Everyone from Congress to the Commodity Futures Trading Commission wants in on the investigation into just how JPMorgan Chase ended up losing at least $2 billion through some poorly conceived trades put in place by an inadequately supervised trader.
In the background of all the investigations – official and unofficial, public and private – will lurk one all-important question: Nearly four years after the banking system teetered on the verge of collapse, how much risk is being accumulated on the books of the surviving giant institutions? And what happens if we tiptoe back to the brink once more?
It’s fortunate that this test case of sorts took place at JPMorgan, which does have the “fortress” balance sheet of which CEO Jamie Dimon continues to brag. Had it taken place at Citigroup, still more fragile and with a less robust track record of risk management, the consequences might have been far more serious.
In a low interest-rate environment, producing reasonable returns seems to require taking unreasonable risks.
But the risky trades that resulted in these losses are the kinds that every big financial institution is going to be tempted to put in place in order to generate the returns that their shareholders want them to deliver. In a low interest-rate environment, producing reasonable returns seems to require taking unreasonable risks. While there are opportunities to invest in low-risk returns in, say, financial services by building a new clearing network for derivatives and other complex over-the-counter transactions – these aren’t likely to be as lucrative.
The problem is that the banking system is still too big to fail. While Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp., took pains to reassure his audience at the American Securitization Forum conference earlier this week that his organization could oversee and control the collapse of any of the nation’s banks – even JPMorgan Chase – skeptics abound.
Perhaps the new powers given to the FDIC to oversee the unwinding of a busted bank will help regulators ensure that one bad apple doesn’t spoil the whole bunch. But what happens if the problems are replicated industry-wide? What if the politics of the situation become unmanageable?
Some veterans of past crises worry that while our banking institutions today may be too big to fail, we may also be too poor to bail them out.
That’s the nightmare scenario. Some veterans of past crises worry that while our banking institutions today may be too big to fail, we may also be too poor to bail them out if the failsafe measures don’t work or aren’t enough to contain a crisis. Tanya Beder, chairman and CEO of SBCC Group, a risk consultancy that advises banks and other financial services firms, cites Iceland as an extreme example: When that country’s banking crisis blew up, it was in part because the amount of debt (in the form of loans) on the balance sheets of its banks had soared to more than 50 billion euros. At the same time, in 2007, Iceland’s GDP was a measly 8.5 billion euros.