Make no mistake, Jamie Dimon will apologize again for all the shortcomings in risk management and oversight that enabled a trader known as “the London Whale” to stick JPMorgan Chase (JPM) with more than $2 billion in losses. “We have let a lot of people down, and we are sorry for it,” Dimon will tell the Senate Banking Committee, according to the text of his prepared testimony, which was released Tuesday. But will he go beyond that and fully explain just what went wrong with the bank’s risk management?
That’s the real question hovering over Dimon’s scheduled two hours of testimony today. But in contrast to Goldman Sachs (GS) CEO Lloyd Blankfein’s appearances at Congressional hearings and in other venues two years ago, when the world was waiting for him to explain just what he had been doing with respect to the Abacus structured finance deal and other transactions, Dimon knows better than to give public opinion a stick with which to beat him. And while his prepared testimony includes a section titled “What Went Wrong?” – with admissions that the trade was “poorly conceived and vetted” and an acknowledgment that the traders at JPMorgan’s Chief Investment Office “did not have the requisite understanding of the risks they took” – Dimon will have to be pressed to provide more details.
He’ll also face some tough questions about the optimal size of banking institutions, and he’ll need to avoid sounding too defensive when arguing that bigger is better – or at least, inevitable. So he’ll be graceful and humble, perhaps even charming, in his apology, and he’ll probably explain – accurately – that the Volcker Rule due to take effect next month wouldn’t have stopped him from undertaking such a trade even had it been in force earlier this year at the time the trades were made. Certainly, he’ll need to come up with a convincing argument in favor of allowing the uber-banks to exist in their present size and form in light of what the trading losses show about the difficulties of overseeing everything that is going on.
But Dimon’s answers will need to go well beyond the kinds of banalities he showed himself capable of delivering in his testimony to the post-financial crisis inquiry and to Congress, when he described the time his young daughter asked what a financial crisis is. His answer then: something that happens every seven years or so. That struck many of his listeners as flippant, and only sounds more so today, as large swathes of the public still struggle with the fallout from the crisis.
So Dimon will need to try his best to provide real answers to the questions he’s bound to get: How could an institution that prides itself on its risk management prowess end up in such a mess? Did his much-vaunted risk management team drop the ball? Were his traders running amok, if, as his prepared testimony says, they “should have gotten more scrutiny from both senior management and the firmwide risk control function”? Does that mean no one told him what was going on until it was too late, while he failed to pick up on the problem himself?
This last question is the most important one – far more so than the ultimate size of the loss or what Dimon will do to punish his underlings, or whether he thinks the Volcker Rule would have stopped the traders from racking up these losses. Its answer will shed the most light both on what still requires oversight or fixing within financial institutions, as well as on what Dimon finds too embarrassing or difficult to admit.
A bad performance from Dimon – by which I mean one that is viewed as not being forthright – will undoubtedly lead to over-regulation on the part of Congress, members of which are eager to jump aboard a populist anti-Wall Street bandwagon in the months leading up to an election.
Good regulations can help a bank like JPMorgan Chase remember what is at stake and prod them to stay within certain lines. But it’s very hard to come up with effective regulations for banks, at least in part because it’s impossible to write new rules and laws to change human nature, including greed.
There is an argument in favor of the Volcker Rule, which essentially asks financial institutions to behave as if their clients, rather than the bank’s shareholders, were their primary concern. But that particular innovation could also carry plenty of unintended consequences and plenty of loopholes that a bank eager to generate a higher return on equity than its peers will still be able to exploit – as the “London Whale” and his activities remind us.
And we’re now at the point where adding layer up on layer of new rules atop the original ones and the latest batch of reforms will end up making money not for investors or banking clients, or even for bank shareholders, but only for the securities lawyers hired to find clever ways around them for their clients.
Ultimately, the answer may be to break up the banks, and that’s why any Dimon defense of the megabanks will be so interesting. A trading loss at a bank the size of JPMorgan Chase should keep terrified legislators – and the rest of us – awake at night. A bank that is the size of, say, a super-regional, with more than 5 percent of all U.S. deposits, is one whose activities require less intense supervision and which will be able to oversee and manage its business far more effectively.
So far, that hasn’t been the policy option legislators have chosen to pursue, and it’s one that Dimon and his peers would combat with even more ferocity than they have devoted to the new raft of regulations. By the same token, however, it’s one that might actually minimize the very real risks that the JPMorgan trading losses remind us still exist in the system today.
Do I expect Jamie Dimon to offer up a detailed analysis of the various ways in which his management and oversight fell short of the mark? No, not really, even though it would do wonders to restore his reputation for being the White Hat of Wall Street. Do I expect him to embrace the idea of a more fragmented banking universe and one, therefore, in which a loss of this kind is less of a systemic threat? Not at all. Do I expect legislators to avoid the temptation to harp on about the Volcker Rule (irrelevant to this situation) and Dimon’s opposition to it? Once again, no. But wouldn’t it be nice if, five years after the first cracks in the financial system began to appear, someone during tomorrow’s hearing would opt for common sense and some plain speaking rather than rhetoric?