Like Lloyd Blankfein with the Abacus fiasco, and Jamie Dimon with “the whale trade,” Barclays CEO Bob Diamond has an unparalleled opportunity to surprise us this week during his appearance before Parliament to explain the most recent financial scandal involving the systematic manipulation of LIBOR, the benchmark interbank lending rate upon which hundreds of trillions of dollars of financial transactions are priced, over several years. Will Diamond seize the opportunity missed by both Blankfein and Dimon to emerge as the first true financial statesman of the modern global banking crisis?
JPMorgan CEO Jamie Dimon will today, once again, stand before the authors of Dodd-Frank and attempt to make the case for why a $2 billion trading loss was a stupid mistake, not a willful breach of at least the intent of the law. Our representatives who wrote the law should hold him to the standards set by JPMorgan’s own Code of Conduct: following the spirit and intent, not just the letter, of the law.
When Mr. Dimon’s predecessor J.P. Morgan Jr. was called before the Senate in 1933, he spoke humbly of a banker as a member of a long-standing profession for which there had grown a code of ethics and customs, “on the observance of which depend his reputation, his fortune, and his usefulness to the community in which he works.”
Despite the financial crash of 2008 and the passage of the subsequent Dodd-Frank reform bill, not enough has been done thus far to address the issue of too big to fail banks. With assets equivalent to 64% of GDP concentrated amongst six of the largest Wall Street banks today, Senator Sherrod Brown (D-OH) has recently introduced the Safe, Accountable, Fair & Efficient Banking Act of 2012. The bill, which has wide-ranging support from the likes of former the Federal Reserve Chairman Paul Volcker, Republican ranking member on the Banking Committee Richard Shelby, President and CEO of the Federal Reserve Bank of Dallas Richard Fisher, FDIC Board member Thomas Hoenig, Former Chairman of the FDIC Sheila Bair, economist Simon Johnson, Stanford finance professor Anat Admati, and former governor of Utah Jon Huntsman, was introduced by Senator Brown prior to a hearing entitled “Is Simpler Better? Limiting Support for Financial Institutions.” It seeks to impose strict limits on institutions' deposit and non-deposit liabilities and requires them to hold considerably more capital, reducing their leverage. In short, the bill seeks to break up big banks and prevent them from putting the nation’s economy at risk.
Much has been written about the trading—not hedging—debacle at JPMorgan. Jamie Dimon’s mea culpa is intended to head off deeper questions. No cover-up on his watch—get out in front, be direct, deal with it, move on. Right? Not so fast.
Reactions to departing Goldman derivatives salesman Greg Smith’s “Why I am Leaving Goldman Sachs,” which appeared as an op-ed in the New York Times last week, have ranged from the hyperbolic — Robert Reich’s “If you took the greed out of Wall Street, all you’d have left is the pavement” — to the addicted — Mayor Michael Bloomberg’s “we need their taxes” (my paraphrase).
Both views are problematic, as I will address. But first, some historical context:
The mystery of derivatives, the secretive multi-trillion dollar market that few understand but is believed to be at the heart of the financial meltdown needs illumination. Without it, policy makers have no chance of getting much needed regulation right. The recent NY Times piece, “A Secretive Banking Elite Rules Trading in Derivatives” was unhelpful in this regard. What follows is intended to be a laymen's and policy maker's guide to derivatives practices and profits.