Every day we rise and tell ourselves this will be a good day, free of that unique combination of predation, self-pity, mediocrity and disingenousness which characterizes the modern bank executive. And every day somebody proves us wrong.
Today it's William B. "Bill" Harrison, Jr., the retired banker who engineered the mega-merger which created JPMorgan Chase. That means the capstone of Harrison's career was the creation of an institution that has repeatedly broken the law, deceived its customers foreclosed on homeowners with a motley crew of college-aged temps known as "the Burger King kids," received billions in public assistance ...
... and still underperformed the Dow Jones average, dropping in stock value to $37.23 (Thursday's closing price) from around $53 per share when it was created by Harrison in 2000.1 You'd have been better off buying Treasuries.
If that's your idea of a stellar resume, you will no doubt read Harrison's defense of mega-banks in the New York Times with great anticipation, an emotion which will be followed promptly thereafter by profound disappointment. Harrison's apologia is as mediocre in its conception, as deceptive in its packaging, as vacant in its morality and as unimpressive in its execution as JPMorgan Chase itself.
And believe me, that's saying something.
They Can Get It For You Wholesale
Harrison begins by oversimplifying and misstating his opponents' arguments (and goes downhill from there), characterizing their position as follows: "In the years before the crisis, greedy bankers used their political muscle to grow from small, specialized banks into giant, all-purpose financial institutions. This transformation led to the financial crisis because banks became too big to manage and too big to fail. If we break them back up, we will eliminate the risk of future crises."
No informed critic would ever suggest that too-big-to-fail banks were the only cause of the last crisis. Beware of a debater who begins by mischaracterizing his opponents' arguments.
"The first fallacy," writes Harrison, "is that the emergence of large, universal banks... was an artificial or unnatural development... The consolidation that took place was driven by the market's needs and represented an evolution toward greater efficiency in banking, just as companies like Amazon, Starbucks and Home Depot brought efficiency to retail."
If you are in a Starbucks as you read this, we will pause for a moment to let you spit out that grande cappuccino in comic Danny Thomas style. This is an argument that Harrison's successor at JPM, Jamie Dimon, is also fond of making. And it makes absolutely no sense.
Starbucks' success was due to salesmanship, attractive retail outlets, and its ability to use its market volume to drive down the prices charged by its suppliers. Home Depot's success came from its identification of an unmet market niche -- and its ability to use market volume to drive down the prices charged by its suppliers. Amazon's success was driven by its concept and execution, the fact it was able to avoid charging sales tax, and ... you guessed it ... by its ability to use market volume to drive down the prices charged by its suppliers.
Pop quiz: How many of these factors apply to too-big-to-fail banks like JPMorgan Chase? If you answered "none," you are correct. With one possible exception: The one "wholesaler" JPM and its peers have successfully arm-twisted on price is the Federal Reserve. And since the Fed is a creation of Congress, that means... you.
Harrison sniffs at the idea that the creation of the mega-banks was the result of "political muscle," clearly hoping that nobody remembers how Citigroup was formed. The architects of that merger were so confident of political support that the deal was announced before it was legal. Treasury Secretary Robert Rubin joined Citi not long after helping to change the law. Now that's "political muscle."
Harrison's merger of Chase Manhattan Bank and J.P. Morgan, Inc. took place shortly afterwards.
"A second fallacy," writes Harrison, "is that these large, universal institutions were primarily to blame for the financial crisis. As most serious observers acknowledge, a combination of bad lending and risk management by banks, poor regulation and ill-advised consumer behavior all played a role." (The word "serious" is almost always deployed in situations like this; it's a common ploy for discrediting legitimate critics.)
And who was it that engaged in all that "bad lending and risk management by banks"? The five top banks held 96 percent of the derivatives market last time I looked, and nearly as much before the crisis. That's where most of that "bad lending and risk management" took place.
In fact, JPMorgan Chase held 44 percent of the entire derivatives market -- all by itself.
As for "risk management" -- supposedly the strength of Harrison's successor Jamie Dimon -- the bank reportedly could lose as much as $9 billion in "London Whale" losses from a unit that a) Had not been following the bank's highly publicized risk management procedures and b) reported directly to Dimon.
The Worst of the Worst
Harrison writes: "None of the first institutions to fail during the crisis -- Countrywide, Bear Stearns, IndyMac, Fannie Mae and Freddie Mac, Merrill Lynch, Lehman Brothers, the American International Group -- were universal banks."
His point appears to be that these institutions had inferior controls; that they failed; and therefore justice was done. If big banks survived, Harrison seems to argue, it's because they were managed more effectively.
Yet a lawsuit from the Federal government says that too-big-to-fail Bank of America was worse than Countrywide, the company it purchased. "Even the top executives of Countrywide Financial Corp., the notorious mortgage lender... complained to each other... that BOA's appetite for risky products was greater than that of Countrywide," the lawsuit said.
The lawsuit named sixteen other banks, including Citigroup, Goldman Sachs, and... oh, this is awkward... JPMorgan Chase.
The Devil Inside
So why didn't those institutions go down with the others? Because they were able to endanger their depositors' money in order to keep afloat just long enough for the government to rescue them -- because they were too big to faill. (The list of sued banks includes a number of foreign institutions which were also the recipients of U.S. taxpayer largesse, including the now-notorious Barclays Bank).
