JPMorgan betting on economic crash
JPMorgan Chase Chief Executive Jamie Dimon on Wednesday appeared before the Senate Banking Committee to defend the bank’s recent multibillion-dollar trading losses.
He was in the hot seat after his bank earlier disclosed at least $2 billion in surprise losses. Lawmakers were concerned that America’s banking industry was back to its old pre-crisis ways even after taxpayers had risked trillions bailing out the big Wall Street banks.
Dimon sought to assure the public that the bank’s loss was an isolated incident of bad judgment that that wouldn’t be repeated.
“I’ve already confessed to the sins [of the bad bet],” Dimon reminded Oregon Democratic Sen. Jeff Merkley. “We will never do something like that again.”
But what is more interesting than Dimon’s supposed repentance is America’s most prestigious bank’s evident views on the economy and Dimon’s view on future bank bailouts.
When asked about JPMorgan’s recent loss, he said: “This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis.”
“What it morphed into, I will not try to defend.”
Of course Dimon says the bet was really just a “hedge” to protect the bank in case of unforeseen economic shocks. Let Dimon’s actions be words of warning. When JPMorgan is betting on an economic crash—pay attention. It is extremely reminiscent of Goldman Sachs (America’s second most prestigious bank) betting on the mortgage meltdown in 2007—just as the housing market peaked, before melting down.
Interestingly, if another crash does come, Jamie Dimon says taxpayers should not rescue the bank. “We have to allow our big institutions to fail. It’s part of the health of the system,” he said. “We shouldn’t prop them up. We have to allow them to fail.”
“I think the banks should be dismantled after that, and their name should be buried in disgrace. So there’s a little Old Testament justice here.”
Dimon’s reference to Old Testament justice might seem somewhat refreshing, but it is also self-serving.
JPMorgan is probably the strongest bank in America. And if its “hedges” are evidence, it is prepared for round two. When the next banking crisis strikes, perhaps triggered by events in Greece and Europe, JPMorgan has plenty to gain if its competition is allowed to fail. Taxpayers would pick up the insured deposits on the failed banks, while JPMorgan could, like a vulture, pick up the leftovers.
Don’t expect the Senate Banking Committee’s investigation of JPMorgan to actually de-risk America’s leveraged, derivative-bloated, Casino Royale banking sector. As Al Lewis, columnist for Dow Jones Newswires, says, “Wednesday’s hearing proved once again that this task is beyond mankind.”
