Defending Goblins and Vultures

One day someone will write a book on bankers in popular culture – people write books on all sorts of things after all. And a stroll through Dissertation Abstracts would probably reveal one or two densely-argued PhD dissertations on the topic every few years – some history or sociology major looking into how no one likes bankers, perhaps because the popular culture presents them as just awful, or pitifully narrow, or blandly inhuman. Or maybe it’s the other way around – perhaps they are awful, or pitifully narrow, or inhuman, and we’re just dealing with heightened realism. But think about it. The banker is not the hero in It’s a Wonderful Life – that’s Jimmy Stewart, who’s been financially crushed by the system. And there’s that bumbling fool of a father in Mary Poppins. He’s a banker, one who eventually sees the light, and then lightens up. Nannies and chimneysweeps are the nice people. And of course, in the Harry Potter books, all the bankers are hideously deformed goblins, who will certainly take care of your money, primarily because they are nasty and unpleasant and heartless. That is who you want safeguarding your assets. You don’t want a human doing that. Warm and fuzzy won’t do at all. Who knows who’d they let into your vault?

And now, since the eighties and then the formal repeal of Glass-Steagall – that 1933 act establishing the Federal Deposit Insurance Corporation and creating a wall between commercial banking and investment banking, protecting your deposits and assuring your banker didn’t take your money and go hog-wild gambling it all on high-risk nonsense – bankers are now traders too, taking your money and inventing new ways to risk it all on some pretty odd bets, often on bets about bets. And they’re covered. Through the FDIC and other mechanisms, the government has to make them whole should they blow it all. And since there are only five big banks left after the last collapse in 2008, they do have to get bailed out one way or the other. Those five banks can’t be allowed to fail. They’re too big. They’d take the economy down with them.

But the image of the banker took a hit with all that, as bankers morphed into high-stakes wheeler-dealers, investing in anything and everything, making scads of money that had nothing to do with taking in deposits and using those funds to make business loans and provide home mortgages. That’s not where the big money is. The real money’s in double-backwards hedging against secondary credit default swaps on bond indexes or some such thing no one understands. And thus the new villains became the high-stakes wheeler-dealers like Gordon Gekko in Oliver Stone’s Wall Street and its recent sequel. Gordon Gekko turned out to be more hideously deformed than any goblin in the Potter books.

And we got the classic venture capitalist in Pretty Woman – that smash-hit movie about a fellow with far too much money and no idea what to do with it, until he meets the right woman, the whore with a heart of gold, who teaches him about kindness and goodness and all that. And he had been doing exactly what Mitt Romney had been doing at Bain Capital. You get rich people – venture capitalists – to give you money, scads of it, with which you buy shaky companies. Then you have those companies you now control borrow impossible amounts of money, secured against what assets they may have, burdening them with impossible debt, and you use that borrowed money to pay back your investors, those rich venture capitalists, with interest, insuring them a healthy return on their investment. And then you dismantle the newly debt-ridden company, as it cannot survive given its new debt load, and sell off its parts, pocketing all that money yourself, making you very rich. And you do it again and again and again.

That’s about as nasty as it gets. And Romney is no Richard Gere – although they both have great hair. Mitt is not going to tap into some hidden reserve of kindness and goodness. He’s more than willing to stand and be heckled as he grins and says corporations ARE people, my friend. And he says Obama doesn’t understand the economy. But he never watched the movie, or, if he did, he just didn’t get it.

And now he’s with the bankers – repeal the Dodd-Frank reforms Obama somehow got passed, and forget that Volcker Rule thing, which is pretty much a return to Glass-Steagall, forbidding wild gambling with any deposits guaranteed by the FDIC – and let these guys thrive. Bankers are good guys, the heroes. They keep America dynamic and rich, benefiting everyone.

But this is interesting:

Mitt Romney says he wants to talk about the economy in this presidential campaign, including his call to repeal the Dodd-Frank financial regulation law. JPMorgan Chase & Co. (JPM)’s $2 billion trading loss in risky transactions isn’t the sort of conversation he had in mind.

So far, presumptive Republican nominee Romney has said little about the transaction that is roiling Wall Street and Washington, prompting an inquiry by the Federal Reserve, a call for a congressional investigation and a demand by Elizabeth Warren, a Democratic Senate candidate in Massachusetts, that JPMorgan Chief Executive Officer Jamie Dimon resign from the board of the New York Federal Reserve.

“Any time you have a development that suggests businesses take unnecessary and unwise risks, you give ammunition to Democrats and cause problems for the Republican narrative,” said Stu Rothenberg, editor of the nonpartisan Rothenberg Political Report. “Romney will have to deal with it.”

Romney has vowed to repeal the Dodd-Frank law – there’s no need to strengthen financial regulations. He calls Dodd-Frank just one more overly burdensome law backed by Obama, one that costs jobs. So he hasn’t commented on the JP Morgan losses since Dimon disclosed them on May 10 – and “he ignored a reporter’s shouted question about the matter at a May 11 rally in Charlotte, North Carolina.”

Of course he ignored the question, as he is getting hammered:

After a brief flare-up in the Republican primary, Mitt Romney’s record at Bain Capital is back on the table. President Obama’s re-election campaign on Monday accused the Republican nominee of causing untold misery for former workers at a steel company in Missouri, from unsafe conditions and reduced benefits to eventual mass layoffs.

