NYT's Joe Nocera: Make Banking Boring
http://www.nytimes.com/2012/05/15/opinion/nocera-make-banking-boring.html?ref=opinion
Thus, the final thing we know: At JPMorgan, nothing changed. The incentives, the behavior, even the trades themselves are basically the same as they were in the run-up to the financial crisis. The London whale was selling underpriced “credit protection.” Isn’t that exactly what A.I.G. did? The only difference is that JPMorgan has the balance sheet to absorb the losses that Iksil and his colleagues have racked up. That is small comfort.
In recent years, whenever I heard Dimon defend derivatives, he cast it as something banks had to offer their clients. Caterpillar, he liked to say, needed to hedge its exposure to foreign currency shifts, which JPMorgan’s derivatives made possible. But what client was being served with these trades? They were done for the bank, by the bank, solely to fatten the bank’s bottom line.
Which brings us, inevitably, to the Volcker Rule, that part of the financial reform law intended to prevent banks from doing what JPMorgan was doing: making risky bets for its own account. JPMorgan executives have insisted in recent days that the London trades did not violate the Volcker Rule (which, for the record, has not yet taken effect). But that is only because the banks have lobbied to protect their ability to hedge entire portfolios. A letter to regulators written in February by a top JPMorgan lobbyist — a letter denouncing the potential effects of a strictly interpreted Volcker Rule — describes a trade that sounds exactly like the ones that have just caused all the problems. Such trades need to be preserved, the lobbyist argues.
Actually, they don’t. “I just want all this garbage out of insured banks,” said Sheila Bair, the former head of the Federal Deposit Insurance Corporation. “A bank with insured deposits should be making loans. If they have excess they should put the money in safe government securities. If they want to trade, set up separate subsidiaries that have higher capital requirements.”
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