In an interview on PBS NewsHour, US
Treasury Secretary Tim Geithner commented on
JPMorgan Chase chairman, president and chief
executive Jamie Dimon's conduct regarding the
bank's recent investment loss, and used the
"diplomatic language of Treasury communications"
to tell Dimon to resign from the New York Federal
Reserve Board.
Dimon as head of one of the
nation's largest banks should resign from the
Federal Reserve Board, but not because JPMorgan lost
$3 billion and counting in
CDS (credit default swaps) positions.
As I
pointed out last week (JPMorgan
not so dumb, Asia Times Online, May 18, 2012,
and Top
Wonks website), the Federal Reserve itself,
together with the Treasury, created regulatory
rules that not only permit but invite banks to
take on CDS to reduce their capital requirements
as derived from the amount of risk exposure,
allowing banks to show bank regulators that much
of their risk exposure has been hedged with CDS so
that banks can lend five times more loans from the
reduced capital level than would be permitted
without CDS hedging.
Dimon should resign
from the Fed Board for another reason: it is a
fragrant conflict of interest to have the head of
a regulated financial institution sit on the board
of the Fed, the bank's regulator.
The
bottom line is that JPMorgan made money to the
tune of $4 billion net in the same quarter that it
lost $2 billion from credit derivative positions
because its risky CDS positions allowed JPMorgan
to make larger profit from more lending to more
than cover the loss from the same CDS position.
That is how risk hedging becomes a profit center
for banks. Dimon would love to have the derivative
play make profit as well as icing on the cake, but
even without the icing, the cake is very good.
Dimon elects to take off-target criticism
by pretending that the CDS play was a sloppy
mistake. He does this to divert attention from the
real problem, which is the structural regulatory
regime that allows banks to make high profit by
avoiding high capital requirements as a percentage
of its risk exposure. Dimon's mea culpa strategy
is aimed at preventing the enforcement of the
Volcker Rule to restrict banking from trading.
The fact remains that: 1. The $3
billion lost by JPMorgan did not vanish into thin
air. It stayed in the financial system, going from
JPMorgan into the pockets of hedge funds; and
2. The guilty parties are not the banks that
play by the rules set by the regulators. The
guilty parties are the regulators, that is, the
Federal Reserve and the US Treasury.
Thus
Geithner once more is merely grandstanding, this
time at the expense of Dimon, who will recover as
a hero when shareholders begin to understand the
actual facts behind the multi-billion dollar loss.
The loss was really an investment to facilitate
high profit from bank loans.
There are a
lot of things wrong with our banking system and
its regulatory regime. But forcing Dimon to resign
from the Fed Board obscures the real issues.
Henry C K Liu is chairman of a
New York-based private investment group. His
website is at www.henryckliu.com
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Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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