(Source: Thomas Olson The Pittsburgh Tribune-Review (MCT) — Europe’s financial union looks like it could unravel. Greece is grappling with a run on its banks. In America, Congress can’t seem to put its fiscal house in order. And then the nation’s biggest bank blows a $2 billion gasket.
JPMorgan Chase’s mammoth loss from risky securities trades adds to investor uncertainty and raises questions about how the government regulates banks, many experts say. Even more shocking, most agree, is that the loss occurred under CEO Jamie Dimon, whom many considered America’s most respected banker.
“This definitely adds fuel to the fire and gives regulators something to hang their hats on,” said Tony Carfang, partner at Treasury Strategies in Chicago, a consultant to banks worldwide.
“We view this as an important cautionary tale,” said Bartlett Naylor, financial policy advocate at Public Citizen, a liberal public policy group in Washington. “If such a bank can make this kind of error, then regulators, who must shield taxpayers, should forbid these financial transactions in the first place.”
Financial experts question the ramifications of what happened — how it might add to regulatory fervor, and whether it might affect investing and lending.
Yet, some experts think publicity is blowing JPMorgan’s mess out of proportion.
“I think this is a media story divorced from reality,” said Allan Meltzer, professor of political economy and public policy at Carnegie Mellon University. “Is it something new, to learn banks lose money? No. Investments go bad, loans go bad, and that’s no surprise.”
Dimon dropped the $2 billion bombshell on analysts just days before the bank’s annual meeting on Tuesday. Still, shareholders voted 9-to-1 to approve his $23 million pay package.
JPMorgan spokesmen declined to comment to the Tribune-Review about the securities trades but said Dimon told analysts the bank sold other securities for profits that brought the net loss down to $800 million.
A $2 billion trading loss is big — but a blip on JPMorgan’s radar screen. The loss equals less than one-tenth of 1 percent of the bank’s nearly $2.3 trillion in assets. It’s about one-tenth the size of JPMorgan’s nearly $19 billion in 2011 earnings, or revenue minus expenses.
“JPMorgan has vastly more capital than it had a few years ago, and it just took a loss,” Meltzer said. “But the public won’t lose anything. The stockholders will, which is the way it should be.”
During America’s 2008-09 financial crisis, Dimon orchestrated JPMorgan’s rescue-by-acquisition of the nation’s largest savings and loan, Washington Mutual, and investment bank Bear Stearns.
“The guy got both Bear Stearns and Washington Mutual for pennies on the dollar as almost every other large-bank CEO was hiding under his desk,” said bank analyst Nancy Bush of SNL Financial, an industry research firm in Charlottesville, Va.
Dimon, a vocal critic of regulation of U.S. banks, objected publicly to the government forcing it and seven other banks to accept billions in aid in October 2008 as the financial crisis unfolded. JPMorgan was among the first to repay its aid, which totaled $25 billion.
“I think the politicians will use this for demagoguery,” Jay Sukits, assistant professor of business administration at the University of Pittsburgh’s Katz Graduate School of Business, said about JPMorgan’s “very stupid mistake.”
U.S. Sen. Bob Casey Jr., D-Scranton, said the Obama administration and regulators have yet to implement the Dodd-Frank Act, legislation Congress passed in July 2010 to overhaul Wall Street dealings and protect consumers.
“That is unacceptable,” Casey said. “We cannot allow the kind of Wall Street gambling that got us into this financial mess to happen again. Wall Street needs to be held accountable, and it is important that we implement the laws that we have passed to guard against this kind of risky behavior.”
Sukits, a former Wall Street banker, and some others believe Congress should reinstate the Glass-Steagall Act, the Depression-era law that separated commercial banking and investment banking but which lawmakers repealed in 1999.
“Glass-Steagall was to keep banks from losing money in the stock market and having to raid depositors’ funds to cover the losses from their market bets,” Sukits said. The law might have stopped JPMorgan from making risky securities trades, he said.
A limited version of the law — the Volcker rule, named for former Federal Reserve Board Chairman Paul Volcker — is being finalized and is expected to take effect this summer. The regulation would curb banks’ trading in risky securities, such as junk bonds, and jeopardizing federally insured deposits.
Some banking experts say tighter regulations, along with the tough economy, have made it harder for banks to raise money and made them averse to lending to anyone but financially solid, favored customers.
“Since the financial crisis, regulation has gone too far and is too prescriptive to do anything other than hamper America’s businesses’ business’ ability to raise capital,” Carfang said.
“Regulators won’t solve this. They are no better at making these (market) judgments than the banks are,” said Meltzer, a noted expert on the Federal Reserve. “Regulators had people at all the large banks before the housing crisis occurred, saw those (mortgage securities) transactions and didn’t object to them.”
JPMorgan’s stumble might cause some to wonder whether PNC Financial Services Group or The Bank of New York Mellon could stumble into similar mine fields. Experts doubt it.
“They don’t do this kind of trading,” Sukits said.
Staff writer Salena Zito contributed to this report.
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