I don’t think it was too much of a surprise that today’s hearing with Jamie Dimon was something less than stringent. Very few Senators bothered to show up with anything more than a list of questions and a pallid expression. The very structure of the hearing, with one round of five minutes of questioning, wasn’t conducive to being very meaningful.
I think Richard Shelby being so solicitous that he asked Dimon whether he wanted to go into closed session, something they do for the CIA, to discuss the trades, made the hearing border on ridiculousness. And most Republicans, and even Democrats like Michael Bennet (who asked him to weigh in on the country’s fiscal situation), gave a light touch.
Still, there were elements that were worth discussing. After Dimon ad-libbed in his opening remarks that “I include myself” among those executives who failed to manage risks with the Fail Whale trades, Tim Johnson did open by asking what Dimon knew when he said that the discussion of the trades was a “tempest in a teapot,” a month before announcing the losses. Dimon answered that he was “dead wrong.” But later in the testimony, as Yves Smith pointed out, later in the testimony, he says definitively that “the buck stops with me” on taking responsibility for the failed trade. That could be used in a criminal case, Smith notes:
Ironically, Dimon’s throwaway comment to Merkley, that he’s already confessed to and takes full responsibility for the ‘small’ synthetic derivative portfolio’s mistakes, was never picked up by the other senators, and I’ll be surprised if the media appreciates the significance of that wee confession. Since Dimon has admitted in Congressional testimony that he was responsible for the internal control failures in the CIO portfolio SOX [Sarbanes Oxley] should now be a slam dunk for the SEC. But of course, that will never happen.
We’ll return to Merkley’s exchange in a second.
Dimon tried to blame the losses on a lot of factors, and in such a way that doesn’t trip up his priorities later. As economist Rob Johnson mentioned in a conference call, Dimon has been lobbying vociferously against things like the Volcker rule. So he doesn’t want this Fail Whale mix-up to lead to a stronger regulatory environment. He tried to explain the trades as a hedge (never saying that they were one, but that he “believed” they were one, to keep him out of trouble), that would make small amounts of money in good times and more money when things went bad. They were also specifically tied to business in Europe. Bill Black, who was also on the call, targeted this as a non sequitur. “He said that senior management ordered the CIO to get out of the risk out of this underlying supposed hedge,” Black said. “But a hedge is supposed to be reducing risk, and it was protecting you from Europe going bad, when Europe is going bad. So it should have been making more money at this time.”
Black continued. “Instead of reducing the risk, the CIO went into a vastly more complex series of derivatives and went far larger, and they hid the losses. I mean, my God. They violated direct orders, lose a ton of money and lie about it. Dimon described a massive insurrection by the CIO.”
Then there was my favorite part of the hearing. In response to Sen. Jerry Moran, Dimon thundered about the need to crush banks that screw up:
Moran: Want to make sure taxpayers aren’t responsible. We set up a living will. Tell me about JPM’s living will.
Dimon: We have to get rid of anything that looks like too big to fail. We shouldn’t prop them up. You want to be sure they can fail and not damage the country. I think we should call it bankruptcy, not resolution. I’d fire the management, I’d fire the board. Resolution authority starts to put the structure in place. Give it to the regulators who know to do it. FDIC took down WaMu. We filed recently an analysis and report of how to take down JPM. I think the bank should be dismantled after that and the name should be buried in disgrace.
So then, here comes Jeff Merkley, after that display, and he lays this out. JPMorgan Chase took $29 billion in bailout money. They took $500 billion in loans from the Fed. They took who knows how much in counter-party payments from AIG. Without that federal intervention, wouldn’t YOU, Mr. Dimon, have been out of a job?
Dimon got very upset at this. His bank was asked to take all that money. “We would all like to be asked to borrow $500 billion,” Merkley said. Dimon said his bank was asked to do that as well, and that AIG was no big deal, maybe $1 billion. Merkley cut Dimon off, saying “Let’s agree to disagree, but I think that many analysts have reached the conclusion that if you’d applied that Old Testament Justice back in 2008, 2009, JPMorgan would’ve gone down and you’d have been out of a job.”
It was a nice come-uppance, but Dimon continued to be shifty. He maintained that the bank was not operating as a hedge fund, that the overall portfolio in the Chief Investment Office was conservatively managed, with a small yield, and that only this one piece of the synthetic portfolio got out of hand. What he described, while a hedge to him, wasn’t a hedge at all, but a bet on a general tail risk, not a specific exposure or position. “Calling this a hedge allows them to speculate in financial derivatives, and no one in their right mind, given the illiquidity, would make this as a hedge,” Bill Black reacted. Saying that the whole portfolio is conservative is irrelevant.
And if you can always call something a hedge after the fact, then a hedge exemption into the Volcker basically renders it meaningless. That’s the lesson of the Fail Whale trades. The supreme irony here is that JPMorgan was about to get away with this. They successfully lobbied for the hedge exemption in the Volcker rule, and had it granted, even though it would have allowed a trade like this that exacerbated a loss rather than mitigated it. “The reason Dimon is so furious is they were about to win,” Bill Black said. “And now that they’ve stepped in it, they might embarrass Treasury and the Fed into adopting a stronger rule.”
Later, to Sen. David Vitter, Dimon contradicted himself within the hearing, saying that the Volcker rule is unnecessary even if it was completely scrapped and rewritten, that stronger capital and liquidity requirements are all that’s necessary for a safer financial system. Earlier in the hearing, with Sen. Jack Reed, Dimon admitted that the Volcker rule “may have stopped parts of what this portfolio morphed into.” But by the time he got to Vitter, he wanted the Volcker rule completely gone, with only capital reserves used to plug risk. “He used a metaphor of different speed limits,” said Bill Black, “with the implication that the speed limit on JPMorgan should be no speed limit. They should use the Autobahn and we get to come along for the ride, but we use deposit insurance and the implicit subsidy of Too Big to Fail.”
Despite Dimon’s railing against too big to fail, he seemed to be just fine with the big part. He acknowledged some issues with how size can feed hubris and arrogance, but added that could happen anywhere. In a statement after the hearing, Sen. Sherrod Brown said, “We’ve seen time and time again that trillion-dollar, Wall Street megabanks deemed ‘too big to fail’ are also too big to manage.” Brown asked if the Chief Investment Office (whose assets alone would have been the eighth-largest bank in the COUNTRY) would need to make credit derivative trades if JPMorgan Chase didn’t have $2.3 trillion in assets, and Dimon mainly just grumbled. Even Republican Bob Corker raised the question of whether a bank of this size is just too complex to manage.
“There’s a mirage of false precision,” Rob Johnson said. “The idea that these things can be modeled and risk can be managed is technocratic fantasy.” The risk models didn’t work and were subsequently thrown out. The claims of “hedges” were laid bare as ludicrous. Johnson concluded, “We essentially have an ungovernable system. I’m not sure they have a sense themselves how to govern it.”
…one side note, the question Elizabeth Warren was dying to have answered, whether Dimon would step down from the New York Federal Reserve, never got brought up. In a statement after the hearing, Warren wrote:
“I have urged Jamie Dimon to resign from the New York Fed Board, and I think he should have used today’s hearing to do just that. This would have be at least one small sign that Wall Street will be held accountable for its failures. However, it is up Congress to pass legislation to prevent these kinds of conflicts from happening again. A second critical step is for Congress to pass an updated version of the Glass-Steagall Act. A 21st Century Glass-Steagall will separate hedge funds and risky investment from ordinary banking and prevent big Wall Street banks like JP Morgan Chase from gambling away people’s life savings. Banking should be boring.”