading by federally insured institutions, was designed to prevent. It will be argued that this trade was a technically a hedge, and therefore exempt from the Volcker rule. Not only does that explanation sound fishy to me (as Salmon notes, for Iksil’s trade to be a hedge, this would mean Chase had an equally giant and insane short bet on against corporate debt, which seems unlikely), but it’s sort of immaterial anyway: whether or not this bet technically violated the Volcker rule, it definitely violated the spirit of the law. Hedge or no hedge, we don’t want big, federally-insured, too-big-to-fail banks making giant nuclear-powered derivatives bets.

  8. How Wall Street Killed Financial Reform
    It’s bad enough that the banks strangled the Dodd-Frank law. Even worse is the way they did it – with a big assist from Congress and the White House.
    By Matt Taibbi
    May 10, 2012

    Two years ago, when he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, President Barack Obama bragged that he’d dealt a crushing blow to the extravagant financial corruption that had caused the global economic crash in 2008. “These reforms represent the strongest consumer financial protections in history,” the president told an adoring crowd in downtown D.C. on July 21st, 2010. “In history.”

    This was supposed to be the big one. At 2,300 pages, the new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy. There would be no more AIGs, and the world would never again face a financial apocalypse when a bank like Lehman Brothers went bankrupt.

    Most importantly, even if any of that fiendish crap ever did happen again, Dodd-Frank guaranteed we wouldn’t be expected to pay for it. “The American people will never again be asked to foot the bill for Wall Street’s mistakes,” Obama promised. “There will be no more taxpayer-funded bailouts. Period.”

    Two years later, Dodd-Frank is groaning on its deathbed. The giant reform bill turned out to be like the fish reeled in by Hemingway’s Old Man – no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore. In a furious below-the-radar effort at gutting the law – roundly despised by Washington’s Wall Street paymasters – a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank. With the Quislingian covert assistance of Democrats, both in Congress and in the White House, those bills could pass through the House and the Senate with little or no debate, with simple floor votes – by a process usually reserved for things like the renaming of post offices or a nonbinding resolution celebrating Amelia Earhart’s birthday.

    The fate of Dodd-Frank over the past two years is an object lesson in the government’s inability to institute even the simplest and most obvious reforms, especially if those reforms happen to clash with powerful financial interests. From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while – but they can no longer make sure it stays passed. You win the modern financial-regulation game by filing the most motions, attending the most hearings, giving the most money to the most politicians and, above all, by keeping at it, day after day, year after fiscal year, until stealing is legal again. “It’s like a scorched-earth policy,” says Michael Greenberger, a former regulator who was heavily involved with the drafting of Dodd-Frank. “It requires constant combat. And it never, ever ends.”

    That the banks have just about succeeded in strangling Dodd-Frank is probably not news to most Americans – it’s how they succeeded that’s the scary part. The banks followed a five-point strategy that offers a dependable blueprint for defeating any regulation – and for guaranteeing that when it comes to the economy, might will always equal right.

  9. From what I have read the worst is yet to come in these derivative trades….. Whale blubber burns for quite a while……. Unfortunately they will he taking down those firms unable to sustain the loses….. About 97 of them and counting…..Wasn’t this something Dominic Strauss was going to warn us about before they found his weakness? Sometimes the messenger gets shot sometimes they get eliminated…… If it’s still on line…. I wonder what he had to really say about the IMF?……

  10. Dimon has complained that the financial regulations would cost JP Morgan over $400 Million. But he is not worried about losing a bet on 2 Billion! What a great CEO.

  11. This guy was primed to declare regulation to be the bain of capitalizm. Give us our bailouts but the bail bucket is ours. Where is Willard Romney, the Bain Capital genuis, on this issue?

