First the Department of Justice, then the FBI, and finally, the U.S. Senate: everyone wants a piece of Jamie Dimon in the wake of news of a multi-billion dollar prop trading loss at JP Morgan, and many in finance are shaking their heads at the idea of such official inquiries. It’s been said several times by several people in the past week–losing money is just a regular part of the business and should be treated accordingly.
Former Federal Reserve governor Lawrence Lindsey has an insightful op-ed in today’s Wall Street Journal discussing the real reason behind the summons: the bottom line is that Jamie Dimon has been deferential to neither side of the aisle, and the Senate is seizing news of this outsized trading loss as an opportunity for payback.
Lindsey elucidates the real importance of this perverse positioning by Congress, who writes that the “clear lesson to anyone participating in the market is to become more risk averse.” He does not mince words (emphasis added):
The most direct impact of a political climate hostile to risk-taking will be on liquidity. Washington is undermining the institutions that comprise the greatest capital market in history.
While a less-liquid capital market is an abstraction for the simple-minded in our nation’s capital, an inexorable decline in asset prices, including equity prices, is not. J.P. Morgan’s trading loss led to a belief that even more regulation was on the way. Thus the market value of the company initially fell by $15 billion, far greater than its $2 billion trading loss—and it has fallen more since.
The Federal Reserve can do all the quantitative easing it wants in a desperate effort to inflate asset prices and household wealth. But if risk-taking and corporate profitability are diminished, this will all come to naught. Washington’s demagogues are hard-wiring the next downturn.
A $2bn loss, to be sure, is more than enough to raise eyebrows and supply a steady stream of headlines. This is especially true when that loss occurs at JP Morgan, the bank helmed by a CEO who is considered one of the more prudent risk managers on the Street. And those losses are unrealized ones brought about by a forced mark to market; the losses will surely grow larger as JP Morgan attempts to unwind the trade. But the size of the loss seems somewhat less remarkable when compared to JP Morgan’s $200bn trading book or its $2.3tn balance sheet. Even the CIO unit specifically responsible for the blunder has banked nearly $6.8bn in profits over the last few years, so they haven’t been such a total drain on the bank, even in light of the recent episode.
It will be very interesting to hear the questions the Senate has prepared for the JP Morgan CEO. The recent hearings on the MF Global investigation–a criminal matter–in which disgraced former CEO John Corzine was asked to testify were an utter disappointment. Even recent memories of that episode notwithstanding, it’s hard to see what value the Senate can add here, and it will likely do more harm than good.