Saturday, May 12, 2012

Same old shit with the banks, still

JP Morgan's (JPM) latest fiasco reiterates the need for real financial reform and we just ain't getting it. Will this latest incident reinforce current reforms and overcome the humongous financial lobby fighting the reforms? Unlikely. JPM lost $2 billion recently trading on credit default swaps (CFS), the same instrument that caused the last meltdown. The SEC is investigating and Fitch downgraded the banks long-term credit. If the Volker rule in the new Dodd-Frank reform bill had been in effect that could not have happened. But the rule is not scheduled to take effective until July. It has also been resisted and watered down by financial lobbyists who insist that they can police their own industry. Jamie Dimon, head of JPM, has been leading the choir with this obviously spurious claim. This latest incident is further evidence to the contrary and reinforces not just implementing the current legislation but a return to much stricter rules like the original Sarbanes-Oxley legislation, which repeal was the main cause of the meltdown in the first place.

Robert Reich scoffs at Dimon's suggestion that it's no big deal, that he'll deal with it and move on. Dimon opposed Volker saying it would 1) separate bank activities into loans versus trading and 2) greatly limit derivatives trading. And that the banks could and would police themselves, having learned their lesson from the last crises. Really. Does losing $2 billion on the same type of activity, a loss that will reverberate throughout the entire industry, and backed by federally insured deposits (meaning we the people take the loss again), instill trust that they can police themselves? Especially since this latest incident has been brewing for at least six weeks which Dimon brushed off as nothing. Reich reminds us of the Dallas Fed's advice to break up the big banks for just such reasons.

Simon Johnson highlights the Federal Reserve's acceptance in this sort of behavior. The Fed is now supposed to run street tests to forestall just the kind of thing that happened at JPM, which test JPM passed just last spring. Johnson doesn't imply Fed complicity, just that financial institutions are not too big and complex for any agency to get a firm grip on to regulate properly. Hence he too suggest that it's long past time to break up the banks and go back to stricter legislation. I though would suggest that the Fed knows just what is going on down to the most minute detail and that they are in fact complicit in the behavior, trapped as they are in this faux financial ideology that has proven beneficial to only the 1%.

Matt Taibbi, as usual, in on target. He reiterates under current regulations JPM still gets federally insured status for such casino betting and the Volker rule would prevent this. Taibbi says let them make such wild bets if they want, but not with the backing of bailouts when they fail. Where is all this talk of free-market capitalism from the conservatives on this issue, proclaiming if you take the risk the reap the rewards and the failures? If there is no risk of failure then where's the risk? We certainly need what legislation there is, Dodd-Frank, to be implemented. If it were then its transparency rules would have at the least seen this situation brewing long before the mega $2 billion loss and stopped it in its tracks. Taibbi though, like most sensible folks, thinks the best solution is to return to Glass-Steagall. Good luck with that one.

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