Posts Tagged ‘Jamie Dimon’

JP Morgan Chase’s $2 Billion Loss Under Investigation

Monday, May 21st, 2012

As the Department of Justice and the FBI open their investigation into how JP Morgan Chase lost $2 billion, the government is investigating to determine if any criminal wrongdoing occurred.  The inquiry is in the preliminary stages.  Additionally, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which regulates derivatives trading, are also looking into JPMorgan’s trading activities.  JPMorgan CEO Jamie Dimon said that the bank made “egregious” mistakes and that the losses tied to synthetic credit securities were “self-inflicted.”

The probe is perceived as necessary, given the ongoing debate about bank regulation and reform, and one expert said it raised the level of concern around what happened.  “The FBI looks for evidence of crimes and goes after people who it alleges are criminals.  They want to send people to jail.  The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,” said Erik Gordon, a professor in the law and business schools at the University of Michigan.

According to Treasury Secretary Timothy Geithner, the trading loss “helps make the case” for tougher rules on financial institutions, as regulators implement the Dodd-Frank law aimed at reining in Wall Street.  Geithner said the Federal Reserve, the SEC and the Obama administration are “going to take a very careful look” at the JPMorgan incident as they implement new regulations like the “Volcker Rule,” which bans banks from making bets with customers’ money.  “The Fed and the SEC and the other regulators — and we’ll be part of this process — are going to take a very careful look at this incident and make sure that we review the implications of what that means for the design of these remaining rules,” Geithner said.  Under review will be “not just the Volker Rule, which is important in this context, but the broader set of safeguards and reforms,” Geithner said, noting that regulators will also scrutinize capital requirements, limits on leverage and derivatives markets reforms.  “I’m very confident that we’re going to be able to make sure those come out as tough and effective as they need to be,” Geithner said.  “And I think this episode helps make the case, frankly.”

Geithner said that Dodd-Frank wasn’t intended “to prevent the unpreventable in terms of mistakes in judgment, but to make sure when those mistakes happen — and they’re inevitable — that they’re modest enough in size, and the system as a whole can handle them.”  The loss “points out how important it is that these reforms are strong enough and effective enough,” he said.

With the passage of Dodd-Frank, banks are required to hold more capital, reduce their leverage and assure better cushions across the financial system to accommodate losses.  Geithner’s comments are similar to those made by other White House officials, who have avoided blasting the bank for its bad judgment, and instead used the event to bolster the case for the financial overhaul.

“We are aware of the matter and are looking into it,” a Justice Department official said “This is a preliminary look at what if anything might have taken place.”  The inquiry by the FBI’s financial crimes squad is in a “preliminary infancy stage,” the official said, and federal law enforcement agents are pursuing the matter “because of the company and the dollar amounts involved here.”

JPMorgan’s and the financial system’s ability to survive a loss that large showed that reforms put in place after the 2008 financial crisis have succeeded.  Nevertheless, the loss by the nation’s largest bank highlights the need for tough implementation of the Volcker Rule on proprietary trading and other rules that regulators are still finalizing.  “The whole point was, even if you’re smart, you can make mistakes, and since these banks are insured backed up by taxpayers, we don’t want you taking risks where eventually we might end up having to bail you out again, because we’ve done that, been there, didn’t like it,” according to President Obama.

Mark A. Calabria, Director of Financial Regulation Studies for the Cato Institute, takes a contrarian view.  Writing in the Huffington Post, Calabria says that “Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!  What the president and his allies miss is that recent events at JPMorgan illustrate how the system should — and does — work.  The losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan.  The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.  This is the way the system should work.  Those who take the risk, take the loss (or gain).  It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.  The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees.  Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis.

According to Calabria, “President Obama has warned that ‘you could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in.’  Had to step in?  What the recent JPMorgan losses actually prove is that a major investment bank can take billions of losses, and the financial system continues to function even without an injection of taxpayer dollars.  It is no accident that many of those now advocating more regulation are the same people who advocated the bailouts.  Banks need to be allowed to take losses.  The president also sets up a ridiculous standard of error-free financial markets.  All human institutions, including banks and even the White House, are characterized by error and mistake.  Zero mistakes is an unattainable goal in any system in which human beings are involved.  What we need is not a system free of errors, but one that is robust enough to withstand them.  And the truth is that the more small errors we have, the fewer big errors we will have.  I am far more concerned over long periods of calm and profit than I am with periods of loss.  The recent JPMorgan losses remind market participants that risk is omnipresent.  It encourages due diligence on the part of investors and other market participants, something that was sorely lacking before the crisis.”

