09/04/2013 07:19 pm ET Updated Nov 04, 2013

Is Washington Seeking Revenge on JP Morgan or Is the US Regulatory System Out of Control?

In the post-crisis tribulations, after being very close to the administration, JP Morgan started campaigning against some aspects of the new financial regulation. Its favorite target was the Volcker rule that restricts the type of investments banks can trade for their own account. It turned into a nasty campaign of Jamie Dimon, its chairman and CEO, against the well-respected former Federal Reserve President Paul Volcker.

Unfortunately the exception to the so-called Volcker Rule for hedging that he defended, and continues to defend, was used by its Corporate Investment Office to take "macro-hedging" positions and added a speculative element to the portfolio. A loss of $6 billion by the "London Whale" followed a statement by Mr. Dimon that "it was a tempest in a teapot."

Multiple regulatory fines pile on largest and most respected U.S.

JP Morgan has an exceptional reputation based on the respect of its clients and competitors on a global basis. It does not seem to enjoy the same from its regulators. I am struck by the amount of regulatory pursuits that are now affecting JP Morgan and have the uneasy feeling that Washington might actually target the most respected bank in American, and maybe in the world. Here are some examples of those actions.

• For some reasons, JP Morgan is sued for targeting its recruitment in China toward relatives of politicians. There is no possibility to originate substantial business from China without connections to the political leadership. Does that seem awkward to anybody? I thought Goldman Sachs was the world champion of cronyism capitalism and that Goldman and the US government are one and the same. A list of its ties to the Obama Administration was published in 2010 and former US officials are among the most senior advisors of Goldman Sachs. Why JP Morgan?
• JPMorgan struck a $410 million settlement with the nation's top energy regulator, which had accused the bank of devising "manipulative schemes" to transform "money-losing power plants into powerful profit centers." (It was rumored to be $1 billion.)
Two federal regulators are preparing a series of enforcement actions and fines against JPMorgan Chase stemming from its dealings with consumers during the recession, presenting the latest legal threat to the nation's biggest bank.
• U.S. authorities are demanding JPMorgan Chase to pay more than $6 billion to settle allegations it mis-sold securities to government-backed mortgage companies in the run-up to the financial crisis, according to people familiar with the discussions.
• JPMorgan Chase & Co. (JPM), the biggest U.S. bank, said it's under federal criminal investigation for practices tied to sales of mortgage-backed bonds that the Justice Department has already concluded broke civil laws.
• The Federal Housing Finance Agency wants JPMorgan, the biggest U.S. bank by assets, to pay more than $6 billion to settle claims that it knowingly sold bad mortgages to Fannie Mae and Freddie Mac ahead of the financial crisis, the Financial Times reported on Tuesday, citing people familiar with the matter.

The mounting potential price tag was partly responsible for a warning by the bank this month that its total legal bill exceeded $ 20 billion since the financial crisis out of the $ 100 billion of the banking system.

Could regulation become a systemic risk?

These actions seem to raise a fundamental question summarized by some newspapers:
• Are Regulatory Orders Against JPMorgan Just a 'Slap on the Wrist'? (American Banker)
• JPMorgan Caught in Swirl of Regulatory Woes (NY Times)
• JPMorgan woes deepen as US demands $6bn penalty (Financial Times)

Rather than trying to take a stand on the conspiracy theory, I am raising the fundamental question of the regulatory dysfunctioning of the United States regulatory system.

The accumulation of fines and legal fees could potentially, more than market movements affect the performance, reputation and future of the US largest bank. Is that the objective? Of course not, even thought the accumulation of recent fines represents almost 10 percent of the bank's equity.

The problem is that nobody is in charge of asking that question, and therefore focusing on its answer. Where is the Federal Reserve on this? Absent, since it does not want interfere with other agencies: the usual intra regulatory "territorial respect." This is the biggest failure of the current regulatory reform: by not rationalizing the number of institutions and by not giving a global leadership to the Federal Reserve who is in charge of the US Systemically Important Financial Institutions, they become the target of every single of the 22 agencies who has some money to ask or some issues to resolve.

It is urgent to call it off. Fines should be suspended until the Administration comes with a sensible way to deal with failures and misbehavior of financial institutions. Unless they would like to spend billions in lawyers' fees to answer class actions from SIFI's shareholders, some form of coordination is needed.

The US regulatory web has definitely become a systemic risk. Jamie Dimon had actually anticipated it.

As a result of Dodd-Frank, we now have multiple regulatory agencies with overlapping
rules and oversight responsibilities. (JP Morgan Letter to Shareholders, 2011.)