Do megabanks threaten the economy?

JPMorgan's hit from a single trade may reach $9 billion, casting doubt on its CEO's claims that the financial giant is safe and sound.

By Jun 29, 2012 12:41PM

Image: Bank Vault (© Corbis/Corbis)This week, The New York Times reported that JPMorgan Chase (JPM) could lose up to $9 billion on a single trade, a huge escalation from the already-massive $2 billion that CEO Jamie Dimon had initially estimated. When the botched trade was first disclosed in May, it stoked fears that Wall Street banks were engaging in the type of casino-style risk-taking that brought the financial system to its knees in 2008. But Dimon insisted -- notably during two congressional hearings -- that the trade was an isolated incident and that Main Street had nothing to fear.

The latest report from The Times casts doubt on that claim, with one former banking regulator telling the paper, "Essentially, JPMorgan has been operating a hedge fund" with the money in its customers' checking accounts. Is this proof that JPMorgan is a threat to the economy?

Yes. JPMorgan is a disaster waiting to happen. JPMorgan's swelling loss underscores the fact that "the banking industry has become its own worst enemy," says Doug Kass at The Street. JPMorgan has engaged in a "relentless abuse of power and the aggressive use of client deposits in risk-taking strategies" that can only be curbed by tough government regulation. A financial industry that has "grown too influential by virtue (or lack thereof) of its nearly unlimited powers" could be deadly to the economy.

Clearly, mega-banks need more conservative approaches. JPMorgan and the "big Wall Street banks are all opaque black boxes" that could be exposed to huge amounts of risk, says Paul R. La Monica at CNNMoney. Banks these days are "insanely complex," and it's easy to imagine them getting burned in this "still murky world of credit default swaps and derivatives," particularly if they have investments in troubled European banks. "Call me a traditionalist, but I like it when banks simply loan money and take deposits." It certainly "beats billion-dollar losses any day of the week." 

And Jamie Dimon should be fired. Dimon ought to be "picked up by the seat of the pants and scruff of the neck and thrown out of his corner office," says Marek Fuchs at The Street. "Slick Jamie" has been getting by on a "nearly inexplicable sense of invincibility," charming "the pants off of the media, traders, and politicians in Washington testimony." With this new $9 billion estimate, it's doubtful that Dimon "has been forthright or, worse, even aware" of what's going on at JPMorgan. "That calls into question his future leadership."

More from The Week

Tags: JPM
Jun 29, 2012 4:33PM
If the former US Treasury Secretary under President Reagan Paul Craig Roberts, a Republican, is correct in his recent assessment involving our large investment banks and their still unregulated foreign CDO's and derivatives, which amount to hundreds of trillions of Dollars, quite certainly any large negative swing involving major overseas economies or the value of foreign currencies among our major trading partners could have absolutely catastrophic economic results for these banks, which our government couldn't possibly cover unless the Fed printed enough money to devalue our Dollar by 90% or more too.

So yes, my own feeling, (and I am not alone), is that the current state of affairs at our most-major investment banks is such that a foreign economic crash could very well bankrupt 95% of us almost overnight because we have allowed these banks unregulated access to foreign markets.  Since when should it be legal for a single large US investment bank to carry more foreign derivatives on its books than our entire Federal budget is including our own debt service???

Anyone who thinks otherwise should look-up Paul Craig Roberts "Collapse at Hand" piece that is not yet a month old.  If he is right, and he is a senior economist, we are all in very big trouble.

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