On JPMorgan’s $2b Loss, and US Financial Regulation

12:57 May 12th, 2012 | 0 notes

Whoops. There goes some of JPMorgan’s reputation as an excellent risk manager.

While we won’t know exactly what screwed JPMorgan so badly (surprise, they don’t want people using the trade against them), there are some important implications arrising from this series of unfortunate events.

First, there is some debate over what JPMorgan actually did to lose $2b. This matters. The Volcker Rule of the Dodd-Frank Act bans proprietary trading, but has an exemption for ‘risk-mitigating hedging activity’. JPM obviously calls there trade a hedge, but now that the supposed hedge is the cause of massive losses, regulators may begin to raise their eyebrows.

This leads only the second implication: regulation. 90% of the types of trades JPM just lost on are transacted by America’s six largest banks. With such a big, single loss, US (and probably UK eventually) regulators will want to take another look at the Too Big To Fails are up to.

This is a problem. The US financial industry is still wading through new additions the thick goop that is the United States financial regulatory regime. Consider this: in Australia we have only three major agencies managing our financial sector. In the US, there are many times more, each with overlapping roles and responsibilities. The US Federal Reserve, the Securities and Exchange, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Financial Industry Regulatory Authority, the Financial Crimes Enforcement Network, the Office of Foreign Assets Control, not to mention the rest of the Treasury Department and numerous state based regulators all have roles in regulating the US financial industry. On top of this, the Dodd-Frank Act (the law passed in the aftermath of the crisis) adds three new regulators to the mix: the Financial Stability Oversight Council, the Office of Financial Research, and Consumer Financial Protection Bureau.

Jamie Dimon (JPMorgan’s CEO) admitted on a conference call that their trading loss would act as ammunition to pundits and politicians calling for new rules.

Zachary Karabell sums up the worries best:

Dimon has been an outspoken critic of the spate of legislation that followed the financial crisis. He has argued that the labyrinthine laws embedded in Dodd-Frank add layers of regulation and complexity to an already chaotic regulatory structure. He has a point. The financial industry is overregulated in the sense of multiple agencies demanding compliance and looking for problems. The banks may have been bailed out, but they now face a web of new rules that are so complicated that two years after the legislation has been passed many of those actual rules have yet to be clarified.

At the same time, the thicket of regulation lacks any sense of the common good served by a free-flow of finance and capital, whether in the form of mortgage financing and refinancing, small business loans, or any of the myriad forms of capital necessary to fuel economic growth. The goal should be to enable that flow without allowing undue systemic risk and greed to imperil it. The current mass of regulations manages to inhibit banks from extending credit while simultaneously not doing enough to monitor risk. They are flawed not because, as Republicans would argue, they are a sign of government overreach, but because they are badly conceived.

There is nothing inherently wrong with regulation. It is in fact a good thing, meant to provide consumers with peace of mind that the financial industry is taking care of their money and won’t do anything to blow up the economy. Except that when finance did blow up the economy in 2008, many failed to mention the huge failures of the regulators alongside the huge failures on the part of the financial industry.

What the US needs is not less or more regulation—the country needs better regulation. Upcoming changes to the United Kingdom’s financial regulatory structure look remarkably similar to the system that currently exists in Australia. The Dodd-Frank Act by contrast, while well intentioned, is a mess, and should have sought to consolidate agencies and provide each with clearly demarcated responsibilities to ensure financial stability. Poorly constructed regulation only serves to give regulation a bad name, and gives credence to those who think there should be no regulation at all.

The presence of numerous regulators clearly isn’t working. Time to simplify.

In the mean time, JPMorgan and others would do best not to provide leviathan with meat to feed on.

For more, visit Daily Beast, Forbes, and Reuters.

UPDATE: SURPRISE!

Obama’s 2013 Budget

6:30 Feb 15th, 2012 | 0 notes

The New York Times has made a useful (and very pretty to play with) visualization of Obama’s new budget. Ignoring the fact that it will never pass congress (none of his have so far), it is none the less an important gauge of the President’s priorities for the coming year. So what appear to be his priorities?

  • Federal Highway Administration receives a 103% boost in funding
  • ‘Housing Programs’ at HUD receive a 62.9% increase
  • The Consumer Financial Protection Bureau receives a 31.8% larger budget (they had a budget?)

More statistics can be viewed at the New York Times, and if you’re up to reading the entire 256 pages document, you can read it at the Office of Management and Budget’s website.

Fun fact: Obama’s budget paper is 256 pages long and spends $3.7 trillion dollars. The Australian Federal Budget is 1102 pages long and only spends $414 billion. Happy reading!