  12. Never mind Holder’s recent NWU speech that did more to undermine the US Constitution than all the previous undermining over 200 years combined, you remember, where Obama decreed he’s got the right to be judge, jury and executioner of every living soul on the planet: “This is a vital part of the Obama legacy. The prior decade witnessed the most egregious crimes imaginable by the nation’s most powerful actors: torture and warrantless eavesdropping from political officials (with the aid of corporate giants), and massive fraud from financial elites. None has been held accountable; the opposite is true: the Obama administration has steadfastly protected all of them.” (G. Geenwald 2-10-12 – Salon)

    The main reason Prof. Turley & I along with 80 million others who won’t vote for President in this election are the grotesque & Orwellian abridging of inviolate legal principles. Never have such fundamental legal principles, as Greenwald reiterates in the same Salon article above: “undergone such a relentless assault under this administration. That general development is odious in its own right. That the specific shielding of Wall Street is driven by such corrupt ends makes it even worse. But the worst part of it all is that Obama is going to spend the next six months deceitfully parading around as some sort of populist hero standing up for ordinary Americans and the safety net against big business, and hordes of people [like lots of the regular commenters on this blog] WHO KNOW HOW FALSE THAT IS will echo it as loudly and repeatedly as they can, tricking many people who don’t know better into believing it.” (G. Geenwald 2-10-12 – Salon)

    Res ipsa loquitur

  13. It was Senator Scott Brown of my state who helped water down the Volcker Rule:

    Wall Street CEOs Personally Lobby Federal Reserve To Weaken New Financial Regulations
    By Travis Waldron on May 3, 2012

    Federal regulators in charge of writing the Volcker Rule, which would ban federally-insured financial institutions from risky proprietary trading, are moving at a faster pace than expected and could have the rule finalized by September.

    Wall Street banks have been lobbying to weaken the rule since it was originally proposed by its namesake, former Federal Reserve Chairman Paul Volcker, and now that it is just months away from finalization, their efforts are getting stronger. The chief executives of six major Wall Street banks, led by JPMorgan Chase CEO Jamie Dimon, traveled to Washington yesterday to personally lobby the Federal Reserve on multiple issues — weakening the Volcker Rule chief among them — Bloomberg reports:

    JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon led Wall Street bosses in a closed-door meeting to personally lobby the Federal Reserve about softening proposed reforms that might crimp their profits.

    The contingent, which included Bank of America Corp.’s Brian T. Moynihan, 52, and Goldman Sachs Group Inc.’s Lloyd C. Blankfein, 57, pressed the Fed on rules they said would overstate trading risks and harm financial markets, the central bank said yesterday in a statement. They also discussed what they see as flaws in Fed stress tests designed to gauge the strength of the nation’s largest lenders.

    Wall Street banks, with the help of Massachusetts Sen. Scott Brown (R), were able to water down the Volcker Rule even before it became law as part of the 2010 Dodd-Frank Wall Street Reform Act. Since the law passed, they have pushed to make it even weaker, falsely arguing that it poses a major risk to the American economy. The banks have been so successful weakening the rule that Volcker himself was disappointed in its outcome.

    Not all bankers oppose the rule. Greg Smith, the former Goldman Sachs trader who publicly resigned from the firm, unknowingly made the case for the rule in an editorial in the New York Times, and a former Merrill Lynch banker recently said the rule was “necessary to correct a mistake that poses a danger to our economy.”

  14. This reminds me of the law in Vegas that wont let a 200 lb ten year old shoot craps in the Casino. If he is too big to fail then dont let him shoot craps. If he is too young to shoot craps then dont let him shoot craps. If he is too big to fail in the banking business he is shooting craps with our money.

  15. The government should not allow a firm to call itself JPMorgan after all the Morgans have died off. Dumb Dimon would be ok.

  16. Forget same sex marriage as a big topic in the news. What does Willard have to say about this story? Too big to fail Willard? Bail them out with the public bucket from the public trough?

  17. This is a most informative site, thank you Jonathan Turley.
    This is a most informative site, thank you contributors.
    I have bookmarked this thread, there is a wealth of relevant links.

  18. Wasnt Dodd-Frank supposed to stop this stuff?

    You mean to tell me they didn’t anticipate this? How can that be? Liberals are so smart, they don’t create loophole filled regulations which favor donors( hat tip to Charles Schumer and Chris Dodd).

  19. http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act

    Reinstate the Glass-Steagall Act. Too simple? Most of the Big Eight accounting firm consolidation happened during the Clinton administration. Now it’s the Fat Four. Bad idea.

    The destruction of the Arthur Anderson accounting firm was also a bad idea. Kill off the Houston office if you want, but why destroy the entire firm? KPMG almost met the same fate, but the federal government finally decided it might not be a good idea to consolidate the accounting industry any further.

    BTW – the accounting industry used to make massive political contributions to both political parties. The AICPA might try to deny that. Just business.

