James Dimon, chairman and CEO of JP Morgan Chase & Co. (AP Photo/Mark Lennihan)
The problem with a super-smart banker like Jamie Dimon, CEO of JPMorgan Chase, is not just that his bank makes risky bets with its own money. The real scandal is that Dimon’s hot-shot traders are gambling with our money. If their complex derivatives deals should go horribly wrong and lead to the megabank’s failure, the taxpayers are on the hook to clean up the mess.
That is because JPMorgan Chase shrewdly parks virtually all of its vast derivatives holdings in its commercial bank subsidiary. In the event of a collapse, the bank can use its deposit base to pay off the derivatives, while leaving the Federal Deposit Insurance Corporation to reimburse depositors if their money runs out. This is not a trivial technicality. JPM is the world’s largest purveyor of derivatives. Its total contracts have a notional value of $72 trillion—and 99 percent of them are booked at its FDIC-insured bank. In the event of failure, sorting out the claims and counterclaims will be a costly nightmare for the FDIC. The bulk of the contracts are “plain vanilla” derivatives used as standard hedges against price or currency changes. The exotic derivatives, however, are dangerous—the kind that suddenly blew up in Dimon’s face some weeks ago, when his bank swiftly lost at least $3 billion on one complicated market gambit, with maybe more losses to come.
We are “insuring” other big boys of banking in the same way. Citigroup has nearly all of its $53 trillion in derivatives in its FDIC-insured bank; Goldman Sachs has $44 trillion parked at an FDIC-backed institution. After Bank of America purchased Merrill Lynch, BofA began transferring the securities firm’s derivatives to the FDIC-insured bank, which now holds $47 trillion in contracts. When Senators Sherrod Brown and Carl Levin, among others, complained that regulators’ acquiescence in these transfers contradicted Congressional instructions in the 2010 Dodd-Frank reform law, the Federal Reserve, the FDIC and the Treasury Department’s Office of the Comptroller of the Currency refused to answer their objections. This matter involves “confidential supervisory” and “proprietary business information,” the three agencies responded in unison.
But it also involves a political scandal—the corruption of a successful government program created during the New Deal to prevent panicky bank runs. The FDIC was designed to protect the savings of mom-and-pop depositors, not the balance sheets of mammoth financial institutions; and so far it has worked. Sheila Bair, former chair of the FDIC, regrets how the big boys have twisted it to their own purposes. “None of these guys would be around if it weren’t for the insurance fund,” she told me. “So they do have an obligation to use the insurance in a prudent way.”