Don't Look Now -- Banks Are Still Ruining America: 6 Harsh Lessons from the JP Morgan Fiasco

JP Morgan, the white knight of banking, supposedly weathered the 2008 crisis with little difficulty. It was not in danger of collapsing like Lehman Brothers and it did not really need bailouts in order to survive, or so it proudly proclaims. Furthermore, its CEO, Jamie Dimon, was known as “Obama’s banker,” a relatively liberal financier who cared both about his bank and his country.

Now, we know this was all a sham.

The truth is that there are no good banks and bad banks among the giants of finance. That’s just a feel-good story that gives us false hope that individuals and individual institutions can fix a system that is rotten to the core.

JP Morgan Chase is no different than other big banks, except that it is the biggest. It is part of an entwined system of too-big-to-fail institutions that are ripping us off. Leading up to the 2008 crash, it was up to its eyeballs packaging and selling mortgage-backed securities that were designed to fail. It helped pump up the housing bubble, profited while it was inflating and profited again while it burst. It was forced to pay a $153 million fine last year for “misleading big investors about the riskiness of mortgage-related securities it was selling just as the home-loan market was melting down.”

JP Morgan helped to crash our system in 2008 and profited handsomely from the bailouts it claimed it really didn’t need (but thank you very much, we’ll take them anyway). And now it's back in the gambling business just like all the other big banks and hedge funds. And should another crash come, we’ll again be asked to pick up the tab -- it's still “too big to fail” according to the conventional wisdom.

But the problem is bigger and deeper than it was even before the horrendous crash. On a day-to-day basis, these large financial institutions use their vast gambling enterprises, to extract profits from our economic system while creating little or no value in return. Economists call these profits “economic rents.” That's French for “rip-offs.” Where does this money come from if the banks are not creating new economic value? It comes from the rest of us in the form of stagnating wages, higher fuel costs and excessive financial fees on mortgages, credit cards and loans. It also comes from tax breaks for the super-rich that the rest of us have to make up. And finally it comes from the costs associated with financial crashes – bailouts, job loss and deficit-related problems.

How big is big?

  • The top five U.S. banks own approximately 60 percent of all U.S. banking assets.

  • Their combined assets total $8.5 trillion which is slightly larger than China’s GDP ($7.2 trillion).

  • JP Morgan Chase heads the list with $2.3 trillion in assets, which is about the size of Great Britain's GDP. We’re talking big.

Fantasy finance fails again

While Jamie Dimon was using his political muscle to bend the Dodd-Frank rules so his bank could gamble at will, his bank was gambling at will. Oh, he would never call it gambling. He says it’s just hedging its other investments, which is the prudent, banker-like thing to do. But really, hedging is just a phrase that bankers use to justify any and all bets they want to place. And they want to place those bets because they are sure they can win. JP Morgan Chase made billions of dollars of profits on tens of billions in bets designed, supposedly, to protect the value of its corporate bond portfolio. (If you have a strong stomach for finance, you can get some of the gory details here.)

A large part of JP Morgan Chase's betting strategy involving playing the A.I.G. game using those nefarious credit default swaps we’ve been hearing so much about, and that JP Morgan Chase invented two decades ago. That game goes like this:

Make believe you’re an insurance company and you are writing insurance on corporate bonds that you don’t own. You guarantee that if the bonds fail, you will make the person you insure whole. In exchange you get premiums, just like a real insurance company. But you don’t call any of this insurance because:

  • Insurance is heavily regulated – you have to have ample reserves to pay off losses. But if you call it a credit default swap you aren’t regulated as an insurance company.

  • Also in the insurance industry you can’t take out a policy on your neighbor’s house unless you own it. That’s because about 800 years ago someone figured out that if you did, your neighbor’s house might mysteriously burn down. But in the credit default insurance game, you can insure anything and everything. You don’t need to own what you insure. And you are free to burn down others' assets if you can. 

This is supposed to allow you to hedge your risk. But since you can bet on bonds you don’t own, it quickly turns into a game of fantasy finance, much like fantasy baseball. It’s pure gambling and no one has yet to show that it has any redeeming economic or social value. (In fact, as an avid fantasy baseball gambler, I believe strongly that fantasy baseball is far more socially useful and far less dangerous that fantasy finance.)

Well, JP Morgan Chase’s gambling house – called the Chief Investment Office – decided to follow in the footsteps of A.I.G. and insure others who were betting on corporate bond derivatives. The bank figured out, just like A.I.G, that the more derivatives it insured, the more revenues it would receive in the form of premiums. It was like printing money (and then getting fat bonuses based on those hefty premiums). As long the corporate bond market didn’t go bad, they could just pocket those premiums and not worry about paying out on their insurance bets. Like A.I.G., they thought the risk of having to pay up was minimal.

