Too Big to Whale: Why JP Morgan Chase Should Be Shut Down

James Dimon of the U.S., chairman and chief executive officer of JP Morgan gestures during the Global Financial Context sessi
James Dimon of the U.S., chairman and chief executive officer of JP Morgan gestures during the Global Financial Context session at the 43rd Annual Meeting of the World Economic Forum, WEF, in Davos, Switzerland, Wednesday, Jan. 23, 2013. (AP Photo/Anja Niedringhaus)

If you want more evidence that JP Morgan Chase is closer to a criminal enterprise than a economically useful bank, then read the report from the Senate's Permanent Subcommittee on Investigations, JP Morgan Chase Wale Trades: A Case History of Derivatives Risks and Abuses. It shows in high definition how this mega-bank, touted as the best managed bank on Wall Street, repeatedly lied and dissembled to regulators and investigators.

We see a federally insured bank gambling recklessly in clear violation of the letter and spirit of the law. Although it was not the committee's intent, the report makes an overwhelming case that JP Morgan Chase it is far too big to regulate or even manage. That points us to only one sane and rational response -- shut it down. (Gretchen Morgenstern, in her excellent New York Times piece, walks right up that edge as well.)

The stench of Wall Street arrogance wafts through the report. Executives show utter contempt for regulators and for telling the truth. How dare those lowly public servants interfere with the bank's primary mission, which is making as much money as possible, anyway possible, and damn the law!

How big is big?
Much of this arrogance comes from sheer size. JP Morgan Chase is the largest bank in America with over $2.4 trillion in assets and 220,000 employees globally. Reportedly, it has another $1.5 trillion in derivatives that it is not required to list on its balance sheet. That makes JP Morgan Chase larger than Germany's GDP. Little wonder that its CEO, Jamie Dimon acts as if he were a head of state when dealing with regulators and the public. As the report makes clear, he saw no difficulty in uttering misleading statements and withholding from regulators crucial documents that the bank is required to provide.

The Whale swallows Dodd-Frank

This fiasco is a wake-up call to all those who thought that Dodd-Frank might rein in financial gambling. The so-called Volker rule supposedly prohibits running a casino in a federally insured bank. But the moment JP Morgan Chase smelled big winnings, it jumped into the riskiest of all Wall Street casinos -- synthetic credit derivatives. (For more on socially useless financial gambling please see How to Win a Million Dollars and Hour: Why Hedge Funds get away with siphoning off America's Wealth).

The Chief Investment Office of JP Morgan Chase was set up to invest $350 billion dollars that the bank claims are excess deposits that it can't, or doesn't want to, loan out to businesses and consumers. That fund alone would make it the seventh largest bank in America. Within that pot of money, the bank set up the Synthetic Credit Portfolio to play in the hot derivatives market. That's where the Whale and his London trading team swam. At first they floated effortlessly through these markets. The bets were modest and the returns were solid. Then in 2011 the Whale hit it big. He placed a billion dollar bet on an index that would increase in value if certain companies would go into bankruptcy. And one of them did -- American Airlines. Bingo! The Whale netted $550 million -- that's a 55 percent return in a matter of months. From 2007 through 2011, they were up $1.772 billion. You can be sure the higher-ups were all smiles about the Whale's successful gambling spree, even though his bets had absolutely nothing to do with protecting the bank through hedging. (e.g., JP Morgan Chase had no financial stake in American Airlines that needed to be insured.)

In early 2012, the Whale hit the shoals. He and his trading team in London were losing money both when they wrote financial insurance and when the took out financial insurance. So what do you do if you're losing in a casino and desperate to get even? You double down, of course. And when that doesn't work, you double down again. But, these were not your typical gamblers. They knew they could drive the market up or down by making bigger and bigger bets, hoping to turn their previous losses into gains. In short, the Whale team acted like any other devious hedge fund -- it tired to manipulate the market. Unfortunately, the word got out that the Whale was reaching his limit and that his big bets couldn't continue. So the hedge funds began manipulating the market in the other direction. In short, they harpooned the Whale, forcing more and more losses.

