To engage in derivative trading is to venture into pirate-infested seas, an environment in which hedge fund trading has swelled to the point of creating “new kinds of risk and play[ing] a major role in the meltdown of the world’s financial system.” Moreover, because of the foolish 1999 repeal of the Glass-Steagall Act--the Depression-era legislation of 1933 that separated commercial banking from investment banking--our largest banks may still take our deposits, continue to rely upon government protection of losses through the F.D.I.C., yet now freely gamble it all by steering into these risky, pirate-infested seas. From the point of view of the American public, this is like chartering a relaxing cruise, only to have the ship’s captain steer a course through the Gulf of Aden and the Straits of Malacca.
|Pirate skiffs alongside a merchant ship|
|Achilles Macris, JPMorgan Chase, London office|
|Boaz Weinstein, Saba Capital Management|
In Azam Ahmed’s article about Weinstein, “The Hunch, the Pounce, and the Kill,” I direct you in particular to paragraphs 18-23, in which he describes a conference at JPMorgan’s New York offices in February. It was here that Weinstein essentially set the bait that hooked and landed “the London Whale.” OK, please forgive this shift of metaphors from piracy to fishing, but I hope we can agree that these two activities share a lot more besides their aqueous environment.
|Beached Whale (no picture available of Bruno Iksil)|
|An example of the salty observation of our ex-Vice-President|
|21st century pirates|
Previously, when a big ship (read JPMorgan) needed to sail through dangerous waters, it could fall back on the protection of naval fleets (read government regulations). Unfortunately, decades of greedy manipulation had reduced the effectiveness of such protection. In this case, besides the repeal of Glass-Steagall, American banks had successfully lobbied for deregulation ever since 1980: the Depository Institutions Deregulation and Monetary Control Act of 1980; the Garn-St. Germain Depository Institutions Act of 1982; the rabid and counterintuitive deregulatory movement cultivated by Alan Greenspan’s Ayn-Rand-inspired, free-market philosophy; the appointment of Wendy Gramm as chairperson of the U. S. Commodities Futures Trading Commission, which led to the exemption of swaps and derivatives from all regulation (not to mention her subsequent seat on the Enron regulation board); and, after Glass-Steagall fiasco of 1999, the SEC ruling that investment banks could determine their own net capital.
Emboldened by these acts, our big banks felt that they ruled the seas and were invulnerable. No one could impede their progress, and they could take all the risks they wanted with impunity. In fact, even as they greedily pressed for still more deregulation, by this past year our four biggest banks (JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs) “held roughly 95 percent of the industry’s total exposure to derivatives.” This is not where banks should be.
|Jamie Dimon, chairman, president, CEO of JPMorgan Chase|
The best we can hope for is for Barack Obama to be re-elected and for Democratic gains in both the House and the Senate. Obama at least understands how the repeal of Glass-Steagall encouraged “a winner take all, anything goes environment that helped foster devastating dislocations in our economy,” as he told an audience at Cooper Union in March of 2008.
Mitt Romney, on the other hand, seems clueless as to any historical connections between what happened in the last few months at JPMorgan Chase and our deregulation. His only comment so far was that “this was a loss to shareholders and owners of JPMorgan and that’s the way America works. Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain.” Is this man for real? What insanity!
As Romney sees things, just as long as someone makes money, everything is all right. God help us. If Romney becomes our next President, he will continue to push for more deregulations of the banks, and that will create the conditions for another financial crisis. Our pirates have clearly shown that our big banks have no idea how to safely navigate the economic oceans of our world. And with continuing blunders, such as this most recent one by JPMorgan Chase, our big banks have done nothing to earn that blind faith that a Mitt Romney or most of the Republican establishment still put in them.