Wealthy Chicagoans Return to Purchasing Upscale Houses, Condos

Wednesday, September 29th, 2010

High-end Chicago houses and condo sales are rising.High-end residential sales in Chicago rose – somewhat unexpectedly — during the first eight months of 2010. This is primarily a result of sellers reducing their asking prices and closings at some high-profile condominium developments.  Even with the uptick in sales, there’s still an excess of houses and condos on the market that likely will depress prices even more.

According to an analysis by Midwest Real Estate Data LLC, there were 452 single-family houses and 572 condominiums price at upwards of $1 million on the market as of August 31.  That represents an 18-month supply of houses and 21 months worth of condominiums.  James Kinney, Baird & Warner, Inc.’s vice president of luxury sales, said that a normal market is a six- to eight-month inventory.  “I think we’re in for many months of wading through inventory,” according to Kinney.  “The supply is going to continue to build until we see a turn in the job market.”

High-end single-family home sales rose approximately 24 percent in the first eight months of the year.  That totals 199 sales as opposed to 161 in the same time period of 2009.  Condominiums fared even better with sales rising 85 percent to 253 units, compared with just 137 a year ago.  Kinney said that the uptick can be attributed by the first closings at high-end developments like the Elysian Hotel and Private Residences and Ten East Delaware.

Even Jamie Dimon, CEO of J.P Morgan Chase & Company, has hopped on the bandwagon.  He recently cut the price of his tony Gold Coast mansion to $6.95 million – a 25 percent reduction from the previous $9.5 million.  Janet Owen, a broker at Sudler Sotheby’s International Realty who is the listing agent, said “They realize the market does pertain to their home, not just everyone else’s.  That’s why these properties are selling.”

Are Banks Really Too Big To Fail?

Wednesday, April 21st, 2010

Former IMF chief economist opines on whether banks are too big to fail and possible solutions.  Simon Johnson, a professor at M.I.T.’s Sloan School of Management and former chief economist at the International Monetary Fund, raises the question of “As we move closer to a Senate – and presumably national – debate on financial reform, the central technical and political question is:  What would prevent any bank or similar institute from being regarded – ultimately by the government – as so big that it would not be allowed to fail?

Writing in the New York Times, Johnson believes that there is sharp disagreement on what would be needed to end “too big to fail” – or, as he terms it, “T.B.T.F.”  From the viewpoint of Senator Christopher Dodd (D-CT), “creating a ‘resolution authority’ would, at a stroke, effectively remove the perception and the reality that some banks are too big to fail.  The basic idea here, as elaborated by Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC) would expand the powers it currently has to ‘resolve’ – i.e., take over and liquidate in an orderly manner – banks with federally insured deposits; it could do this for any financial institution.”

The Republicans, on the other hand, believe that this approach would formalize the existence of T.B.T.F. banks.  They believe that the FDIC lacks the skill to wind down complex financial institutions as this job differs from closing small- and medium-sized banks to protect depositors.  The “counterproposal, which seems to also have the support or Senate Richard Shelby (R-AL), is that we should just allow big financial firms to fail outright, i.e., to run through the usual bankruptcy procedures.  At a rhetorical level, ‘let ’em fail’ has some appeal.  But as a practical matter, it is a complete non-starter,” according to Johnson.

The third suggestion, proposed by Senator Ted Kaufman (D-DE), is quite simple.  “Break up these megabanks.  As even Alan Greenspan said in October 2009,” Johnson says, “‘If they’re too big to fail, they’re too big’.  There is no evidence for economies of scale or scope – or other social benefits – from banks with assets above $100 billion.  Yet our largest banks have balance sheets around $2 trillion.”

Johnson concludes:  “Making our largest banks smaller is not sufficient to ensure financial stability.  There are many other complementary measures that make sense – including higher capital requirements, more transparency for derivatives and generally more effective regulation.  But reducing the size of our largest banks is absolutely necessary if we are to reduce the odds of another major financial catastrophe.”