What JPMorgan $2B Loss Means
Since last Thursday heads have rolled at JPMorgan in the wake of a $2 billion investment loss. Biggest head among them is highly regarded 30-year veteran Ina Drew, JPMorgan’s Chief Investment Officer (CIO).
At the surface a 2% loss on a bad investment seems innocent enough. Its recoverable without threatening insolvency for a bank like JPMorgan.
But the frightening reality is it exposes a systemic problem that still persists within the financial system that could easily trigger a repeat of the Great Recession of 2008.
The Glass-Steagall Connection
The reason JPMorgan was able to make the speculative investment that led to a $2 billion loss is because the portion of the Glass-Steagall Act of 1933 that made such investments illegal was repealed in 1999 under President Bill Clinton.
The Great Depression of the 1930s was caused by banks making speculative investments with depositor funds. When highly speculative deals went sour the banks lost their depositor’s money. That led to the stock market crash of 1929, then to runs on banks, then bank closures and finally the Great Depression.
Among many other good things, Glass-Steagall made it illegal for banks to be in the investment business and it protected depositor funds by creating the FDIC.
After 1999, however, banks once again could gamble in the stock market. It took them just 8 years to create the 2nd largest economic crisis in U.S. history by making speculative investments in home mortgages.
The Great Dodd-Frank Failure
The other reason JPMorgan was able to make the speculative investment that led to a $2 billion loss is because the Dodd-Frank Wall Street Reform Act of 2010 that was touted to fix the root cause of the Great Recession didn’t fix it.
Dodd-Frank made mostly peripheral changes to convey the appearance the problem had been fixed. Among the most important, it created a bailout fund that banks must pay into to foot the cost of future systemic failures.
It’s sorta like a super FDIC for banks that uses bank money instead taxpayer money to pay for the bailouts. In 2008 taxpayers funded the bailouts with TARP. Fortunately, that has since been recovered.
It had some eye candy consumer protections included to make it look good to voters during the middle of the 2010 election cycle. It was signed into law by President Obama on July 21, 2010.
The reason Dodd-Frank didn’t have real teeth is that it’s primary authors (Tim Geither, Lawrence Summers, Barney Frank, Chris Dodd) had a vested interest in covering up their own culpability in causing the Great Recession. An explanation is beyond the scope of this article, but it was roughly like having the wolves protect the hen house (the hens being bank depositors and taxpayers).
The Volker Rule Won’t Cut It
Much ado has been made in the news that the Volker Rule will really fix the problem when it is fully implemented in two years. It is part of Dodd-Frank.
The bottom line, though, is that the Volker Rule still allows speculative investments by banks. It will only implement a series of murky government oversight rules to limit risky bank investments.
It is a far, far cry from reinstating Glass-Steagall.
A surprisingly lucid article about the Volker Rule appeared in the Huffington Post just after the public comment period on it ended:
“The Volker Rule: Return to Sender“
– Robert Kuttner, Huffington Post, 2/26/2012
JPMorgan’s $2 billion speculative investment loss is a gaping wound that clearly reveals that the root cause of the Great Recession of 2008 still exists.
A further complication is that JPMorgan’s speculative investments didn’t happen in the United States. They were made in London. That leaves open the unanswered question whether or not those investments can be regulated under U.S. law.
That aside, it was a mistake to repeal the speculative investment portion of Glass-Steagall in 1999 and Dodd-Frank, with its convoluted Rube Goldberg Volker Rule, doesn’t fix it.
Until the simple, straightforward rule from Glass-Steagall is reinstated, the United States will remain in danger of a repeat of 2008.