Another Excerpt: All the Presidents' Bankers: Nixon's War/Wall Street's War

(This excerpt first appeared on Zerohedge, with permission from Nation Books. All rights reserved.)

Wall Street’s War

While the protests against the Vietnam War intensified in the first years of the Nixon administration, the financial elite was fighting its own war—over the future of banking and against Glass-Steagall regulations. National City Bank chairman Walter Wriston was a steadfast warrior in related battles, as he fought with Chase chairman David Rockefeller for supremacy over the US banker community and for dominance over global finance.

Rockefeller’s sights were set on a grander prize, one with worldwide implications: ending the financial cold war. He made his mark in that regard by opening the first US bank in Moscow since the 1920s, and the first in Beijing since the 1949 revolution.

Augmenting their domestic and international expansion plans, both men and their banks prospered from the emerging and extremely lucrative business of recycling petrodollars from the Middle East into third world countries. By acting as the middlemen—capturing oil revenues and transforming them into high-interest-rate loans, to Latin America in particular—bankers accentuated disparities in global wealth. They dumped loans into developing countries and made huge amounts of money in the process. By funneling profits into debts, they caused extreme pain in the debtor nations, especially when the oil-producing nations began to raise their prices. This raised the cost of energy and provoked a wave of inflation that further oppressed these third world nations, the US population, and other economies throughout the world.

Bank Holding Company Battles

When Eisenhower signed the 1956 Bank Holding Company Act banning interstate banking, he left a large loophole as a conciliatory gambit: a gray area as to what big banks could consider “financially-related business,” which fell under their jurisdiction. In practice, that meant that they could find ways to expand their breadth of services while they figured out ways to grow their domestic grab for depositors. On May 26, 1970, the “Big Three” bankers— Wriston and Rockefeller, along with Alden “Tom” Clausen, chairman of Bank America Corporation—appeared before the Senate Banking and Currency Committee to press their case for widening the loophole.

During the proceedings, Wriston led the charge on behalf of his brethren in the crusade. Tall, slim, elegantly dressed, and the most articulate of the three, he dramatically called on Congress to “throw off some of the shackles on banking which inhibit competition in the financial markets.”

The global financial landscape was evolving. Ever since World War II, US bankers hadn’t worried too much about their supremacy being challenged by other international banks, which were still playing catch-up in terms of deposits, loans, and global customers. But by now the international banks had moved beyond postwar reconstructive pain and gained significant ground by trading with Cold War enemies of the United States. They were, in short, cutting into the global market that the US bankers had dominated by extending themselves into areas in which the US bankers were absent for US policy reasons. There was no such thing as “enough” of a market share in this game. As a result, US bankers had to take a longer, harder look at the “shackles” hampering their growth. To remain globally competitive, among other things, bankers sought to shatter post-Depression legislative barriers like Glass-Steagall.

They wielded fear coated in shades of nationalism as a weapon: if US bankers became less competitive, then by extension the United States would become less powerful. The competition argument would remain dominant on Wall Street and in Washington for nearly three decades, until the separation of speculative and commercial banking that had been invoked by the Glass-Steagall Act would be no more.

Wriston deftly equated the expansion of US banking with general US global progress and power. It wasn’t so much that this connection hadn’t occurred to presidents or bankers since World War II; indeed, that was how the political-financial alliances had been operating. But from that point on, the notion was formally and publicly verbalized, and placed on the congressional record. The idea that commercial banks served the country and perpetuated its global identity and strength, rather than the other way around, became a key argument for domestic deregulation—even if, in practice, it was the country that would serve the banks.

The Penn Central Debacle

There was, however, a fly in the ointment. To increase their size, bankers wanted to be able to accumulate more services or branches beneath the holding company umbrella. But a crisis in another industry would give some legislators pause. The Penn Central meltdown, the first financial crisis of Nixon’s presidency, temporarily dampened the ardency of deregulation enthusiasts. The collapse of the largest, most diverse railroad holding company in America was blamed on overzealous bank lending to a plethora of non-railroad-oriented entities under one holding company umbrella. The debacle renewed debate about a stricter bank holding company bill.

