J.P. Morgan Funds Senate Finance Chair, Even Bigger Problem in the Wings
Tom Ferguson: Euro crisis may have more devasting effect on US banks than previously thought - May 22, 12
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Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and a Senior Fellow of the Roosevelt Institute. He received his Ph.D. from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or coauthor of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). Most of his research focuses on how economics and politics affect institutions and vice versa. His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a long time Contributing Editor to The Nation and a member of the editorial boards of the Journal of the Historical Society and the International Journal of Political Economy.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.Senator Tim Johnson, chair of the Senate Banking Committee, wants Jamie Dimon, head of JPMorgan Chase, to come and testify and explain how they lost $2 billion. There's a problem here. Who is Senator Tim Johnson's largest campaign contributor? Well, that's people associated with JPMorgan. So file this under the category as you can't make this stuff up, as Tom Ferguson said to me. And Tom now joins us.Tom teaches at the University of Massachusetts Boston. He's a senior fellow at the Roosevelt Institute. He writes a column at AlterNet. So, Tom, you were the one that wrote me and said you can't make this stuff up. So let's talk a bit about that. But there's actually something even more significant at stake here than just more money sloshing around Senate. But let's start with this, the financing issue.THOMAS FERGUSON, POLITICAL SCIENTIST AND AUTHOR: Sure. Well, I mean, one has to say that, you know, yeah, it's bad that JPMorgan seems to be Johnson's largest contributor now for some election cycles, but the truth is is that the major banks and other financial houses are way into Johnson. The financial services industry has been his largest contributor for just about every election cycle in the last few years. And the truth is, although I think his leadership PAC is actually named something like South Dakota First or something like that, in fact, when you start looking at the cash in, it's perfectly obvious it's New York and other financial service centers first.Now, this is a bad scene. And I have to tell you also, Paul, that Senator Johnson's record here is not great. He was not the chair when DoddâFrank was drafted, DoddâFrank being the financial reform bill. Dodd was the chair. But, actually, Dodd had a pretty terrible record as a regulator. But as he was exiting, he did sort of do a kind of death bed conversion, and his draft of the bill was actually a good deal better on many points than Frank's. And his own committee members wouldn't swallow it. Senator Johnson was among those who made trouble. That's pretty easy to find in newspapers if you look. And the Dodd version of that bill was dead on arrival. And, you know, now we haveâSenator Johnson is the chair, and, you know, exactly as you suggested, it's more than a little weird that he calls in his largestâthe guy who does run the firm that is his largest contributor to come testify. I mean, I think we are entitled to some skepticism.JAY: And there's a question that one hopes Dimon will be asked that he's not likely to be asked, but I guess we can be pleasantly surprised, which is, if you wereâyou being JPMorganâare out there hedging against other investments with what turns out to be derivatives play and you lost all that, that means you lost your hedge. So then the question is: well, how much of this was supposed to be safety hedging, is just purely speculative, and the downside actually isn't hedged against at all?FERGUSON: Look, I think it's obvious now that they were trying to make the hedges a kind of profit center. I think everybody realizes that. The truly scary question, though, is quite related to what you said. It's this, is that, you know, even somebody receiving a large sum of money from the financial services industry should realize that there is a major financial crisis brewing in Europe. I mean, in 2008 the whole world crashed after U.S. authorities let Lehman Brothers go bust. Now we've got the European authorities thinking about letting an entire country go bust. That's Greece. And we've been constantly assured by American regulatory officials and bankers that there's nothing to worry about; if the worst happens in Europe, why, the gross exposures of the American banks that look kind of intimidating on their face are really quite well hedged. I think anybody should now realize that it's time to look very carefully into those assertions, that they're probably not worth the paper they're not printed on.And, you know, you've got to ask, tooâI think not only should you call Dimon to testify, obviously, but frankly, Ben Bernanke and Bill Dudley, the operating head of the New York Fed, it's timeâthey need to testify too. After all, we've been hearing for the last few months about how the officious regulatory officials were blockingâwere actually costing the New York banks money because they were so diligent about checking through their trades and such. It's obvious that the Fed didn't know anything about this. The regulators don't seem to have been