“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master— that’s all.”
-Lewis Carroll, Alice in Wonderland
The House Financial Services Committee hearings on the losses in JP Morgan’s Chief Investment Office were an improvement over the Senate version, in that there was comparatively little fawning over Jamie Dimon and more earnest, even if not very successful, efforts to pry information from him (one wonders whether the fact that Chuck Schumer has been hitting Wall Street up for superPac donations was a contributing factor). Even some Republicans got a bit stroopy with him, including the Representative from Bank of America, Patrick McHenry.
But to anyone who knows bupkis about finance, the striking thing was how many times Dimon gave sloppy to downright dishonest answers. And they didn’t have the feel of the kind of careful word parsing that Goldman execs did when under Congressional hot lights in 2010, of people who’ve been scripted and rehearsed to give very narrow answers and duck anything that will put them on rocky ground. While there was nothing wrong with Dimon’s manner, our buddy Amar Bhide was right when he called Dimon’s answers Orwellian. He played remarkably fast and loose with words and definitions. It was disrespectful, but not in a way that anyone could have called him out on it. The five minute limit on questions made it impossible to do the sort of questioning it would have taken to nail down Dimon’s misrepresentations.
Let’s give a few examples of Dimon’s crude propaganda efforts. I wish I had a transcript; I’m working from rough notes, and some of the memorable howlers were quick asides.
At one point, Dimon tried calling making loans proprietary. This was an effort to insinuate that the Volcker Rule’s efforts to ban proprietary trading would interfere with core banking businesses.
Brad Sherman presented Dimon with the results of an IMF study (via Bloomberg) that showed that JP Morgan had lower funding costs due to its implicit government guarantee. Dimon responded by arguing that single A industrial companies pay less for funds than his AA rated bank. Huh? Industrial company funding costs are completely irrelevant and Dimon knows this. It’s a “blow smoke” answer.
McHenry argued that the Dodd Frank orderly liquidation authority preserved too big to fail. I happen to agree because I’ve gotten estimates that 30% to 50% of JP Morgan’s derivatives contracts are under UK law, and therefore the FDIC could not override their termination or cross default clauses if it tried putting the parent into liquidation and keeping the subsidiaries going. Since derivatives are booked in the depositary, it’s hard to see how the FDIC can stop derivatives not under US law being terminated or subject to higher haircuts as a result of a parent company resolution, and that not producing a risk of a run on the depositary (which is what the OLA was meant to avoid). McHenry then asked for Dimon to discuss the difference between OLA and bankruptcy. There’s a considerable difference, but Dimon dissed McHenry (whose poorly worded question gave Dimon too much rope) by telling him he saw them as the same.
Dimon (annoyingly) kept claiming the failed trade was a hedge. That’s only because Dimon uses a wildly personal definition of what a hedge is: something to protect you from Bad Things Happening. No, that is either a reserve or insurance. A hedge is a position taken to reduce or limit losses in a position you already have. And he kept promoting the dubious idea that portfolio hedging should include bets against systemic risks (Dimon kept presenting hedging against systemic risk as if it was a unitary phenomenon).
Dimon kept maintaining that because his organization was slow to pick up on how risky the trade was, that regulators couldn’t be expected to have caught it either. That’s barmy. As we stressed, this trade violated a really basic premise of trading desk management: never take a position that is too large for you to unwind quickly (shorter: never get too big relative to that market). Lisa Pollack of FT Alphaville (who wrote extensively that something WAS amiss before JPM woke up to it) demonstrates today that regulators could have seen something suspicious was going on and have tracked it back to JP Morgan from DTCC reports.
Nevertheless, there were some interesting themes throughout the day: jousting over Dimon’s opposition to regulation, Dimon’s insistence that US banks needed the right to compete against those evil foreign banks who got better treatment (this was actually not true when the trade was being put on; Eurobanks were subject to what is referred to as Basel 2.5, meaning a tightening in capital standards as part of the gradual implementation of Basel III. JP Morgan and other US banks are actually arbing the fact that foreign branches, which fall under US regs, are not effectively overseen by US supervisors. The UK’s FSA has argued they’d get better oversight if they were made into subsidiaries, which would put them under the purview of foreign regulators).
But the most important difference of views was on whether banks were serving the real economy or themselves. Some even dared to talk about banking as a utility, and Dimon conceded that if JP Morgan were regulated it could would not have lost money in the CIO trade. Several Congressmen took up the theme, but the most persuasive statement came from Gary Ackerman:
Ackerman: What’s the difference, briefly, between gambling and investing?
Dimon: When you gamble, on average, you lose. The house wins.
Ackerman: That been my experience in investing.
Dimon offers to find him a better investment advisor and Ackerman looks amused.
Ackerman: I would tend to agree with you. But we seem to be treating them quite the same. I used to think all of Wall Street was on the level, that it facilitated investing, that it allowed people and institutions to put their money into something they believed in and believed would be helpful and beneficial and would grow and make money and especially good for the economy and on the side create a lot of jobs good for our country and good for America
Now a lot of what we are doing with this “hedging,” and you can call it protecting your investment or whatever, but it’s basically gambling. You’re just betting that you might have been wrong. It doesn’t help anything succeed any more or encourage anything any more. It creates the possibility that people say “Do these guys really know what they are doing if they are now betting against their initial bet?” And then if you go and hedge against your hedge, which means you’re betting against your first bet, it seems to me that you are throwing darts at a dart board and putting a lot of money at risk just in case you were wrong the first time. I don’t see how that creates one job in America, I don’t see how it helps the American economy, I don’t see how it helps the housing market or the building market or the “let’s make steel” or widget market one tenth of a zillionth of a percent. What it helps is if you are right a majority of the time, then it makes a bunch of money for the guys who did it, and doesn’t help the company or the industry, the economy, or the country at all. And if you are wrong, it puts systemically everything at risk. And when I mean everything, I mean the confidence the American people, the investing community, and everybody else has in the system. And that’s a loss you can’t hedge against.
This point is essential. Dimon started his remarks by claiming that the US had the best capital markets in the world. Nothing like an appeal to American exceptionalism in DC. But he tried to present himself as aligned with their. In fact, the success of the US financial markets rests on the size of the American economy and on the fact that in the wake of the Great Depression, we created the best investor safeguards in the world, including regular, audited financial reports and prohibitions against insider trading, front running, and misleading or incomplete disclosures. Dimon and his peers are unabashedly out for what is best for banks, and argue that it is somehow good for the rest of us, when the evidence is overwhelming that the industry is more and more a cancer on the real economy.
The US capital markets are running on brand fumes, the global economy is likely to have at best a faltering recovery, with a lot of people ground into penury by protracted joblessness and loss of savings and asset value. When the histories of this period are written, the top bankers like Dimon and their refusal to cede ground to the good of the public will be seen as a primary cause of persistent economic and social distress.