Jamie Dimon Derivatives Fiasco Highlights Obama Failure

05/11/2012 12:25 pm ET | Updated Jul 11, 2012
  • Peter S. Goodman Executive Business and Global News Editor, The Huffington Post

Fun as it may be to beat up on the arrogant Jamie Dimon for the $2 billion-plus derivatives fiasco at JP Morgan Chase, this is like blaming the lion that ate the kid who got too close to its cage at the zoo, rather than going after the guy who allowed such an unsafe cage to be built.

That guy is named Barack Obama. He had assistance from a pair of key advisors, Tim Geithner and Larry Summers, whose ample experience should have enabled them to recognize the dangers of allowing Wall Street to keep trading derivatives free of regulation.

Yes, Dimon's very public humiliation is both well-earned and somewhat delicious, given his ceaseless tirades against regulation and his smug assurances that his institution was above reproach because it supposedly employed the most sophisticated instruments of risk management. But he is the chief executive of the largest financial institution in the land, and he is merely doing what he is paid handsomely to do: maximize profits for shareholders by whatever means available, and never mind the risks to the broader financial system.

Central to Dimon's profit-making model is ensuring that JPMorgan Chase retains its status as Exhibit A on the list of American institutions that are clearly too big to fail, meaning its collapse would threaten the health of the whole financial system. That gives his traders extra space to operate between solid ground and the abyss. They can bet aggressively, knowing that failure comes with a built-in public backstop. The profits roll up to the corner offices, and the losses roll down to the taxpayer and ordinary working people who pay with their livelihoods when the economy suffers.

The fact that Dimon and his coterie of traders would operate this way should surprise no one. What are they supposed to be doing, helping blind people find their way to church? The real villains here are the people who are paid to look out for the public interest, and who failed, leaving us to absorb -- yet again -- a gargantuan hole in the balance sheet of a major institution, with no clear sense of the full size of that hole or who might yet fall into it.

Obama had nothing to do with the creation of the worst financial crisis since the Depression. It was nurtured by decades of reckless financial deregulation overseen by his predecessors, principally Bill Clinton and George W. Bush, and the easy-money credit policies of Fed Chairman Alan Greenspan. Obama did not design the no-strings-attached Wall Street bailouts that were rushed through Congress in the fall of 2008, with the same sort of enlightened deliberation that authorized the war in Iraq. That was the handiwork of Bush's Treasury Secretary Hank Paulson, who before that headed Goldman Sachs.

But once the crisis became Obama's to manage, he brought in Geithner as treasury secretary, despite the fact that he had run the New York Fed while the crisis was building, while doing nothing to arrest its dangers, and then helped Paulson engineer the bailout. Obama brought in Summers as his chief economic advisor, despite the fact that he had been Clinton's Treasury Secretary during a decisive period of financial deregulation. Summers steamrollered Brooksley Born, who, as head of the Commodity Futures and Trading Commission in the late 1990s, had warned of the dangers of unregulated derivatives while calling for a regimen of rules.

By early 2009, with Obama in the White House and the second batch of bailout funds waiting to be delivered to Wall Street, the dangers of unregulated derivatives trading were as conspicuous as a guy without a striped tie in Washington. The near-collapse of AIG had brought home the fact that financial behemoths were trading exotic investments worth trillions of dollars without anyone watching to see if they had real dollars parked somewhere to cover losses.

The Obama administration had substantial leverage that it could have used to impose a sensible regulatory framework. Citigroup and Bank of America could not have survived without public largess, and AIG was a ward of the government. The administration could have attached stiff conditions to the next capital infusion, while threatening to withhold it. It could have demanded serious rules on derivatives. It could have required that too-big-to-fail institutions be broken into smaller pieces. It could have pushed for updated incentive structures at banks, with rules threatening executives with surrendering their compensation when their companies took undue risks and failed.

But the Obama administration didn't do any of these things. It just handed over the money, while buying into the same perverse logic that had allowed the financial crisis to gather force: The guys on Wall Street must always be made happy, or terrible consequences result.

Summers had killed derivatives regulation a decade earlier by warning that rules would sow unease in the markets and send money scurrying from Wall Street to London. As Obama came into office, he and Geithner sold the president on the same basic fear: Regulate and you will freak out the markets and infuriate the big banks, whose cooperation is key to recovery.

Governed by this logic, the Obama administration left for later the crafting of a new set of rules. It left the nitty-gritty to Congress, which is something like handing your tax return and a six-pack of Corona to your 11-year-old. The subsequent orgy of lobbying delivered the grotesque Dodd-Frank reform law, and entrusted the details to a bunch of regulatory agencies. We are still waiting for the details. Anyone who says we are now safer than before is surely paid to say such things.

In short, more than three years after the global financial system nearly imploded because of unregulated, casino-style gambling, nothing of substance has changed. And here we are again, staring at a familiar set of questions: How big are these JP losses, and how much money has been set aside to cover them? Nobody knows. What happens if this turns out to be worse than Jame Dimon is telling us? Ditto.

You can blame the guy who presided over the losses, which is at least entertaining, but he was merely acting in accordance with the incentives at work. The real problem is that the people who could have changed those incentives chose not to, bowing down to the bankers in the hopes that making them richer would somehow improve fortunes for everyone else.