Under Wriston’s guidance, National City had spearheaded a fifty-three-bank syndicate to lend $500 million in revolving credit to Penn Central, even when it showed obvious signs of imminent implosion.

Penn Central had been one of the leading US corporations in the 1960s. President Johnson had supported the merger that spawned the conglomerate on behalf of a friend, railroad merger specialist Stuart Saunders, who became chairman. He had done this over the warnings of the Justice Department and despite allegations of antitrust violations called by its competitors. With nary a regulator paying attention, Penn Central had morphed into more than a railroad holding company, encompassing real estate, hotels, pipelines, and theme parks. Meanwhile, highways, cars, and commercial airlines had chipped away at Penn Central’s dominant market position. To try to compensate,
Penn Central had delved into a host of speculative expansions and deals. That strategy was failing fast. By May 1970, Penn Central was feverishly drawing on its credit lines just to scrounge up enough cash to keep going.

The conglomerate demonstrated that holding companies could be mere shell constructions under which other unrelated businesses could exist, much as the 1920s holding companies housed reckless financial ventures under utility firm banners.

Allegations circulated that Rockefeller had launched a five-day selling strategy of Penn Central stock, culminating with the dumping of 134,400 shares on the fifth day, based on insider information he received as one of the firm’s key lenders. He denied the charges.

In a joint effort with the bankers to hide the Penn Central debacle behind a shield of federal bailout loans, the Pentagon stepped in, claiming that assisting Penn Central was a matter of national defense.5 Under the auspices of national security, Washington utilized the Defense Production Act of 1950, a convenient bill passed at the start of the Korean War that enabled the president to force businesses to prioritize national security–related endeavors.

On June 21, 1970, Penn Central filed for bankruptcy, becoming the first major US corporation to go bust since the Depression. Its failure was not an isolated incident by any means. Instead, it was one of a number of major defaults that shook the commercial paper market to its core. (“Commercial paper” is a term for the short-term promissory notes sold by large corporations to raise quick money, backed only by their promise to pay the amount of the note at the end of its term, not by any collateral.) But the agile bankers knew how to capitalize on that turmoil. When companies stopped borrowing in the flailing commercial paper market, they had to turn to major banks like Chase for loans instead. As a result, the worldwide loans of Chase, First National City Bank, and Bank of America surged to $27.7 billion by the end of 1971, more than double the 1969 total of $13 billion.

A year later, the largest US defense company, Lockheed, was facing bankruptcy, as well. Again bankers found a way to come out ahead on the people’s dime. Lockheed’s bankers at Bank of America and Bankers Trust led a syndicate that petitioned the Defense Department for a bailout on similar national security grounds. The CEO, Daniel Haughton, even agreed to step down if an appropriate government loan was provided.

In response, the Nixon administration offered $250 million in emergency loans to Lockheed—in effect, bailing out the banks and the corporation. To explain the bailout at a time when the general economy was struggling, Nixon introduced the Lockheed Emergency Loan Act by stating, “It will have a major impact on the economy of California, and will contribute greatly to the economic strength of the country as a whole.” After the bill was passed, not a single Lockheed executive stepped down.

It would take several years of political-financial debate and more bailouts to sustain Penn Central. One 1975 article labeled the entire episode “The Penn-C Fairy Tale” and condemned the subsequent federal bailout: “While the country is in the worst recession since the depression and unemployment lines grow longer every day, Congress is dumping another third of a billion dollars of your tax payer dollars down the railroad rat hole.” (The incident was prologue: Congress would lavish hundreds of billions of dollars to sustain the biggest banks after the 2008 financial crisis, topped up by trillions of dollars from the Fed and the Treasury Department in the form of loans, bond purchases, and other subsidies.)

