Why JPMorgan Chase is not "Too Big To Fail"

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It was not long ago when progressive, nonprofit groups such as USPirg were applauding efforts to limit bank interchange fees, or swipe fees that banks were charging for the use of check cards. Of course, the Durbin Amendment did pass, and many consumer banks saw large drops in revenue from fees due to that legislation. Did anyone not realize that bankers would be smart enough, and creative enough, to stick it to the very people who were allegedly protected by the Durbin Amendment? The Durbin Amendment was not the only recent stab at reducing bank fees. Overdraft fees were also limited in a separate measure.

The first attempt to restore the lost revenue was the imposition of monthly fees, which failed under a stream of public protest. Now, led by JPMorgan Chase (NYSE: JPM), consumer banks have indeed found a way to steer expensive, high risk customers away from costly checking accounts.

If one disentangles a typical Visa Check Card from a checking account, the result is a simple prepaid debit card, and one that is not subject to Durbin Amendment limitations. Paperwork from overdrafts is also eliminated. In fact, all paperwork is eliminated. The technology behind this type of debit card has existed for some time, as such Visa, Mastercard, and even American Express debit cards are available at thousands of mass retailers around the country. What is new is having such a large and respected commercial bank as JPMorgan confess its desire to move its unprofitable, lower income customers into such cards.

I am not so naive as to believe that JPMorgan, or any other bank, is in business for any reason other than to make a profit. As much as their advertising might suggest banks are altruistic benefactors toward a better society, that is nonsense. But what irks me is how quickly JPMorgan, and the other banks that follow its decision in this area, have forgotten how just four years ago, they were knocking on taxpayers' doors, soliciting low cost loans. And some of that loan money no doubt came from the very individuals that JPMorgan believes is beneath its own dignity to offer standard checking accounts.  The hypocrisy concerns me, and I am waiting, perhaps vainly, to hear the public outcry on this latest move.

The money that JPMorgan will save by reduced costs in tending to lower income customers will be diverted to its wealthier customers who might be steered into savings, and in particular, fee generating investment accounts. It is times like this I wish Glass Steagall had not been repealed, and that banks did not have investment accounts to offer to their customers.

Speaking of Glass Steagall and JPMorgan, the bank disclosed on May 10th that it had lost some $2 billion out of its London trading desk from some hedges that had gone badly. The irony of this is thick, on both sides. JPMorgan CEO Jamie Dimon is often acknowledged as the best banker in the country, having guided JPMorgan so successfully that not even during the recessionary years did it ever post an annual loss. He is also possibly the most outspoken banker, using his status as leader of this country's largest bank to rail against regulation.

JPMorgan in recent years has held the somewhat mythical status of being “above the fray” that other banks must deal with on a daily basis. Its huge investment banking arm has acted on an opposite cycle from the banking business. In 2009 and 2010, when bank earnings were hard to come by, the investment bank earned billions. More recently, investment bank earnings have slumped at the same time as bank earnings have advanced sharply. No one would suffer more than JPMorgan if an enforceable Glass Steagall type regulatory framework were written and did pass. Click here for a terrific historical summary of Glass Steagall, particularly focused on the aspect how the roosters ran the henhouse.

So, while no one now, except this author, is seriously discussing Glass Steagall, the actions by JPMorgan show the Volcker Rule would have prevented the JPMorgan loss. When the bank traded utilizing its own funds, there was going to be a winner, and a loser. That sort of “zero sum” game is wholly inappropriate in a bank that is Too Big to Fail. It was very kind of JPMorgan to show the necessity of passing the very regulatory scheme that it leads the opposition lobbying effort to defeat.

The first trading day after the trading loss announcement, the market dragged JPMorgan stock down by over 8%, and calls were made by no less than Simon Johnson for the end of Dimon's reign as Chief Executive. The SEC and others are launching investigations. It will be an uncomfortable few months for JPMorgan. Frankly, I do not see this particular trading loss as being that much of a deal changer. The strengths of the institution, its financial health, and its vast geographic footprint have not changed. If you liked JPMorgan May 9th, you should like it a little more with its stock down so precipitously on the news.

Above all else, I hope that this leads to a serious discussion of actually furthering the goal of ensuring that the Financial Stability Board is wrong, and that in fact there should be no domestic banks too big to fail. This is the view, which I fully endorse, of Richard Fisher, Chairman of the Dallas Federal Reserve. I suggest you read his report from the Chairman as part of the Dallas Fed's annual report.

Of course, JPMorgan is not the only bank with hedging operations. All commercial banks with large investment banks, such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C) do much the same thing, and time will tell if they have been similarly ensnared by bad bets. Our banks never had to take on the sorts of risks they did, and apparently, continue to do. How do I know that? Look at the Canadian banks. Alan Greenspan's laissez faire may work in parts of the economy, but it has been proven, by hundreds of billions of losses and bailouts, not to work for banks. The sooner we admit it, the better. 

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