Sunday, March 17, 2013

A London Whale, A Dallas Banker and the Need for Change

Last week, a U.S. Senate committee investigating JP Morgan’s $6.2 billion loss by the “London Whale trader reported that the firm was involved in “trades so large in size that they roiled world credit markets” and that “risk evaluation models were manipulated” and “inadequate regulatory oversight was too easily dodged or stonewalled … and financial results were misrepresented” and the firm “made disclosures that raise significant concerns about the accuracy of the information it provided to investors and about omissions of key information.”
During Senate testimony on Friday, Ina Drew, who oversaw the JP Morgan unit at the time said, “I did not, and do not, believe I bore personal responsibility for the losses.” CEO Jamie Dimon was not present at the hearing.

Also last week, Federal Reserve Bank of Dallas President Richard Fisher reiterated his observations about “too big to fail” banks including:
  • a dozen megabanks today control almost 70% of the assets in the U.S. banking industry,
  • the megabanks can raise capital more cheaply than can smaller banks,
  • this is patently unfair. It makes for an uneven playing field, tilted to the advantage of Wall Street against Main Street, and it places the financial system and the economy in constant jeopardy. It also undermines citizens' faith in the rule of law and representative democracy,
  • the 2010 Dodd-Frank Act was a well-intentioned response to the problem. Its stated promise—to end "too big to fail"—rings hollow,
  • Congress should rewrite Dodd-Frank so that it actually ends the problem of banks that are too big to fail and
  • our proposal won't lead to bigger government. It will lead to smaller banks governed by the market discipline of creditors who are at real risk of losses, and by laws that apply equally to all.”
  • Regarding JP Morgan – while the Senate’s findings provided little new news, the London Whale trade is another incident in the expanding list of oversights, missteps and frauds at varied units at the megabanks in recent years. Given that the report cited potential violations of the Securities Act of 1933 and Friday’s testimony by several executives was evasive and defensive, perhaps more management changes and disciplinary actions are needed.
  • Regarding Fisher’s comments – while the leadership of the Federal Reserve, as well as other DC players, may not share his views, his message seems aligned with many on Main Street, where most U.S. citizens live. In Washington, change is slow; perhaps the momentum for change is increasing.

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