Tuesday, May 15, 2012

The JPMorgan Chase fiasco reveals the huge structural flaws that persist on Wall Street by Eliot Spitzer

What to do with Jamie Dimon? The CEO and Chair of JPMorgan Chase has tried so hard in the past several years to seem the “good banker.” He is so charming and gracious, yet all the while lobbying, cajoling, pushing, and wheedling to eviscerate any semblance of real reform on Wall Street. He shrugged off the cataclysm of 2008 as just something that happened, like the weather—no need for any structural reform.

Now the chickens have come home to roost—at least 2 billion of them—and it is clear that Chase is like every other big financial institution with distorted incentives. Thanks to a backstop of a federal guarantee, these gigantic institutions get to keep all the upside of crazy bets while the government gives them all the downside protection they need. Earlier this year, Dimon pooh-poohed concerns about the risks his traders were taking. Did Dimon not understand those risks, not care to know about them, or actually mislead the public about them?

But it isn’t so much money, they cry! True, in the context of Chase’s balance sheet, a $2 billion loss can be absorbed. But it shows once again the impossibility of trusting the banks in the absence of structural reform and regulation to control their willingness to take almost unmitigated risk. Of greater significance than the size relative to Chase’s balance sheet is that the loss was in a relatively stable market in which most people are finding it easy to trade. Imagine if the market had been choppy—the losses could have been even more gargantuan—and if several institutions had been in the same position, then the aggregate effect could have become once again cataclysmic.

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