More Bank Holding Company Politics

Despite the Penn Central crisis, the revised Bank Holding Company Act decisively passed the Senate on September 16, 1970, by a bipartisan vote of seventy-seven to one. The final version was far more lenient than the one that Texas Democrat John William Wright Patman, chair of the House Committee on Banking and Currency, or even the Nixon administration had originally envisioned. The revised act allowed big banks to retain nonbank units acquired before June 1968. It also gave the Fed greater regulatory authority over bank holding companies, including the power to determine what constituted one. Language was added to enable banks to be considered one-bank holding companies if they, or any of their subsidiaries, held any deposits or extended any commercial loans, thus broadening their scope.

President Nixon signed the bill into law without fanfare on New Year’s Eve 1970. In fact, his inner circle decided against making a splash about it. They didn’t think the public would understand or care. Plus, they realized that there was a prevailing attitude that the Nixon administration had favored the big banks, and though it had, this was not something they wanted to draw attention to.

The End of the Gold Standard

The top six banks controlled 20 percent of the nation’s deposits through one-bank holding companies, but second place in that group wasn’t good enough for Wriston, who noted to the Nixon administration that his bank was really the “caretaker of the aspirations of millions of people” whose money it held. Wriston flooded the New York Fed with proposals for expansion. His applications “were said to represent as many as half of the total of all of the banks.” The Fed was so overwhelmed, it had to enlist First National City Bank to interpret the new law on its behalf.

By mid-1971, the Fed had approved thirteen and rejected seven of Wriston’s applications. His biggest disappointment was the insurance underwriting rejection. The possibility of converting depositors for insurance business had been tantalizing. It would continue to be a hard-fought, ultimately successful battle.

Around the same time, New York governor Nelson Rockefeller (David Rockefeller’s brother) approved legislation permitting banks to set up subsidiaries in each of the state’s nine banking districts. This was a gift for Wriston and David Rockefeller, because it meant their banks could expand within the state. Each subsidiary could open branches through June 1976, when the districts would be eliminated and banks could merge and branch freely.

Several months later, First National City Bank was paying generous prices to purchase the tiniest upstate banks, from which it began extending loans to the riskiest companies and getting hosed in the process; a minor David vs. Goliath revenge of local banks against Wall Street muscle.

By that time, the stock market had turned bearish, and foreign countries were increasingly demanding their paper dollars be converted into gold as they shifted funds out of dollar reserves. Bankers, meanwhile, postured for a dollar devaluation, which would make their cost of funds cheaper and enable them to expand their lending businesses.

They knew that the fastest way to further devalue the dollar was to sever it from gold, and they made their opinions clear to Nixon, taking care to blame the devaluation on external foreign speculation, not their own movement of capital and lending abroad.

The strategy worked. On August 15, 1971, Nixon bashed the “international money speculators” in a televised speech, stating, “Because they thrive on crises they help to create them.”16 He noted that “in recent weeks the speculators have been waging an all-out war on the American dollar.” His words were true in essence, yet they were chosen to exclude the actions of the major US banks, which were also selling the dollar. Foreign central banks had access to US gold through the Bretton Woods rules, and they exercised this access. Exchanging dollars for gold had the effect of decreasing the value of the US dollar relative to that gold. Between January and August 1971, European banks (aided by US banks with European branches) catalyzed a $20 billion gold outflow.

As John Butler wrote in The Golden Revolution, “By July 1971, the US gold reserves had fallen sharply, to under $10 billion, and at the rate things were going, would be exhausted in weeks. [Treasury Secretary John] Connally was tasked with organizing an emergency weekend meeting of Nixon’s various economic and domestic policy advisers. At 2:30 p.m. on August 13, they gathered, in secret, at Camp David to decide how to respond to the incipient run on the dollar.”

