Sheila Bair: JPMorgan Debacle Signals That Big Banks 'Too Big To Manage'

JPMorgan's $2 billion trading loss is proof that the big banks need to be broken up, former financial regulator Sheila Bair said on CNN on Monday.

"I think it does underscore that even with very good management these institutions are just too big to manage," Bair told CNN.

Bair, who served as chair of the Federal Deposit Insurance Corporation until last July, also told Bloomberg TV on Monday that the Federal Reserve's efforts to keep interest rates low are leading to more risk-taking by financial institutions, pointing to JPMorgan's disastrous bet as a glaring example.

Bair explained that banks are taking more risks to get the same return that they would have gotten on safer investments if interest rates were higher.

"With interest rates so low now on the really safe investments, they’re going to higher-risk securities to maximize the spread, the return they’re getting," Bair told Bloomberg. "The regulators should be very, very focused on [this].... It can have unintended consequences of the type that I think may have played a role here with the JPMorgan trading losses."

"It's not just banks that are feeling pressure to search for yield; it's pension funds, it's others that are traditionally risk-averse and perhaps should be, are looking for higher-risk, higher-yield assets to deploy all this money that has been pumped into this system," Bair added.

Bair wrote in Fortune Magazine on Friday that it is time for the Federal Reserve to raise interest rates, since low interest rates are encouraging irresponsible risk-taking.

"Near zero interest rates...encourage highly leveraged speculative investments based on short-term price fluctuations, not long term economic fundamentals," Bair wrote in Fortune.

Comments

[delia ruhe]

02:44 PM on 05/15/2012

Sheila Bair makes an excellent point. I have read Krugman's *End this Depression Now!* which presents a thoroughly logical program for recovery -- except that it doesn't factor in the astonishing talent of banks and corporations for preying on human weaknesses and desperation.

Bair notes that "Much attention has been paid to rising income inequality in the U.S. over the past several decades." But she doesn't mention that so little of that attention is paid to stunningly low wages and salaries as being a huge part of the problem. For example, teachers earn between $39,000 and $41,000 (Canadian teachers start at $40,000 and go up to $90,000. Most of us Canadians still consider that teachers are only moderately paid).

Between 1970 and 2008, US productivity went up by 30 percent, while wages flatlined. Greedy bankers stepped up to the plate with aggressive credit card marketing, shady mortgage refinancing schemes, and subprime mortgages. And now Krugman wants to risk more of this?

Minimum wage should go up to $15 an hour—immediately—with a 10 percent increase every year for 10 years. Repubs will whine, ostensibly on behalf of small business—while refusing outright to consider a one-year government program that would help ease businesses into a higher minimum wage regime.

I agree that more consumer spending would be good, but consumers need better wages rather than easier credit in order to perform their patriotic duty to spend. Better wages would also bring in more tax revenues.

[SantaMonican]

11:53 AM on 05/15/2012

Why dance around the problem? It's time to dust off the Sherman Anti Trust Act and break up the big banks, that have gotten far too large, and are doing too many different things.

Time to go back to being smaller banks that actually serve the community.
More competition is good for the market. Break them up, Mr. President. Bust those trusts!

[intolleft]

11:33 AM on 05/15/2012

Says the former "too big government" official.

[exmate]

11:22 AM on 05/15/2012

I wonder which part of TOO BIG do people not understand.

[exmate]

11:06 AM on 05/15/2012

too big to fail
too big to manage
too big to regugulate

[GCurry]

11:06 AM on 05/15/2012

It's true that they're too big to manage. But that isn't THE problem.

Managing a big bank is like navigating a big barge down a fast-moving river. It's possible, but the reason it's difficult is the CURRENT, not that steering the barge is impossible.

In this case, the current is the culture of greed, make money at any cost, that we celebrate and reward here in the land of opportunity. Public companies, in particular, are compelled by their structure to grow capital, above all other goals. They systematically even erode the laws of the land to make their own imperative easier to achieve, and more lucrative.

When the barge runs aground, we fire the captain (or more likely, crew, if a scapegoat can be found) and we use public monies to pull it back into the channel, or cut it up for scrap.

But the real problem is the current.

[Unshriven]

11:03 AM on 05/15/2012

Big banks, too powerful to control.

[PC Contrarian]

11:01 AM on 05/15/2012

Why is it only Big Banks that are too big to manage?
Why don't we consider the Federal Government, which is far bigger and far more influential in our life, is also too big to manage?

Here's an example of Obama and Holder's getting out of control:

http://articles.mercola.com/sites/articles/archive/2012/05/15/raw-milk-farmers-on-money-laundering-crimes.aspx?e_cid=20120515_DNL_art_2

[[e-mail]]

11:01 AM on 05/15/2012

The concept of "private banks" , per se, is the problem ...

[2tango]

10:55 AM on 05/15/2012

This one play down any situation, because she is part of the same status-quo that took the country down.

[mnyegele]

10:50 AM on 05/15/2012

If big banks are "too big to manage," we have only one choice. Let's use the anti-trust laws, and break the big banks up. Let's also revive the Glass-Steagall law. When Glass-Steagall was in effect, we had no bank failures. That's a good reason to revive that law.

[exmate]

11:15 AM on 05/15/2012

We had deregulation because someone said "Government is not a solution to our problems. government IS the problem". So we dismantled laws which had kept us out of trouble for 50 years since The Great Depression.

[exchef100]

10:43 AM on 05/15/2012

If taxpayers are responsible for covering losses (FDIC, bailouts, toxic asset purchases, gov't takeovers...etc) then these banks should play by federal rules/regulations. Not sure why this is an argument. If they don't want to adhere to the regulations or be regulated, they shouldn't receive federal insurance....and then when all of their deposit customers flee, they will either fail or shape up.

[Alaskatraz]

10:33 AM on 05/15/2012

What hasn't been explained - if JPMorgan lost 2 billion - who made 2 billion? Is it a zero sum game?

[another looker]

10:50 AM on 05/15/2012

There is always money to be made on the other side, and more importantly, there is always someone willing to short any option.

[Alaskatraz]

11:04 AM on 05/15/2012

So the money wasn't "lost"? It was just a "transfer of wealth"? Sounds like socialism to me!

[Devington]

10:51 AM on 05/15/2012

a very excellent question. can someone on this thread explain?

[bbrecht]

10:33 AM on 05/15/2012

Aren't low interest rates somehow related to the derivitives trading? If the rates go up wont this negatively effect derivitives?

[an seanchus mor]

10:29 AM on 05/15/2012

“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support.

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.” Adam Smith

I have gained a recent renewed respect for Smith due to my convergence on the metaphor of firewalls. Valid for 225 years and still true!

http://adamsmithslostlegacy.blogspot.com/2008/05/adam-smiths-advice-on-banking.html