  20. “Reinstate the Glass-Steagall Act. Too simple?”

    Nope. Not just too simple. Too effective at stopping the kind of criminal speculation banks are currently engaging in.

  21. JPMorgan Trading Loss Suggests Little Has Changed Since The Financial Crisis
    By D.M. Levine

    If you thought Wall Street had learned its lesson four years after the global financial crisis, JPMorgan Chase’s $2 billion trading debacle suggests you should think again, investment bankers and industry experts say.

    To some, it suggests that the need for financial reform is still just as urgent as it was the day the crisis broke out.

    JPMorgan revealed on Thursday that it had lost about $2 billion (with possibly more losses to come) from risky bets on opaque derivatives at a London trading desk.

    The pressure on the bank intensified on Friday, with reports that the Securities and Exchange Commission had opened an investigation of its trades and Fitch Ratings downgrading the bank’s long-term credit rating to A+ from AA-.

    JPMorgan’s big losing trade shows that at least some big banks are engaged in the same sort of behavior that rocked the financial system in 2008, if on a smaller scale.

    “This is a smaller version of the same betting that went on in 2006,” said Will Rhode, a principal and director of fixed income at The Tabb Group, a financial-markets research and advisory firm.

    “Ultimately, this is about banks being dissatisfied with the single-digit returns on equity that are associated with their conventional lending businesses, and trying to find other ways to make money,” said Daniel Alpert, founding managing partner at investment bank Westwood Capital, “with risk, once again, taking a backseat to potential reward.”

    The episode has provided ammunition to those calling for new regulations, particularly the part of the Dodd-Frank financial reform act known as the Volcker Rule, or a ban on proprietary trading by federally insured banks. The rule is currently scheduled to take effect in July, though Federal Reserve Chairman Ben Bernanke has suggested regulators will probably miss the deadline. Part of the delay is due to a barrage of pressure from lobbyists, who have helped to complicate and water down the rule.

    “This latest debacle at JPMorgan demonstrates that the banks cannot police themselves, and should not be trusted to do so,” said law professor Frank Partnoy, director of the Center on Corporate and Securities Law at the University of San Diego. “At minimum, they should be required to disclose details about their derivatives, so their shareholders can understand what risks they are taking.”

  22. The rule is currently scheduled to take effect in July, though Federal Reserve Chairman Ben Bernanke has suggested regulators will probably miss the deadline. Part of the delay is due to a barrage of pressure from lobbyists, who have helped to complicate and water down the rule.
    Wait until the value of the U.S. dollar implodes. Thank the lobbyists. And the weak politicians. At the beginning of the 20th century, Argentina had a higher standard of living than the United States.
    “This latest debacle at JPMorgan demonstrates that the banks cannot police themselves, and should not be trusted to do so,”
    No kidding.
    “At minimum, they should be required to disclose details about their derivatives, so their shareholders can understand what risks they are taking.”
    Can you understand the details of the derivatives risks? The people taking those risks have supercomputers to run the calculations. Don’t forget about Quantum Computer 9000.

  23. You cannot fix a predatory system that’s designed at its base to be fixed no more than you can alter the base instincts of a cat. How about a system that puts people before profits?

  24. Philly Deals: Jamie Dimon loses his luster
    Joseph N. DiStefano
    May 13, 2012

    Through the deep financial crisis and its slow aftermath, JPMorgan Chase & Co. chief Jamie Dimon was the Last Man Standing. But Thursday night, he was just another limping bank boss with some explaining to do.

    As chairman and CEO of the largest U.S. lender, a company he had banged together from a string of big-name but troubled loan and investment firms since the late 1990s, Dimon had kept his job through the financial meltdown and come out of it with the reputation for acuity and depth and the profitable record to challenge President Obama and Federal Reserve boss Ben Bernanke over whether companies like his had grown too big for the public’s safety.

    And then, Thursday night, Dimon acknowledged that a French trader in his London office had blown $2 billion ($1 billion net) of the company’s own money in a failed strategy that was supposed to hedge the bank’s exposure to credit losses. “Poorly monitored, poorly structured, poorly reviewed” by his own treasury, Dimon admitted. “Egregious.” JPMorgan shares tumbled, wiping out more than $10 billion in value.