Nixon’s solution, pressed by the banking community, was to abandon the gold standard. In his speech the president informed Americans that he had directed Connally to “suspend temporarily the convertibility of the dollar into gold or other reserve assets.” He promised this would “defend the dollar against the speculators.” Because Bretton Woods didn’t allow for dollar devaluation, Nixon effectively ended the accord that had set international currency parameters since World War II, signaling the beginning of the end of the gold standard.

Once the dollar was no longer backed by gold, questions surfaced as to what truly backed it (besides the US military). According to Butler, “The Bretton Woods regime was doomed to fail as it was not compatible with domestic US economic policy objectives which, from the mid-1960s onwards, were increasingly inflationary.”

It wasn’t simply policy that was inflationary. The expansion of debt via the joint efforts of the Treasury Department and the Federal Reserve was greatly augmented by the bankers’ drive to loan more funds against their capital base. That established a debt inflation policy, which took off after the dissolution of Bretton Woods. Without the constraint of keeping gold in reserve to back the dollar, bankers could increase their leverage and speculate more freely, while getting money more easily from the Federal Reserve’s discount window. Abandoning the gold standard and “floating” the dollar was like navigating the waters of global finance without an anchor to slow down the dispersion of money and loans. For the bankers, this made expansion much easier.

Indeed, on September 24, 1971, Chase board director and former Treasury Secretary C. Douglas Dillon (chairman of the Brookings Institution and, from 1972 to 1975, the Rockefeller Foundation) told Connally that “under no circumstances should we ever go back to assuming limited convertibility into gold.” Chase Board chairman David Rockefeller wrote National Security Adviser (and later Secretary of State) Henry Kissinger to recommend “a reevaluation of foreign currencies, a devaluation of the dollar, removal of the U.S. import surcharge and ‘buy America’ credits, and a new international monetary system with greater flexibility . . . and less reliance on gold.”

With the dollar devalued, investors poured money into stocks, fueling a rally from November 1971 led by the “Nifty Fifty,” a group of “respectable” big-cap growth stocks. These were being bought “like greyhounds chasing a mechanical rabbit” by pension funds, insurance companies, and trust funds. The Chicago Board of Trade began trading options on individual stocks in 1973 to increase the avenues for betting; speculators could soon thereafter trade futures on currencies and bonds.

The National Association of Securities Dealers rendered all this trading easier on February 8, 1971, when it launched the NASDAQ. The first computerized quote system enabled market makers to post and transact over-the-counter prices quickly. With the stock market booming again, NASDAQ became a more convenient avenue for Wall Street firms to raise money. Many abandoned their former partnership models whereby the firm’s partners risked their own capital for the firm, in favor of raising capital by selling the public shares. That way, the upside—and the growing risk—would also be diffused and transferred to shareholders. Merrill Lynch was one of the first major investment bank partnerships to go “public” in 1971. Other classic industry leaders quickly followed suit.

Meanwhile, corporations were finding prevailing lower interest rates more attractive. Instead of getting loans from banks, they could fund themselves more cheaply by issuing bonds in the capital markets. This took business away from commercial banks, which were restricted by domestic regulation from acting as issuing agents. But bankers had positioned themselves on both sides of the Atlantic to get around this problem, so they were covered by the shift in their major customers’ financing preferences. While their ability to service corporate demand was dampened at home, overseas it roared. Currency market turmoil also led many countries to the Eurodollar market for credit, where US banks were waiting. Thus, the credit extended through international branches of major US banks tripled to $4.5 billion from 1969 to 1972.

The market rally, cheered on by the media, was enough to bolster Nixon’s fortunes. In the fall of 1972, Nixon was reelected in a landslide on promises to end the Vietnam War with “peace and honor.” Wall Street reaped the benefits of a bull market, and more citizens and companies were sucked into new debt products. The Dow hit a 1970s peak of 1,052 points in January 1973, as Nixon began his second term.

The Volcker Rule's Major Miss & Kim Kardashian's Bikini Bod

Something isn't always better than nothing. (This piece originally appeared at Truthdig. Also, hat-tip to Pam Martens at www.wallstreetonparade.) 

