What’s The Problem With The Whale?

Posted by Jeff Carter
on March 15th, 2013

Retiring Senator Carl Levin has been investigating Jamie Dimon’s whale. It’s pretty clear that JP Morgan ($JPM) screwed up. The question is should the government care if they can afford to take the hit?

Dance card, 1884, "Hall's Dining Rooms&qu...

Dance card(Photo credit: Wikipedia)

As a trader, I have absorbed some pretty big losses occasionally. As long as I could afford the risk, it really only mattered to me and my immediate family. I think the same dictum sort of applies to JP Morgan. If they can afford to pay, let them play.

However, the banks couldn’t afford it back in 2008. Taxpayers paid. Hence, Senator Levin’s interest in what’s going on at the bank today. Even a free market libertarian like me thinks it’s proper for the government to investigate if I am on the hook to bail them out. My clearing firm had the right to pull the rug out from under me if I got to whacky with my trading positions.

To get people up to date, there has been a clear trajectory toward where banks are today. It started way back in the Clinton administration when Democrat Treasury Secretary Robert Rubin and Republican Senate Finance Chair Phil Gramm got together to allow banks, insurance companies and investment banks to combine. I am glad everyone in America wants to see political parties work closely together to “get things done” today but I digress.

The repeal of Glass-Steagall set off a chain reaction that was happening organically with the combination of Travelers Insurance and Citibank ($C). If that merger hadn’t been allowed to happen, the pressure to combine financial entities under one roof would have been delayed-but not stopped. The next step was private partnership investment banks listing their shares on public markets($MS, $GS).

Once the banks began playing with the public’s money the game changed significantly. It went from ours and investor money (OIM) to other people’s money (OPM). They took a lot more risk because they had a lower cost of capital, and they didn’t have to answer personally to their investors.

When you don’t have to go toe to toe with actual investors-it’s a lot easier to be abusive. Just look at faceless comments on the internet. Many times real people in real situations would never say the same things..

Banks can talk about how they are “pious stewards of capital”, but their actions belie that statement. Often times they are very reckless and are so big they have little control over risk.

Once the banks went public, and the government created incentives for assumption of too much risk concentrated in one place, the house of cards was destined to fall. No piece of legislation that has been passed since has made the marketplace any safer. No regulation written has curbed potential bad behavior.

It’s not a question of if another house of cards will be built, it’s a question of when and how bad will it hurt when it falls.

Dodd-Frank has made it worse in ways most people don’t even realize. Prior to the law, exchange clearinghouses ($CME, $ICE) weren’t able to borrow at the Federal Reserve window to bail themselves out in case of a crisis. Today they can. They can because Dodd-Frank is forcibly trying to push over the counter markets into a clearinghouse. Just because you have a hammer doesn’t mean you need to pound it.

We had a golden opportunity to reform the nation’s financial system in 2009. Those (Obama, Dodd, Frank) with their hands on the levers of power totally blew it. They codified “too big to fail” by writing it into law and expanding the edict. New Treasury Secretary Jack Lew will make sure that it stays in place.

The US needs to change the way it regulates banking, trading, and other parts of our financial system. But, there is zero chance that it will happen a way that is economically efficient, or makes it more transparent to American citizens. Very few people truly understand the ins and outs of every part of the banking/trading/lending/thrift system. Those that do have a vested interest in keeping it the way it currently stands.

Today’s hearing on the whale is just one more dance between the partners of Too Big to Fail Banks (TBTFB) and Big Government. Don’t be surprised when you try to get a dance with TBTFB and you find her dance card is full-forever.

And you get to pay for her cover charge, room fee and bar bill.

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thanks for the link Doug Ross.

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