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Zach Carter

Zach Carter

Posted: May 4, 2010 04:10 PM

J.P. Morgan Still Hates the Economy

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J.P. Morgan Chase, America's largest warehouse of arrogant financial elites, has issued yet another deceptive lobbyist smear in the guise of an "analyst report." Yesterday, the megabank's Chief Economist James Glassman launched a broadside against Sen. Carl Levin (D-MI) for having the audacity to publicly investigate allegations of financial fraud at Goldman Sachs. Glassman -- a top official at one of America's most rapacious institutions -- then indulges in a vaguely worded assault on financial reform, arguing that Congress is about to ruin the economy by cracking down on Wall Street. Don't believe a word of it.

First, I want to talk about Glassman's complaints about both financial reform and the Goldman Sachs hearings. After that, I want to talk about all the horrible things J.P. Morgan has done to the American economy over the past decade. Let's look at Glassman's objections to the current Wall Street reform legislation:

What flaws need fixing? The financial system is highly interconnected. The bankruptcy laws need to be modified to allow for an orderly unwinding of a failing financial institution (for example, ending the exemption given derivatives has attracted some attention) . . . . It's time for the grownups to step in. In its present form, financial reform will make credit more expensive and more difficult to obtain and businesses will find it more difficult to shed risk, harming the very people we are trying to help.

It's difficult to take Glassman seriously, because his objections are vague lobbyist talking points rather than specific arguments backed up by actual economic research. They are, nevertheless, preposterous claims.

Glassman thinks we can end too-big-to-fail by tweaking the bankruptcy code. That's a joke. Even Glassman's boss, J.P. Morgan CEO Jamie Dimon, doesn't believe such garbage. Bankruptcy is a slow and tedious process that cannot provide markets with the immediate certainty necessary to prevent massive fallout from a megabank failure. If you rely on bankruptcy, policymakers will have no choice but to resort to bailouts, and everybody in the market knows it. This could be a terminology mismatch--perhaps Glassman is actually referring to the resolution authority that both President Obama and Dimon want. But of course, that resolution mechanism is actually in the bill, which would mean Glassman is complaining about the bill for doing exactly what he wants it to do.

If Congress really wanted to kill too-big-to-fail, it would break up the behemoths like J.P. Morgan into institutions that are small enough to fail. Needless to say, the research report makes no mention of breaking up the banks.

Glassman seems very upset about the prospect of serious derivatives reform, and it's easy to see why: J.P. Morgan alone controls almost half of the entire $3.3 trillion market (over $500 trillion in face-value). This is the crazy casino market that destroyed AIG. The critical reform is to require that derivatives be traded on open and transparent exchanges, but all Glassman wants to do is change their status in bankruptcy. The idea of transforming this secretive hotbed for abuse into an open and transparent market never crosses his mind.

I wonder why. Right now, J.P. Morgan's derivatives clients don't have access to pricing information, but J.P. Morgan does. That imbalance allows Glassman's firm to make a lot of money by simply gouging its own customers. How much money? Dimon said the company would lose up to $2 billion a year under the derivatives reforms circulating through Congress in early April. That's $2 billion that stays in the real economy, instead of being cannibalized by J.P. Morgan. But good news for the economy is bad news for Glassman, whose bonus depends on profits, however they're collected.

But of course, the point of Glassman's "research report" is not to raise substantive objections to reform. He's just trying to say nasty things about the big bad government clamping down on the righteous and productive activity on Wall Street. This is an exercise in distraction, not debate.

And so Glassman spends a lot of time focusing on Michigan's chronic unemployment problems in an effort to discredit Sen. Levin. This is a disingenuous and irrelevant attack. The U.S. economy has shed over 8 million jobs since the financial crisis set in. We're slogging through a brutal recession caused by unregulated Wall Street excess. If you have to bring up the Michigan unemployment rate in 1981 to counter this view, you're really grasping at straws.

From there, Glassman moves on to point out that banks couldn't have done so much damage to the economy without real borrowers who actually took out lousy loans:

Folks may like to hear that someone else is to blame for the mistakes they made, but everyone knows -- including those who bought houses far beyond what they could afford and then walked when the promise of endless capital gains died and including investors who bought funky financial instruments that enabled the housing bubble out in West Florida to inflate - that Wall Street isn't the only culprit in the housing debacle. Sir, Goldman was no more culpable in the housing debacle than Congress.
That last line is a doozey. Indeed, Congress shares responsibility for the housing debacle--because it listened to the lobbyists and executives from megabanks and deregulated the industry.

Blaming the borrower, of course, ignores the harsh reality that banks fueled a predatory lending epidemic over the past decade, both with their own in-house lending operations and with those of other companies that they financed. Much of this lending was simple fraud, and according to the FBI, 80 percent of mortgage fraud is perpetrated by the lender. This is exactly the sort of behavior that needs Congressional scrutiny, so that the public can understand what financial reform is supposed to accomplish. That's why Levin's hearing on Washington Mutual--an unrepentant predator which J.P. Morgan now owns--was so productive. Educating the public is no easy task when banks are spending millions on misinformation campaigns and deploying epic squadrons of lobbyists to Capitol Hill.

Still, there were and still are plenty of irresponsible borrowers out there. It's hard to see how this lets Wall Street off the hook. Bankers shouldn't have been stupid enough to extend loans to people who couldn't afford them -- distinguishing a good loan from a bad loan is, in fact, the most fundamental responsibility of a banker. In Glassman's absurd narrative, a bank's failure to underwrite prudently is being disguised as the immoral behavior of a borrower.

Banks made these destructive loans for a reason -- they made tons of money when they packaged them into securities and sold them to investors. The borrowers who bought houses they couldn't afford lost a ton of money and ruined their credit. The banks that kept these lousy loans on their balance sheets and bought these lousy securities got bailed out by taxpayers. We need financial reform to stop precisely this kind of behavior, and it has to occur at the bank, where the loan is funded and extended.

Let's not forget, it wasn't just "investors" clamoring for mortgage bonds and derivatives that fueled the housing bubble. There were also investment banks, like Goldman Sachs and J.P. Morgan, who were eager to make big bucks by packaging and selling the securities. Investors ignored the havoc they were wreaking, and so did the bankers. Even if Goldman avoids any penalties from its Abacus deal, the company's role in inflating the housing bubble is not a matter for dispute. Goldman's only serious defense in this regard is that other firms -- notably J.P. Morgan -- played a larger role. If you want to fix this problem -- banks selling lousy securities to investors -- you have to explain it to the public and tighten bank regulations.

So what has J.P. Morgan been up to for the past decade that makes its chief economist such an expert on the virtues of weak regulation? It had a $30 billion subprime mortgage operation. It operated a credit card business completely dependent on unfair and deceptive practices. It fleeced local governments by bribing public officials in order to raid taxpayer coffers. It is one of just a handful of banks that skims from the tax rebates of poor people with predatory Refund Anticipation Loans. It is the only major bank in the country that finances mountaintop removal mining, a bombing campaign for Big Coal that is destroying Appalachia. It spends more money on lobbying than any other bank in the country.

After the dot-com scandals, the government imposed a strict separation between the research departments at investment banks and the rest of the company's operations. Analysts were giving bogus stock advice in order to lure investors into buying bad stocks that would prove profitable for the analyst's banking team. J.P. Morgan is making it increasingly clear that we need a new separation, this time between the research department and the lobby shop.

 

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