Of course, they had incredibly complex ways to cover their bets. There derivatives piled onto derivatives like planes stacked up at JFK. But those strategies collapsed when the corporate bond market started to deteriorate over the past several months.

JP Morgan Chase became so big in this obscure casino market that they were able to manipulate it. At first the manipulation helped them milk the market for more than $3 billion in profits over the past several years. It was a rigged game while the relatively good times lasted. But the game turned sour when the corporate bond market deteriorated. That’s when being a big fish in a small market meant trouble. It means you can’t sell your gigantic positions to cover your bets because there are no buyers. Instead, hedge funds saw the bank as a beached whale and bet against it. To date, something like $13 billion has evaporated in the form of former profits and current losses, with more sure to come.

So, what are the lessons learned?

1. The big banks are still gambling. Shocking, isn’t it? Obviously, it’s a way of life. It’s built into the fabric of who they are. They always have at the ready a cover story about how they’re just hedging their assets, making markets for their customers and protecting their downside. Baloney. Their real motive is ever so simple --- money. Financial gambling is the quickest way to big bucks. When the big banks and hedge funds see the opportunity, they jump at it. It’s in the DNA of the banking system. It's what the financial elite are trained to do – all of them. And it will never change as long as we allow them to play with all that money. Why invest long-term in goods producing industries when you can milk your casino?

2. The big banks know that even if they get caught and fail, we will bail them out. JP Morgan, so far, has not taken down the entire financial system with its bad bets. But that’s more by luck than by design. We still don’t know the full extent of its losses. Everyone knows, however, that JP Morgan Chase will be rescued by the taxpayer should things get rough. There is zero chance that we will allow it to fail. How would you approach gambling in Las Vegas if you knew that your losses would always be covered?

3. Too big to fail also means too big to regulate. There are dozens of regulators who are “embedded” in JP Morgan Chase as well as the other large banks. That means that each day these federal regulators walk into their offices at JP Morgan Chase and pore over the books. Yet, they didn’t spot this casino until it already failed? That should tell us that Dodd-Frank can never handle these too-big-to-fail banks. The bill itself is now too big to implement, thanks to Jamie Dimon and his tireless lobbying efforts. Together the big banks watered down the bill and are now trying to drown it. But even a perfect bill would be impossible to fully implement in banks that are larger than large countries.

(Fox News, of course, is all over this angle. It’s a great chance to attack the Obama administration and regulations in general. But they have no solution other than letting the free market decide what’s best. That ought to really scare the big banks!)

4. To close the casino, the big banks must be broken up. There is no way to reform a too-big-to-fail bank without breaking it up into much smaller pieces. No bank should hold more than $50 billion in assets. Banking should be a public utility designed to aid the economy, not to enrich its biggest gamblers. It’s supposed to turn savings into investment, not into a craps game. And as long as they're too big to fail, they're gambling with other people's money. (A return to fully separating commercial banking from investment banking is a good start. But the separated banks also would need to be dramatically reduced in size.)

5. The JP Morgan crisis makes the case for a financial transaction tax. Big banks gamble in part because they have more money than they can profitably invest in firms that produce goods and services in the real economy. This excess money becomes their gambling stake and it makes them itchy to place their bets. The answer is to make each and every transaction more costly through a financial transaction tax – basically a very small sales tax on securities of all shades and colors. You want to write credit default insurance? You pay a small transaction tax that takes away a good deal of your potential profits. You want to buy a derivative, sell it, buy it again and then swap it for another? Then each transaction will cost you. This kind of tax would suck about $150 billion a year out of Wall Street putting downward pressure on financial salaries and bonuses. (The National Nurses United union is leading a campaign for this gambling tax. You can join the effort at

6. Cap all bank compensation packages. For a very short while during the crisis our political leaders got religion about Wall Street incomes. They understood that bubble profits were based on fantasy finance that evaporated during the crash. The resulting damage and bailouts led to salary caps on bailed-out companies. But as soon as the banks returned the overt TARP bailout money, the caps disappeared. That was a huge mistake. They needed to be made permanent. Or if you want to be more fair-minded, the caps should stay in place until the unemployment rate returns to 5 percent.

Rather than looking for individuals to blame (even though so many richly deserve it) we should go after the entire banking system. Our case is simple. The big banks and their hedge fund friends crashed the economy with their reckless gambling. They killed 8 million jobs, caused a collapse in government revenues and led to mounting federal debts. Meanwhile state and local government services and employment were cut -- all thanks to Wall Street. Our financial elites should pay us back for the damage they caused. The only language they understand is money.

But wouldn’t that drive the best and the brightest out of the financial sector?



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