    “Terrible timing,” bank analyst Jeffrey J. Harte told his clients at Sandler O’Neill + Partners L.P., a bank-investment firm in New York. The loss, Harte wrote, is not an existential threat to JPMorgan — $1 billion is about what the bank collects in profits every three weeks. Still, he told clients, he’ll no longer project a premium price for JPMorgan shares; after such an embarrassing stumble, Dimon’s bank no longer deserves special treatment.

    “It’s a major step backward,” veteran bank-watcher Dick Bove, of Rochdale Securities in Connecticut, told me. Typically a critic of government regulation, Bove said JPMorgan’s error “ruins” bankers’ credibility at a time when they seemed to be winning the fight to ease heavy-handed oversight.

    Dimon “should survive. But he’ll have to rebuild,” Bove said. “His mantra has always been, ‘Reward success, punish failure.’ So some people are going to be fired. And his aura of invincibility is gone. And breaking up the banks will now be an issue in the presidential race.”

    It could still blow over — investors will forgive — if the losses turn out to be less than Dimon’s warning, said David Kotok, boss at Vineland-based Cumberland Advisors. On the other hand, Dimon himself warned, things could get worse in the quarters ahead.

    The loss strengthens the case for bank critics who agree with ex-Fed chief Paul Volcker that commercial banks like JPMorgan — whose customer deposits are insured by solvent banks and those who rely on them, and backed in times of crisis by taxpayers — shouldn’t be making such big financial bets with company money. It also helps those who believe we should go back to the Depresssion-era separation between companies that take deposits and lend and have an easy-to-trace role in the real economy (call them banks) and those that make ingenious, calculated, high-stakes bets on more abstract investments (call them, for example, hedge funds).

  25. The One Thing Jamie Dimon Got Right This Week: William D. Cohan
    Sunday, May 13, 2012

    About two-thirds of the way through JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s stunning conference call Thursday, in which he announced that the hedging strategy originating in the firm’s vaunted “chief investment office” had cost the firm $2 billion, he seemed to hit his stride.

    “It is very unfortunate,” he said, “this plays right into the hands of pundits out there. But we have to deal with it.”

    Well, Jamie, as a former JPMorgan Chase managing director turned Wall Street pundit, here you go: The problem with the unexpected loss and its hasty announcement was not so much the sheer magnitude of the losses — a firm with a trillion-dollar balance sheet can withstand them — but that for weeks you and your fellow senior executives have been pooh-poohing the risks posed by the huge proprietary bets being made by your bank’s Bruno Michel Iksil (aka the London Whale).

    After Bloomberg News revealed the extent of the gambling that was going on in JPMorgan’s London office on April 5, Dimon called it a “complete tempest in a teapot” and heaped scorn on the journalists who revealed the extent of the bet and how it was roiling debt markets throughout the world. The firm’s chief financial officer, Doug Braunstein — my onetime boss, who fired me in 2004 — told the press on April 13 that the chief investment office “balances our risks. They hedge against downside risk, that’s the nature of protecting that balance sheet.” Braunstein added that he was “very comfortable with the positions we have” and that all of the positions are “very long-term in nature.”

    What’s worse, in February, during the company’s annual investor day, Dimon further belittled the journalists in attendance by mocking their questions about Wall Street’s inordinately high compensation structure, whereby — generally speaking — 40 percent to 50 percent of every dollar of revenue generated goes to the employees who work there. At JPMorganChase, the compensation expense ratio in 2011 was around 35 percent, while at Goldman Sachs Group Inc. and Morgan Stanley it was higher — in the 50 percent range — and at Lazard Ltd., it was 63 percent.

    Why Wall Street feels the need to pay the people who work there so much money is the question. Whom do these firms serve? The shareholders who own them or the employees who work there? For far too long, the answer has been — sadly — the bankers. Why don’t Dimon and his fellow industry leaders understand that the less that gets paid out to employees, the more that goes to the bottom line?

    But Dimon would have none of it, at least during the investor day conference on Feb. 29. He even thought it would be funny to dig out a comparable statistic from a newspaper company and found one that showed that journalists’ compensation had eaten up 42 percent of the paper’s revenue. That’s “damned outrageous,” he said. “Worse than that, you don’t even make any money! We pay 35 percent. We make a lot of money.” He’s right about that. In 2011, JPMorgan made $19 billion in profit. Dimon received compensation of $23 million.