The subject of heated debate in financial circles, the Volcker Rule, which was originally passed as part of the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, was finally approved by regulators. It will begin taking effect in April 2014 with full compliance required by July 2015. They say the devil is in the details. Regarding the Volcker Rule, the devil is in the details of its abundant exemptions. These include a laundry list of practices and businesses that mega-banks have performed under one roof, since the 1999 repeal of Glass-Steagall, as well as the myriad perks they won along the way to that power-consolidating event.

The Volcker Rule in its current form ostensibly focuses on mitigating the “excessive” risk of proprietary trading at banks (which it doesn’t do well). Worse, it leaves all the other risky trading related activity that poses a far greater systemic threat untouched, such as:

1) Market making—the ability of banks to trade on behalf of clients or eventual clients, which is how they make the bulk of their trading profits, and thus create risk.

2) Underwriting—the creation of securities that can contain multiple layers of financial complexity, such as the toxic assets at the heart of the recent crisis.

3) Hedging—or the desire of banks to “protect” themselves through trading, which is virtually impossible to detect from any other kind of trading.

4) Trading government bonds.

5) Organizing or offering hedge and private equity funds, which involves trading and was theoretically to be prohibited under the original intent of the Volcker Rule.

Other exclusions (yes, there are more) relate to the ability of banks to trade—proprietary or otherwise—within their brokerage arms (which are supposedly, but not actually, distinct from their deposit-taking arms) and insurance company arms (which have historically been eager buyers and accumulators of toxic assets).

The real danger of the Volcker Rule, though, isn’t just that it leaves the structure of Wall Street’s deposit-insured, security-distributing and market-making services intact. The danger is that Wall Street critics believe it makes a meaningful difference, that it’s an obvious road on the way to the Glass-Steagall reinstatement highway, and are thus not ranting and raving for it to be made stronger, even as the bank lobbyists and lawyers are making every effort to further weaken it.

The Volcker Rule Exclusions Are the Rule

Between effectiveness and legalese, you can drive an 18-wheeler of financial wizardry. And that’s even accepting the notion that proprietary trading was a key culprit in causing any major financial crisis, relative to nearly any other risk producing bank practice, which it wasn’t.

Even so, the banks have been lobbying for exemptions in this minimal attempt at regulation and won’t stop. Thus the eventual implemented rule will entail more pages of exemptions, particularly if the public remains oblivious to its current impotence to deter risk.

The Big Six banks (JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley) that control the majority of domestic deposits (and nearly all of U.S. derivatives) dangle them as financial hostages before complicit regulators, legislators and presidents. Too big to fail is about power, not size. These banks that sit atop the U.S. financial hierarchy by virtue of their legacy leaders having attacked 1933 Glass-Steagall regulations since the 1950s—piece by piece—own insurance companies, asset management companies, and brokerage or trading houses. They not only have access to an increasingly higher proportion of deposits, but also of pension and other funds, and insurance policies. That’s why one of the main things that banks did to weaken the possibility of broad restriction on any of their overall trading activities was to ensure these side financial service businesses would bear no restriction on trading, proprietary or otherwise, as per their exemptions in the Volcker Rule.

The Fed’s Language Game

The Volcker Rule won’t take full effect until July 15, 2015. Thus, the only thing that really happened on Dec. 10, 2013, was that the Fed announced that five federal agencies “issued final rules” to “implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘Volcker Rule’).”

As Fed Chairman Ben Bernanke remarked with great fanfare from a media hailing the mere “adoption of final rules” as a deterrent to Wall Street’s most heinous behavior (December is a slow news month):

“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk taking by depository institutions and their affiliates. Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond toextensive public comments” (italics mine).

It’s true that the Volcker Rule has the ability to limit “excessive risk,” but only in the most literal sense. Even Bernanke’s choice of words indicated focus on a small portion of risk—not systemic risk and not the risk that these banks remain too powerful to fail.