awake. And, you know, it'sâhow can we believe anybody's assurances here?Let me go a little bit further. It is, I think, true that Dimon and JPMorgan Chase are probably the best in their business. I take them seriously when they say they try to control risks. But the truth is, I think what you're learning here is that you can't believe anybody's assurances that risks are controlled. You can't believe the banks themselves. You can't believe the regulators. The warning here, I think, is that you've got to devise mechanisms that will prevent this sort of thing from happening, that don't rely on just the confidence, however much you repose in a single individual or a bank. And, indeed, the whole cult of the star CEO, the truth is is that nobody seemed to know for much of the last few weeks quite what the real story wasâeven in the bank, if you believe some of the reporting in the press.JAY: And what would a mechanism like that look like? And then, how would you ever get that through Congress?FERGUSON: Well, yes, there isâif you want a happy ending, you know my usual line: see a Disney movie. But, I mean, the simplest thing is what some people call narrow banking. I mean, you just makeâyou get banks out of the securities business. That is to say, no, you can't buy credit default swaps. You can't do stock market speculation. You can take deposits and you can make real loans. That's pretty much all you can do. And, you know, the U.S. had a kind of version of that for many decades after the New Deal. It wasn't quite that tight, and it worked fine. You know, you didn't have big bank failures for decades in the United States. And then, when they began to loosen the rules, you had many more of them. And then after, you know, the GlassâSteagall act's abolition under, alas, the Democrats, you've had, of course, just one failure after another.JAY: So a lot of the economists we're talking to, Europeans, you know, they say it's just inevitable that there's going to be a complete default by Greece. And in all likelihood the planning's already underway, it seems, for Greece to exit the euro. With that kind of collapse, what will it mean for American banks?FERGUSON: Well, the truth is, look, I can't claim to knowâI mean, I doubt very much that everybody is as hedged as they say. You know, you'd have to be crazy to believe that after you've just seen what were described as hedges go awry. And they were, after all, bets on Europe, don't forget. That wasâ.JAY: Yeah, well, just for a second here, just for people that aren't as conversant in all this, explain again what hedging this would mean, whatâunderstand hedging.FERGUSON: Well, [crosstalk] I mean, if you thought they were hedging, they were trying to offset some possible damage from trades that they made going bad, in simple English, and they plainly did not do that.JAY: So that's the issue. They've been making it appear as if they're hedged against such a European financial crisis, and now you can't believe any of the hedging is really hedging.FERGUSON: I thinkâno, I don't think anybody can say with much confidence what would happen. And you only have to have a few of these hedges in a large institution fail, the institution to go bust. And then, you know, the authorities, if they don't stand behind it (you don't do another round of TARPs and bank bailouts, in other words), they can take out the whole system again. I mean, this isâI mean, it could happen in a European bank rather than an American bank, and suddenly, you know, even if our guys were hedged, if somebody can't pay off on their hedges, everything goes down like nine pins. I mean, this is a little crazy.What's actually happened here is pretty straightforward, that, you know, DoddâFrank didn't fix the too-big-to-fail banks. And there's nevertheless, after it was passed, massive pressure to weaken it even further. You know, you only have to listen to former Governor Romney talk about this to realize justâor almost any Republican in Congress to realize how crazy the situation is. There wereâpeople were talking about repealing DoddâFrank. And, no, this is a really bad scene, and people are at risk right now.JAY: So the fundamental issue here is, four years later, still no transparency. And given, as you described, the money-driven Congress, it ain't getting any better.FERGUSON: Well, yes, that is a problem. I mean, some of our greatest speculators are actually in Congress, except they don't speculate: they take the cash and deliver the services. It's really a kind of service delivery industry. I mean, we've been over this ground sometimes in other interviews. We can do it again if you want. But, I mean, I think everybody sees the problem here.And it is timeâthe U.S. press has given the Congress too easy a time on this. I had a call this morning from, you know, arguably one of the leading business papers in the world, you know, and they were saying, well, we might make a story out of this. You know, my reflection, you know, which I didn't say at the time, was: where have you guys been? You know, just what is the problem here? I mean, how bad does it have to get before people will sort of cover this in the mainstream media?JAY: Thanks for joining us, Tom.FERGUSON: Thanks.JAY: And thank you for joining us on The Real News Network.
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