Wednesday, May 16, 2012

Why is Obama kissing Dimon's Tail?

On The View (God save me for mentioning this silly show) yesterday, President Obama called Jamie Dimon--CEO of JPMorgan Chase--"one of the smartest bankers we’ve got." Obama calls JPMorgan Chase, itself, "one of the best-managed banks there is."

Yet now, that "best-managed" bank is being investigated by the FBI for a $2 billion "trading" loss, described by Dimon as a hedging error. The person directly responsible for the loss--Ina Drew--has taken an early retirement, after earning bonuses in excess of $15 million in each of the last two years.

These are the Masters of the Universe, the people most often targeted as reaping unjustified rewards for pushing paper, at the expense of everyone else. And now, the Administration and some members of Congress are using this incident to ramp up efforts for reform in the financial industry:
In Washington, U.S. Treasury Secretary Timothy Geithner said JPMorgan's losses strengthened the case for reform.

"I think this failure of risk management is just a very powerful case for ... financial reform," Geithner told an event sponsored by the Peterson Foundation. "The test of reform is not whether you can prevent banks from making mistakes ... the test of reform should be: 'Do those mistakes put at risk the broader economy, the financial system or the taxpayer?'"

Larry Summers, Treasury secretary in the last years of the Clinton administration, said JPMorgan's loss strengthened the case for stronger capital requirements at banks.

"I think that whatever one thought about how large a safety buffer was necessary 10 days ago, it seems to me that in light of what has happened one would tend to have a bias towards larger safety buffers, larger capital requirements, larger levels of liquidity," Summers said in an interview for the Freeland File show on Reuters.com.

Congress meanwhile ratcheted up its own response to JPMorgan's trading blunder, which comes as policymakers are finalizing new rules for the bank industry.

"I would suggest that JPMorgan take their business to Las Vegas because it's just a gamble," Senate Majority Leader Harry Reid, a Democrat who represents Nevada, told reporters.
Big talk. Yet, Dimon enjoys close relationships with prominent people in the Administration--like Obama and Geithner--having visited the White House some 16 or more times. And he's tight with Obama's Chicago crowd, as well:
Dimon spent several years in Obama’s hometown of Chicago, where he ran Bank One after a nasty breakup with his one-time mentor. He got to know Rahm Emanuel. He hired Bill Daley as a top executive before Daley became Obama’s second chief of staff. He gave hundreds of thousands of dollars in contributions to Democrats.
So, are we really supposedly to believe he is about to become the poster-boy for Wall Street reform in the Summer before the 2012 Elections?


Unlikely. For Dimon is knee-deep in the behind-the-scenes wrangling in 2008 that ended Bear Stearns and led eventually to the bankruptcy of Lehman Brothers, as detailed in William Cohan's House of Cards. At the time, Geithner was chairman of the New York Federal Reserve and worked out a deal with Dimon, wherein JPMorgan would walk away with all of Bear Sterns' legitimate assets for a bargain-basement price of $2 a share (the stock was trading at over $90 a share just a few weeks before). All of the risk for this deal was magically borne by the Fed, as Geithner extended a loan to JPMorgan to buy the stock. If things went bad, JPMorgan wouldn't have to repay the loan, the government would just eat the loss; it was truly the "deal of the century." Ultimately, backlash and lawsuit threats forced the price up to $10 a share, but JPMorgan still made out like a bandit. And this is one of the chief reasons why JPMorgan made it through the financial crisis unscathed. Indeed, it made money.

And that's because of Dimon's genius and sound management skills? No (this is not to say Dimon is not smart, however). It's because he had the right connections and because people like Geithner were more than happy to cut deals, rather than own up to the failings of the Fed at oversight.

Now, we have calls for more reform, more oversight. But the truth is, the government barely enforces the current rules, barely engages in the oversight they are already tasked to perform. Because politicians--like Obama--would rather play golf with Dimon and take his money. This "investigation" will be another dog and pony show, mark my words.

Cheers, all.

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