A more misleading aspect of Bernanke’s statement was that he claimed it took so long to get to this point because of the need to address “public comments.” Given the comparative length of bank-supportive pages relative to public-protecting ones, “public comments” essentially means bank lobbyist demands.

Separately, the Fed’s press release underscored the elements of trading the rule would not touch as much, if not more so, than what it would. The release stated that insured-deposit-taking banks would be prohibited from “engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on those instruments for their own account” plus be subject to “limits on investments in, or relations with hedge funds or private equity funds.” But it also stated that “the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds.” In addition, it clarified that “certain activities are not prohibited.” That these exclusions were prominent in the Fed’s press release speaks volumes to the parties the Fed is trying to coddle.

For good political measure, under the Volcker Rule, each bank must establish a compliance program. CEOs must attest to the program’s integrity, under the eye of an outside regulator—who will have to take all this pious restraint at face value.

Breaking It Down

The proposed rules tally 892 pages, of which the beginning contains exposition and outlines the crux of the rule prohibiting certain proprietary trading and hedge and private equity fund activities.

The exclusions kick in on page 55. Through page 79, we get their general aspects, with more specific details following on page 80. We wander through Underwriting Exemptions from pages 80 to 139, followed by a long section on Market-Making Exemptions from pages 140 to 317.

Then, we get a bunch of permitted hedge fund related activities that nearly negate the idea of the Volcker Rule altering the relationship of big banks to big hedge funds from pages 317 to 361. From this point, we meander through permitted trading in certain government and municipal securities (including in foreign bonds). There are a few antiquated categories that seem open to more lobbying through page 388.

Permitted Trading on behalf of clients gets 10 pages, as does permitted trading by a regulated insurance company. Permitted trading activities of a foreign banking entity get 23 pages.

Then we come to a section that sounds sort of regulatory, but is too obtuse to tell from pages 433 to 447. After a few pages of definitions as to what constitutes “High-Risk Asset” and “High-Risk trading strategy,” we get one page—one page!—on trading that could “Pose a Threat to Safety and Soundness of the Banking Entity or the Financial Stability of the United States.”

Another section of loopholes begins with covered fund activities on page 463. This is the stuff that allows banks to trade almost anything anywhere as long as it’s named in such a way as to avoid suspicion. Section 10 begins with prohibitions on banks buying or having certain relationships with a “Covered Fund.”

Pages 500 to 637 provide lists of exemptions to the above such as foreign public funds, insurance company separate accounts, loan securitizations (which were central to the subprime crisis), derivatives on loan securitization (ditto), venture capital funds (another word for private equity funds) and credit funds (which can hold all sorts of AIG-type credit derivatives).

In Section 11, we get another laundry list of permitted activities in conjunction with organizing covered funds, including “permitted risk-mitigating hedging activities” (and aren’t they all?) from pages 638 to 766. These also include foreign funds and insurance companies. To cap it off, we get some obligatory legal jargon about how to comply with whatever weakened rules remain from pages 767 to 882. C’est tout.

Something Is Not Always Better Than Nothing

For those people who think the Volcker Rule is a swipe at the banks and will reduce risk in the system, I urge you to reconsider. The Volcker Rule (and Paul Volcker, for whom it’s named) might have had good intentions, but the form it has taken, and was destined to take as I’ve written before, is a placation. It is not substantive reform, or even the right path.

Only a resurrection of Glass-Steagall will truly reduce the risk mega-banks pose to our economic lives. The multiple decades of regulation assassination, the combining of financial services from insurance policies to our pension funds, the epic leverage in the banking system as part of the high-stakes game of global profit, the enabling of the derivatives market to reach many times the world’s GDP, disproportionally controlled by the Big Six U.S. banks—are all time bombs of financial devastation.

