The conversation may change with JP Morgan Chase's latest $2 billion plus faux pas. Instead of being too big to fail, we may find that the Wall Street behemoths in particular have become too big to succeed. That is to say, the literal size of corporations like Citibank, JP Morgan, Bank of America and even AIG, all the products of banking de-regulation, may have outgrown any manageable size and so have become a danger to themselves as well as the U.S. economy overall.
Whether out of ignorance or not understanding the ramifications of such high risk derivative hedges, CEOs such as JP Morgan Chase's Jamie Dimond apparently have little control over the trades such as caused the $2 billion loss. As Jessica Silver-Greenberg and Nelson D. Schwartz of the New York Times wrote, "Top investment bank executives raised concerns about the growing size and complexity of the bets held by the bank's chief investment office as early as 2007, according to interviews with half a dozen current and former bank officials."
In fact, it now has been reported that Chief Investment Officer Gina Drew in charge of their risk management department had Lyme disease and so was incapacitated during this period, which led to "shouting matches" between subordinates in the New York and London offices.
We've known since 2000 that banks have made huge profits since the repeal of Glass-Steagall allowed them to make such risky bets. The down side has been their over leveraging that caused greatest recession since the Great Depression. And now we see that the excessive profits generated since then have only caused them to take even more chances.
Then there is the too-big-to-manage syndrome:
The record has not been good for large financial institutions in particular. For with larger profits as a share of the national income pie, have come declining employee incomes, benefits, and a diminished social safety net. This is in part because the too-bit-to-manage entities have used their economic muscle to divert more resources to them -- whether as extravagant CEO salaries, less progressive tax rates that endanger new research and development as well as major infrastructure improvements and rising inequality that is creating a permanent underclass of the less privileged. What size is too big to manage? Any institution that breeds market panics and endangers other institutions, which means it has to be regulated. Paul Krugman probably said it best in a recent blog.
"What is more, said another senior former executive, Mr. Dimon had other fires to put out, and the chief investment office wasn't a "problem child" for either top managers or the board of directors, despite its rapid expansion. Gigantic losses were piling up from bad mortgages, and new regulations were threatening the profitability of traditional banking, among other pressing matters."
"The point, again, is that an institution like JPMorgan -- a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers -- shouldn't be engaged in this kind of speculative investment at all. And that's why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010."
So why not judge our institutions on the basis of whether they are too big to succeed? Should they even be attempting to diversify into high risk areas with federally insured deposits without limits? It looks like CEOs like JP Morgan's Jamie Dimon are able to fool some of the people -- including their investors--much of the time. It might prevent a few financial disasters.
Harlan Green © 2012
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