On May 10, Jamie Dimon, Chief Executive Officer of JP Morgan, the largest bank in the United States, broke the news that it suffered a $2 billion trading loss over a recent six week period on a derivatives portfolio that was initially designed to reduce risk. Following this JP Morgan shares dropped nearly seven percent and wiped out nearly $10 billion in shareholder equity by the end of the next day. By the end of the following week Chief Investment Officer, Ina Drew retired and estimates raised the actual loss to $3 billion and could be as high as five. Additionally JP Morgan was hit with three shareholder lawsuits accusing executives including Dimon of misleading investors about the extent of the mistake. This of course gave supporters of greater financial regulation a perfect example despite Dimon’s protests to the contrary. JP Morgan emerged from the recent financial crisis relatively unscathed and was seen as a responsible investment bank among many that were not.
Taking some perspective of the situation this trading loss which is the fifth highest in history is largely an isolated event and not occurring simultaneously with many of the infamous collapses in 2008. And while the parent company JP Morgan Chase is a banking and financial service company JP Morgan is investment banking so everyday people with bank accounts will not lose anything. However, many banking firms are involved with other companies and investment banks so if one collapses it can bring down more than just the defective bank. That will not happen in this case since despite the staggering loss of $3 billion JP Morgan is still a strong enough institution to bear it. However, it still makes it very difficult to advocate deregulation considering the size of this loss and how much worse it could be. As of February Federal Reserve Chairman Ben Bernanke reported that regulators will not make the deadline for the Volcker Rule which is to go into effect July 21, however in the wake of this latest financial blunder there will be fewer credible critics to argue for it and the Dodd-Frank Bill of which it is a part. The current congress lacks the votes to get stricter reforms passed, but this latest debacle makes the odds of repeal less.
In addition to this being just what reformers needed in their fight against deregulation it is also a boon to President Barack Obama’s campaign since there is no positive way for Republicans to explain this. Three billion dollars is inconsequential when one is dealing with figures in the trillions, but while it is more money than most people will ever see in their life for Republican challenger, Mitt Romney it would be if he lost his personal fortune twelve times. Too often free market economists want people to look at the big picture and quickly dismiss billion dollar losses, however, with so many Americans out of work or struggling to make it through another month such an amount is hardly insignificant. Romney who supports repealing the Dodd-Frank Act has been largely silent about the loss except that just because he supports repeal does not mean he is against any regulations. The problem is Dodd-Frank actually has weak points that large financial firms exploit and Republicans in Congress have largely curtailed the enforcement powers. One has to wonder just what kind of law he would replace it with considering all its weaknesses including inaction over preventing the formation of “too big to fail” banks.
Both Democrats and Republicans have been timid about passing stricter laws on financial regulations, but at least with the former you can expect some half hearted attempt whereas the latter has tacked so far to the right that any regulations passed will be largely ineffective and illusionary. No matter who wins in November Wall Street will have a good year it’s just the bounty will vary. As such financiers and bankers would prefer Romney to win and to ensure that they should have been more careful since it is precisely this risky activity that makes voters reconsider their arguments over deregulation. People still remember the crises in 2008 which is also why the economy is in its present condition.
President Obama may not have to do much of anything if supposedly responsible financial institutions make such catastrophic mistakes. The Republicans have capitalized on voters’ needs for simple explanations and solutions, but explaining what went wrong and how increasing regulations will hurt the economy in such a way is impossible. While details are still emerging apparently what happened was hedge fund insiders became aware of increased credit default swaps because of Bruno Iksil, a trader at JP Morgan. Known as the “London Whale,” Iksil is infamous for his aggressive trading thus prompting heavy opposing bets including some from another branch of JP Morgan which purchased the same derivatives in such high volume. Apparently executives knew as early as April that something was not right, but dismissed such concerns until losses in the hundreds of millions began to emerge and did not admit it until May 10. All Democrats need to say is it took one aggressive trader and poor oversight for this to happen.