The JPM Loss: Would Dodd-Frank ‘Prevent This Kind of Stuff’?

Receiving Wide Coverage ...

JPMorgan (What Else?): One more time, we’ll break it down for you thematically.

The Cleanup Crew. Matthew Zames succeeded Ina Drew as chief investment officer, overseeing the operation that produced JPM’s $2 billion trading loss. Zames has been with JPM since 2004, and knows a thing or two about risk; his first job in the industry was as a junior trader at Long-Term Capital Management, which blew up during the 1998 credit crisis. A decade later, as a much bigger crisis was beginning, Zames played a major role in JPM’s takeover of Bear Stearns. Michael Cavanagh, a “trusted longtime lieutenant” of CEO Jamie Dimon, was put in charge of a team of executives who are investigating what went wrong in London. Cavanagh is a former chief financial officer of the company and was transferred to run the treasury and securities unit two years ago as part of sort of cross-training regimen for executives. Both he and Zames have been mentioned as potential successors to Dimon. Wall Street Journal, Financial Times, New York Times (mini-profile of Zames and news story about the reshuffling)

Payback Time? The papers speculate on whether the company will try to claw back pay from Drew, who “retired” after the trading loss on her watch gave the company a black eye. Wall Street Journal, New York Times

Legal Questions: An op-ed in the Journal declares that “Losing Money Isn’t a Crime,” and that the “nobody should care” about JPMorgan’s $2 billion bungle except the company’s shareholders and the employees who stand to lose their jobs or bonuses. The writer, Yale law professor Jonathan Macey, faults politicians who are making a stink about the trading loss for “trying to create a crisis atmosphere” and “using the loss as a pretext to regulate.” Another law professor, Peter J. Henning, writes in the Times’ “White Collar Watch” column that while the disastrous credit trades themselves probably won’t be at issue, JPM’s disclosures to shareholders about what management knew and when they knew it might be.

Regulatory issues. President Obama declared that if all of Dodd-Frank were put into practice, “it should prevent this kind of stuff from happening.” But the Times reports that regulators sent mixed messages about whether the JPM mess would result in tighter supervision. Sen. Bob Corker caused a “firestorm” among lawmakers by relaying a conversation he had with an OCC examiner, who told him the Volcker rule would not, and should not, have precluded the JPMorgan CIO’s hedges that went awry. The agency’s spokesman later “clarified” that it’s too soon to tell, the rule hasn’t been finalized yet, etc. In the FT, a “leader” (that’s what the Brits call editorials) calls JPMorgan’s mistakes “salutary” since they support the case for regulators to reign in risk-taking by banks and, just as important, to limit the damage that one institution can do to the broader economy. In the Journal, columnist Francesco Guerrera is similarly thankful that the JPM blunder has reminded regulators of the importance of having a plan in place to dismantle troubled megabanks without wreaking widespread havoc. In a separate piece in the FT, the paper’s U.S. banking editor, Tom Braithwaite, thinks the trading loss has been blown out of proportion (he suspects “‘tall poppy syndrome,’ the unpleasant desire to drag down the successful that I always thought was not common in the US but seems to be spreading”). But the resulting “calls for bank simplification” might make regulators more receptive to exercising a little-understood power they have in the “living wills” section of Dodd-Frank: they can “order disposals if they believe financial groups are too complicated to be wound down safely.” Meanwhile, politicians are calling for Dimon to step down from the board of the New York Fed (it’s “the fox guarding the henhouse,” said Sen. Bernie Sanders of Vermont) and former presidents of other regional Fed banks say the pols have a point.