This immense power in the hands of the Big Six banks and their leaders is dangerous to all of us, whether we believe that something like the Volcker Rule or Dodd-Frank represents true reform or not. Without curtailing that power, through a full separation of deposits and loan taking services from any other kind of trading and security creation engine or other form of financial service—the intent of the original Glass-Steagall Act—we are not safe. There will be bigger and broader crises.

Our apathy is exactly what the banks, their CEOs, their lawyers and their lobbyists count on. They depend on citizens getting bored and glassy-eyed when a financial term is mentioned and turning to stories about Miley Cyrus twerking or Kim Kardashian’s bikini bod instead. They rely on journalists not reading between the lines or even tabulating the lines. They bet that most legislators (excluding Sens. Elizabeth Warren and Bernie Sanders) will focus anywhere else, because they can out-complicate the lingo. They are confident that the population will continue to furnish them chips on the global betting table. That is our current system. That is the system that must be abolished through the strict re-deployment of Glass-Steagall. We—all of us—have too much at stake to be blindsided by anything else.

JPM Chase Chairman, Jamie Dimon, the Whale Man, and Glass-Steagall

It was fitting that while President Obama and his Hollywood apostles broke fundraising records at a sumptuous $40,000 per plate dinner at George Clooney’s place, word of JPM Chase’s ‘mistake’ rippled through the news. Not long ago, Dimon’s name was batted about to become Treasury Secretary.  But as lines are drawn and pundits take sides in the Jamie Dimon ego deflation saga – or, as I see it - why big banks should be made smaller and then, broken up into commercial vs. speculative components ala Glass Steagall – it’s important to look beyond the size of the $2 billion dollar (and counting) beached whale of a trading loss.

Yes, $2 billion in the scheme of JPM Chase’s book and quarterly earnings is tiny, a ‘trading blip’ as it’s been called by some business press. But that’s not a mitigating factor in what it represents. In this era dominated by a few consolidated and complex banks, the very fact that it’s a relatively small loss IS the red flag. 

First - because the loss could (and will) grow. Second, because even if it doesn’t, it’s a blatant example of a big bank incurring un-due risk within barely regulated, highly correlated financial markets. It only takes another Paulson hedge fund, or a trading desk at Goldman Sachs, to short the hell out of the corporates that JPM Chase is synthetically long, or take whatever the other side really is, to create a liquidity crisis that will further screw those least able to access credit – individuals, small businesses, and productive capital users.

We know this. We’ve seen this. We're in this. There’s no such thing as an isolated trading loss anymore. And yet Jamie Dimon, seated atop the most powerful bank in the world, has smugly led the charge to adamantly oppose any moves to alter the banking framework that allows him, or any bank, to call a bet - a hedge or client position or market-making maneuver  - with central bank, government official, and regulatory impunity.

Flashback to the unimaginable in 1933

It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR.

Okay, that’s pretty common knowledge. But, here’s something that isn’t: of all the giant banks operating their trusts schemes and taking advantage of off-book deals, and international bets in the late 1920s, it was an incoming head of Chase (replacing Al Wiggins who shorted Chase stock in a network of fraud) that advocated for Glass-Steagall. Indeed, despite all pedigree to the opposite (his father was Senator Nelson Aldrich architect of the Federal Reserve and brother-in-law, John D. Rockefeller), Chase Chair, Winthrop Aldrich, took to the front pages of the New York Times in March, 1933 to pitch decisive separation of commercial and speculative activity arguments.  Fellow bankers hated him.

His motives weren’t totally altruistic to be sure, but somewhere in his calculation that Chase would survive a separation of activities and emerge stronger than rival, Morgan Bank, was an awareness that something more – permanent – had to be put in place if only to save the banking industry from future confidence breaches and loss. It turned out he was right. And wrong. (much more on that in my next book, research still ongoing.)

Financial history has a sense of irony. JPM Chase was the post-Glass-Steagall repeal marriage, 66 years in the making, of  Morgan Bank and Chase. Today, it is the largest bank in America, possessing greater control of the nation’s cash than any other bank.  It also has the largest derivatives exposure ($70 trillion) including nearly $6 trillion worth of credit derivatives. 