Catch this: The Whale and his traders suspected that some of the traders who bet against them may have come from within JP Morgan Chase's own investment bank. Further, they wondered if the traders at the investment bank also tipped off certain of its client hedge funds so that they all could gang up on the Whale and make a killing. (To date internal bank investigations deny these allegations. )

As a result of the squeeze, the Whale's losses climbed from a few million to approximately $6.2 billion.

Dimon and Company Knew

As the report makes clear, no way could this happen without the awareness of the very top executives. First of all, the magnitude of the losses triggered all kinds of risk management alarms that are supposed to prevent the bank from putting too much money at risk. This is JP Morgan's forte, right? Rising losses and larger risky bets also would force the bank to keep more capital on hand, which would further cut into its profits, a process that the top executives watch very closely. And of course, this kind of trading was clearly violation of government regulations designed to prevent gambling in federally insured banks.

So what do you do if you're JP Morgan Chase? First you just turn off the alarms, hoping the doubling and tripling down might work. Then you allow the Synthetic Credit Portfolio team to minimize its losses by mis-pricing their bets so the losses look smaller. (In fact JP Morgan Chase exonerated the mis-pricing in its own internal investigation.) Next, you don't tell the regulators even after they ask for information. You even flat out refuse to give them critical documents. When they get too close, you try to intimidate them. You make misleading public statements. And then when you're caught with your pants around your ankles you claim it was all a misunderstanding and that any lie you may have uttered was based on the best information you had at the time.

Just a few Rotten Apples?

If London Whale caper were the only instance of law-breaking, maybe we could write it off to just a few rotten apples in a very big barrel. But the record shows that JP Morgan Chase is an incorrigible recidivist. It has been caught with in so many slimy deals that it's entire apple orchard is diseased.
  • It was fined more than $290 million for colluding with hedge funds to design and peddle financial products designed to fail so its hedge fund partners could collect the insurance when the securities crashed.
  • It was nabbed helping Payday loan sharks prey on low-income borrowers charging rates of over 500 percent, all so JP Morgan Chase could collect overdraft fees.

At most, the bank pays a fine, fires some lower-level employees, and promises, (so help me god!) never, ever to do that particular slimy deal again. Just another day at the office in a too big to jail bank.

Moral of the Story:

JP Morgan Chase is much too big to police. Even though there are dozens of regulators who work each day inside the big bank, the relationship depends entirely on the cooperation of the banks. The regulators can easily be run around in circles, if the bank is intent on misleading them and hiding crucial information.

By now it should be obvious to all of us, if a big bank sees a way to make big bucks they will do so even if it breaks every law in the books. Dodd-Frank has no chance of working. Prosecution won't work either as Attorney General Holder made clear because the banks are viewed as too big to jail without threatening the entire global financial system.

Break-up JP Morgan Chase:

The only rational and just option is to put JP Morgan Chase out of business. It should be broken into much smaller entities as soon as possible in one of two ways.

One option is to break up the bank into a series of much smaller banks, but still allow each to be privately owned. That what anti-trust actions did to Ma Bell and Standard Oil. But a word of historical caution: look at how that worked out. Most of the Baby Bells are no more. Instead of ATT we now have only a handful of giant communications companies led by Verizon and...yes, the new ATT. Instead of Standard Oil we have a small number of enormous oil companies that continually consolidate into even larger entities. If the "smaller" banks that follow a break up remain large, then it's doubtful much will change. We'll still have to police the hell out of them or they'll gamble the economy away yet again, knowing they are still too big to fail or jail.

That leaves us with a second option that would make the Tea Party wet its pants -- break JP Morgan Chase into 50 state-owned public banks. (States Rights!). That should put an end to the dangerous gambling and the deceptions that are driven solely by the drive for maximizing private profits and bonuses. Large private banks that are too big to fail, jail and regulate are wondrous institutions for their well-healed executives, investors and hedge fund partners. But they are clear and present danger to the rest of us.

(BTW, the public North Dakota state bank is doing just fine.)

Les Leopold is the Executive Director of the Labor Institute in New York, and author of How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning Off America's Wealth , (J. Wiley and Sons, 2013).