JPMorgan Chase, like its peers, received massive aid during the period of crisis, despite Dimon's claims at the time about its "fortress balance sheet." (Dimon's misleading statements about the "London whale" have already prompted the SEC to investigate whether he deceived investors; his "fortress" comments might be an appropriate subject for another such investigation.)
Harrison's right that there was "poor regulation." But what he fails to mention is the role his bank and other too-big-to-fails have played -- and are still playing -- in weakening regulations and regulators. Dimon's key Board position at the Federal Reserve would be a good place to start. So would the role that Dimon has played in trying to weaken Dodd/Frank. And so would Harrison's own political contributions -- as a Romney bundler this year, as a frequent contributor to Republicans, and as a targeted supporter of influential Democrats like former Finance Committee Chair Chris Dodd and Timothy Johnson.
When Dimon testified before the Senate Banking Committee, only two of the Senators before him had not been the beneficiaries of his bank's largesse. Now that's political muscle.
At this point the reader may be wondering how much more embarrassment Harrison's going to cause himself. Stick around.
The Buck Stops There
"A third fallacy," writes Harrison, "is that large financial institutions have become too complex to manage." That's a shame because, if it's true, both Harrison and Dimon have lost their best defense for the serial crimes and mismanagement which occurred at JPM under their leadership. These include:
- A massive bribery scandal in Louisiana which led to nearly $1 billion in fines and forfeited fees;
- An admission that it illegally overcharged 4,000 families of active duty members of the Armed Forces for their mortgages, and illegally foreclosed on fourteen of them;
- Four known violations of Section 17(a) of the Securities Act of 1933, constituting "purposeful and negligent fraud in interstate commerce" (the last three were each committed after paying a fine for the previous offense and promising not to do it again);
- One known violation of Section 13c of the Securities Exchange Act of 1934, involving purposeful fraud;
- $2 billion in payments to settle fraud charges related to the WorldCom scandal;
- $135 million to settle fraud charges related to the Enron scandal;
- Billions in settlements on charges of mortgage and foreclosure fraud, some of it presumably conducted by those "Burger King" kids; and,
- Statements to investors and the public by Jamie Dimon which alleged the bank had a "fortress balance sheet," while concealing secret and direct emergency loans from the Federal Reserve that reached48 billion at their peak.
All of this happened on either Harrison's or Dimon's watch.
I was so hoping these problems arose because it was "too complex to manage." If Bill Harrison says that's not true, then I don't know what to think of him or his successor anymore. If their bank is not unmanageable, then why couldn't Harrison or Dimon ensure that it was a well-run and crime-free organization? The most generous explanation involves a lack of both leadership skills and managerial competence.
We'll stay away from the less generous explanation.
The Wrong Crowd
Their pals are a bad bunch, too -- whether they're committing similar repeat fraud violations, laundering drug money, or rigging municipal bids like Mafiosi. A Senate investigator came right out and said it: a bank like Wells Fargo is too big to face prosecutions, so its employees and executives can break the law with impunity -- and immunity.
Remember: Banks don't break laws. Bankers do.
When even the conservative and pro-banker magazine The Economist runs an issue with the word "Banksters" and writes about "the rotten heart of finance," the case against your profession has been made. Too big to fail means too big to jail, and that has to stop.
Harrison and his peers created institutions that would have collapsed without government rescue. There aren't any management failures worse than total collapse -- which would have been their legacy without taxpayer help. Even now, with the Fed pumping money into them as if they were overblown balloons in a Thanksgiving Day parade, these mega-banks can't show a decent return for investors. So in desperation they're turning to riskier and riskier investments again, the way JPMorgan Chase did with its "London whale" disaster, like desperate bookies doubling down on their bets.
Why? Because they know that they'll be bailed out again if... or should we say when?... they fail.
Harrison's peer, CEO Chuck Prince of Citigroup, famously said of his bank's risky leveraged buyouts, "As long as the music is playing, you've got to get up and dance." Added Prince, "We're still dancing."
The nation should be haunted by this image of zombie-like bankers waltzing, St. Vitus-like, to the eternal music of greed. Their banks died, revived only by the electrical jolts of government buyouts. And they'll die a thousand deaths, leaving the rest of us to disinter them and revive them once more so they can prey on us again.
Stop dancing, Bill. John Reed and Sandy Weill at Citigroup have admitted that too-big-to-fail banks shouldn't exist. Your salesmanship isn't enough to convince us otherwise anymore. If you lack the decency to join Reed and Weill, then for once in your life at least stop trying to sell us a bill of goods.
Your nation wearies of you, Bill Harrison. Economic common sense, managerial competence, and basic decency have aligned like planets in a horoscope, and here's what that horoscope says: Go home, Bill. Play some golf. Make some amends. Ask your God or your nation for forgiveness. Or just bask in the warm glow of tropical sunshine.
But whatever you do, Bill, face the truth: You've failed. The music's over. Go home.
1If you're really into this stuff, then note: There was a 3:2 stock split in January 2001. After that it hit a high of $54.99 and... well, here we are.