It is the size of a bank holding company’s deposits that dictates the extent of the risk it takes, risk ‘models’ not withstanding: the more deposits, the more risk, the more potential loss. JPM Chase is not alone in using its position as deposit taker to increase speculation, but it has more to play with.

And the more access to other people’s money, the greater the gambling incentive. The largest banks hold deposits (our deposits) hostage in the global game of financial warfare. Related access to capital and bailouts are enabling weaponry in the fight for worldwide insitutional supremacy.

The Alleged Hedge

Now, consider JPM Chase’s alleged ‘hedge’ itself; a trading position taken in the London department, the chief investment office,  set up to allegedly protect the bank’s overall book and ‘invest’ its excess capital.  Any investment is a bet. A hedge is supposed to mitigate loss if the bet fails. An investment is not a hedge.

Let’s pretend for a moment that banks were about simple conventional - banking – taking deposits and making loans. In that context, it would be nonsensical to hedge loan risk by pouring on more loan risk, or put out a fire by pouring fuel on its flames.

In other words, if a bank lends money to, say Boeing, it accepts a rate, in return,  more or less related to its assessment of the risk involved in getting its money back, which translates into an interest payment. To hedge that payment, a bank could purchase ‘insurance’ or ‘protection’ from a counterparty solvent enough to make good on any shortfall in Boeing’s ability to pay its interest, or in the event of an Boeing default.  What is not a hedge for the loan, is further exposure to the risk that Boeing could default.  Yet, in a more complex manner, that’s exactly what happened here.

By engaging in a trade that tied up 15% of its assets, or $350 billion, no matter what label that trade received, the Whale man and his managers (leading up to Jamie Dimon), went long credit risk by shorting an index of synthetic credits, thereby placing the bank in the position of paying out, or losing money, if those credits deteriorate. In effect, and super-simplistically, it doubled down. In its more complex form, the firm took a short position in an index of credit default swaps representing 125 North American investment grade corporations (including Boeing), called the CDX.NA.IG.9. The index reference of underlying corporates has been diving in price, hence the loss - and mounting loss to JPM.

Deception and Delusion

Going long the corporate credit market while still immersed in the fallout of having been long the European sovereign and US real estate market, demonstrates the same cluelessness about the economy and financial system prevalent in the media and in Washington every time the words ‘slow recovery’ rather than something to the effect of ‘prolonged, continued, enduring depression’ are uttered.

In such a charade, why wouldn’t JPM Chase, a bank existing on an array of federal largesse, and Jamie Dimon who was re-voted to Class A NY Fed Director, the position he held during the 2008 crisis, in early 2010 – rubber stamp a bet that corporate economic health is a foregone conclusion.

It was under that same misplaced, other people’s money optimism and hubris that MF Global stole (or for the apologists, ‘mistakenly took’) $1.6 billion of its segregated customers' money to stay in a bad bet. Former MF Global CEO, the ‘honorable’ Jon Corzine’s bet was that certain European sovereign credits would improve. Only they didn’t. Not in time for his margins to hold out.

It’s more than ironic, that JPM Chase, the bank still entangled with MF Global customer money, took the same bet, albeit with different credits and is trying to pawn it off as an ‘egregious’ mistake, a blip on the radar of an otherwise pristinely risk-managed bank.

It’s also supremely annoying that Dimon is right about something, that the Volcker Rule wouldn’t necessarily apply to this ‘hedge.’ There’s nothing particularly wrong with the Volcker Rule; it will mitigate some fraction of risk, though given the SEC and Fed’s inability to understand what risk is, it’s unlikely they’ll take the mental leap to segment trades as mitigating it, or not. Yet, the Volcker Rule will not change one fundamental pillar of global systemic risk – as long as banks are not segregated ala Glass Steagall along deposit-taking  / loan-making vs. speculation lines, they will have access to capital to burn. And burn it they will.