  26. It could still blow over — investors will forgive — if the losses turn out to be less than Dimon’s warning, said David Kotok, boss at Vineland-based Cumberland Advisors. On the other hand, Dimon himself warned, things could get worse in the quarters ahead.
    Oh, really. Can we say, cook the books if you can. Where is the transparency? Ask Quantum Computer 9000.

  27. JPMorgan Resignations: Three Executives At Bank Reportedly Will Resign Following $2 Billion Loss

    NEW YORK (AP) — Three high-ranking executives at JPMorgan Chase are expected to leave their jobs this week after a trading blunder cost the bank $2 billion, The Wall Street Journal reported Sunday.

    The Journal, citing people familiar with the situation, reported that one of the executives is Ina Drew, who for seven years has run the risk-management division at the bank responsible for the loss.

    The other two identified by the newspaper are an executive in charge of the London desk that placed the trades and a managing director on that team. The bank did not immediately return a message from The Associated Press.

    The $2 billion loss, disclosed on Thursday by CEO Jamie Dimon, has been an embarrassment for the bank and led lawmakers and critics of the banking industry to call for tougher regulation of Wall Street.

    On Friday, investors shaved almost 10 percent off JPMorgan’s stock price. Dimon said in a TV interview aired Sunday that he was “dead wrong” when he dismissed concerns about the bank’s trading last month.

    “We made a terrible, egregious mistake,” Dimon said in an interview that was taped Friday and aired on NBC’s “Meet the Press.” “There’s almost no excuse for it.”

    Dimon said he did not know the extent of the problem when he said in April that the concerns were a “tempest in a teapot.”

    The loss came in the past six weeks. Dimon has said it came from trading in so-called credit derivatives and was designed to hedge against financial risk, not to make a profit for the bank.

    Dimon said the bank is open to inquiries from regulators. He has also promised, in an email to the bank’s employees and in a conference call with stock analysts, to get to the bottom of what happened and learn from the mistake.

    Dimon told NBC that he supported giving the government the authority to dismantle a failing big bank and wipe out shareholder equity. But he stressed that JPMorgan, the largest bank in the United States, is “very strong.”

  28. Why We Regulate
    Published: May 13, 2012

    One of the characters in the classic 1939 film “Stagecoach” is a banker named Gatewood who lectures his captive audience on the evils of big government, especially bank regulation — “As if we bankers don’t know how to run our own banks!” he exclaims. As the film progresses, we learn that Gatewood is in fact skipping town with a satchel full of embezzled cash.

    As far as we know, Jamie Dimon, the chairman and C.E.O. of JPMorgan Chase, isn’t planning anything similar. He has, however, been fond of giving Gatewood-like speeches about how he and his colleagues know what they’re doing, and don’t need the government looking over their shoulders. So there’s a large heap of poetic justice — and a major policy lesson — in JPMorgan’s shock announcement that it somehow managed to lose $2 billion in a failed bit of financial wheeling-dealing.

    Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on.

    Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,” which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.

    So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts. Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.

    This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences.

    It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics. It’s clear, that is, to everyone except bankers and the politicians they bankroll — for now that they have been bailed out, the bankers would of course like to go back to business as usual. Did I mention that Wall Street is giving vast sums to Mitt Romney, who has promised to repeal recent financial reforms?

  29. Elaine:

    “Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time.”

    Krugman seems to neglect or doesnt understand that people made money on the other side of that trade.

  30. from a Wall St. Journal Article by Gregory Zuckerman:

    For a group of hedge funds and other traders, J.P. Morgan Chase & Co.’s sudden $2.3 billion trading loss means big profits, according to people familiar with the matter.

    Firms such as BlueMountain Capital Management LLC and BlueCrest Capital Management LP each scored gains of about $30 million, according to people familiar with the matter. Representatives for the firms declined to comment.

    One trader elsewhere estimated that well more than a dozen firms, including his, as well as traders at banks also profited by taking the other side of J.P. Morgan’s trades.

    I keep wondering what Krugman did to win a Noble Prize in economics.

  31. Bron,

    “I keep wondering what Krugman did to win a Noble Prize in economics.”

    Maybe one day you’ll understand.Till then keep reading Rupert’s WSJ.

Comments are closed.