Obama's Favorite Banker Jamie Dimon Bitches About Regulations, Has Short Memory

“I have a great fear someone’s going to write a book in 20 years and the book is going to talk about all the things that we did in the middle of a crisis to actually slow down recovery.”  - Jamie Dimon, CEO JP Morgan Chase 

In hot pursuit of the “Bankster of the Year Award,” Jamie Dimon, the CEO of JP Morgan Chase, is gaining quickly on Lloyd “Doing God's Work” Blankfein, the CEO of Goldman Sachs. You’ve got to admire Dimon’s nerve to complain, as he recently did to Fed Chair Ben Bernanke, that the heavy hand of financial regulations is slowing down our pathetic economic recovery. It takes even more chutzpah to argue that the financial markets can actually police themselves instead.  

Dimon is banking on the spread of financial amnesia – that incurable disease that causes us to forget that the era of banking deregulation led to the worst crash since the Great Depression and caused the loss of over 8 million jobs in a matter of months. (How many jobs is that? It’s the equivalent of the entire workforce of New England.)  

If you didn’t black out completely, you should remember that Wall Street’s reckless (unregulated) gambling spree did us in. And you also should realize that we haven’t done nearly enough to prevent our financial elites from taking us down again.    

Through the haze of time, Dimon hopes we’ll forget that we bailed out his bank along with all the other big players on Wall Street. Although he and his PR minions claim that his bank was completely solvent and really didn’t need any help, the truth is that without the bailouts and the enormous government-backed guarantees of all manner of "toxic" assets, JP Morgan Chase would have gone under as well.  

Instead of letting them take their lumps as the "free market" would dictate, we now have fewer big banks that are even bigger and that have even more control over their markets. Of course these oligarchs want less regulation. They have returned to record profits and bonuses, and have not had to pay a dime in windfall taxes or surtaxes on their obscene bonuses. Only in finance can you puff up a bubble and rack up phony profits, wreck the economy when it bursts, get bailed out so that you can profit again like nothing happened, and then have the gall to complain about mild regulations that might make it just a bit harder to rip us off again. Oh…and get even bigger when all is said and done. 

And should they fail? They know we have no choice but to bail them out again because they have been deemed by the US government as “systematically important financial institutions.”  

But Mr. Dimon’s Teflon image as Obama’s favorite banker is now under assault. Due to the Pulitzer Prize-winning reporting of ProPublica’s Jesse Eising and Jake Bernstein, we’ve learned that the hedge fund Magnetar and JP Morgan Chase were in cahoots on some particularly slimy deals.  

It turns out that JP Morgan Chase worked with Magnetar to structure a $1.1 billion collateralized debt obligation (CDO) deal called Squared that was purposely structured to fail spectacularly. (A CDO squared is a CDO composed of slices of other CDOs, which in turn are composed of slices of large pools of often shaky mortgages.) Magnetar was permitted to select the most toxic mortgage pools to put into these CDOs, and then to bet enormous sums that they would fail. JP Morgan let them rig the game because of the enormous fees that would accrue to Dimon and company for putting the scheme together. 

Unfortunately, making the deal work also required that JP Morgan sell the damaged goods to its clients by convincing them the securities were highly rated and would not fail. Low and behold, when the CDOs blew up just as Magnetar had planned, the hedge fund walked off with $290 million and JP Morgan “earned” $20 million, while the clients lost their shirts. The word “fleecing” comes to mind. Here’s how Eising and Bernstein put it:   

JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses, the banks didn't disclose to CDO investors the role Magnetar played. 

(A former JP Morgan executive is under investigation by the SEC. JP Morgan Chase also may have fleeced itself as it kept $800 million of the supposedly “safe” slices of the deal which soon turned out to be worthless. What we don’t know is whether or not it pawned off those slices to the Fed as collateral for loans.)  

What will prevent JP Morgan Chase from doing something like this again? Financial ethics? “Free” markets? The tooth fairy? 

In fact, the current debate is far too narrow; the Dodd-Frank bill calls for mild new regulations while Wall Street wants none of it.  In the end, we will likely learn the hard way, yet again, that we need even stronger regulations including those that would bust up the largest banks so that they never again can take us down.  

The case for such protections for consumers and investors is strong. If you look at the impressive array of data compiled by Kenneth Rogoff and Carmen Reinhart in This Time is Different, you will find that periods of tight financial regulations correspond with the lack of financial crises, and that eras of deregulation are chock full of them. From 1946 to about 1970 the regulatory régime created by the New Deal and the 1944 Bretton Woods agreement virtually abolished financial crises both here and abroad. Also, during that period, Wall Street salaries were no higher than equivalent jobs in the rest of the economy, while the rest of the economy was humming. That stability and control over finance helped us build a middle class that was the envy of the world.  

After deregulation took hold, financial crashes returned with a vengeance, culminating in the 2008 crash which nearly took us back to the Great Depression. And as deregulation set in, middle-class incomes stalled while financial incomes went through the roof.  

But no regulatory régime will work today unless we also radically restructure the financial industry. JP Morgan Chase and the other 18 or so “systemically important” financial institutions are just too big. Period. There is no way to effectively manage or regulate such giants. They will increase their speculative activities precisely because they know they are too big to fail.  

Our forefathers had more guts. When the robber barons got too big at the turn of the 20th century, they busted the trusts. When finance took down the economy in 1929, the New Deal regulated them into submission for the next 50 years. This time, however, when Wall Street again was on its knees begging for help, we bailed them out instead of busting them up. 

I will make Mr. Dimon a bet. The book “someone is going to write in 20 years” is not going to focus on how regulations hurt the recovery. Instead, it will focus on why we failed to break up the financial trusts that were such a clear and present danger to us all.