“I personally saw the last bit of steel go through the furnaces,” Joe Soptic, a worker at GST Steel who lost his job when the company went under after being acquired by Bain, said on a campaign conference call. “To me it was like watching an old friend die and there was nothing you could do.”

Soptic described how his wife went on to wage an expensive, frustrating and ultimately unsuccessful fight against cancer that he said was made even harder by the loss of family health insurance in the bankruptcy. But even as the company’s workers struggled to pick up the pieces, Bain ultimately made a significant overall profit off its acquisition, from fees and dividends even as it ultimately collapsed under the weight of heavy debt, Soptic and Obama campaign officials stressed.

This came with a new two-minute ad from the Obama campaign, full of testimonials from people who lost their jobs at the newly Bain-owned companies. It was Pretty Woman, without the happy ending – and with no pretty woman.

And as for what happened at JPMorgan, the Wall Street Journal has a pretty good summary:

A massive trading bet boomeranged on J.P. Morgan Chase, leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the “King of Wall Street.”

The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets.

The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade.

The bank’s strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Mr. Dimon said Thursday in a hastily arranged conference call with analysts and investors after the stock-market close. He called the mistake “egregious, self-inflicted,” and said: “We will admit it, we will fix it and move on,” he said.

And it gets more complicated from there, as Felix Salmon explains here:

What was really going on here was that JP Morgan had hundreds of billions of dollars in excess deposits, thanks to its too-big-to-fail status. And rather than lending out that money and boosting the economy, Jamie Dimon decided to simply play with it in financial markets, just as a hedge fund would.

Salmon dives into the details – the bet that Europe would have a meltdown, employing odd combinations of credit default swaps against indexes of indexes, and Europe not melting down and no way to cover the highly-leveraged bets that it would, and all the claims by Dimon that they were not trying to make money, just hedging things to protect themselves, when this unit of JPMorgan had been set up to be one of their profit centers and had actually been generating at least a quarter of all their profits. It was clearly pure greed, using other people’s money, guaranteed by the fed, to gamble big time – for massive profits. And it didn’t work. Even the goblins in the Potter books were better with money. But Dimon still maintains no banks should be regulated – because what they do is good for everyone.

But Alex Pareene takes issue with that:

Let’s put JPMorgan Chase chairman, president and CEO James “Jamie” Dimon on trial. Mr. Dimon has a reputation for being the sagest guy on Wall Street and an expert at managing risk. JPMorgan emerged from the financial crisis not just unscathed but secure enough to step in and rescue Bear Stearns when the government asked it to. (He gets very mad when you say that his bank got bailed out by the government, and he insists that the government made him take all that free money.) Then his bank somehow accidentally lost billions of dollars last week, whoops! And he is really embarrassed, but not embarrassed enough to fire himself. So, let’s put him on trial and force him to explain what good he and his bank are.

The SEC is investigating, and that’s fine, but that will take forever, and hearings just won’t do:

Dimon might have to be hauled before Congress to answer questions, but no one watches congressional hearings, and no one likes members of Congress. I think a big televised prime-time tribunal would be best. And then maybe some JPMorgan shareholders, unemployed people, journalists and angry bloggers can just ask him some really simple questions about why he thinks JPMorgan shouldn’t be regulated at all.

So let’s have a trial:

While I am definitely endorsing a humiliating show trial, we don’t have to send Jamie Dimon to jail afterward, even if a jury of people who had their houses foreclosed on them find him guilty. The point of this is to mainly have him on the record, compelled to answer questions plainly and clearly, to an unfriendly audience of non-Davos people.

And Pareene has questions:

Questions like, “Wouldn’t it have been better if that $2 billion had been used for almost anything in the world besides shady mega-bank gambling that no one understands?” And, “Doesn’t it seem you guys could save a bit of money on salaries and so forth while still achieving basically the same results if you replaced your chief investment officer with some old people who play video slots all day?”

And this gets down to what the hell bankers actually do:

I am just not really clear on the role JPMorgan has in a healthy and functioning economy, whether it is making billions in high-stakes gambling or losing billions in high-stakes gambling. It seems like America was actually doing pretty well with there not being any such thing as credit-default swaps, which JPMorgan invented, in the 1990s, right before investment banks were allowed to merge with retail banks and do whatever they wanted with everyone’s money.

And there’s more:

I’d also like Mr. Dimon to have to explain whether he knew he was about to have to admit to losing billions of dollars when, on May 3, he complained about the “discrimination” faced by bankers. Dimon also argued a few days later that the economy would’ve added twice as many jobs in the last twenty-four months if it weren’t for a “constant attack on business” from various unnamed hippies and government bureaucrats. I would like to know how many jobs were created when JPMorgan accidentally lost some unknown amount of money that is likely to end up being more than two billion.

Also did Dimon lie during his first-quarter earnings call last month, or did he have no idea what sort of things his Chief Investment Office was up to (even after their actions were reported in the press)? If he didn’t have any idea, shouldn’t he maybe step down to run a smaller bank, where he can keep a closer eye on everything?

Dimon said initially that the stuff that lost all the money wouldn’t have violated the Volcker Rule, even though it plainly violates the spirit of the Volcker Rule but also he’s not sure if the bank broke any laws? Jamie, I think maybe you should consider retirement; this bank is too complicated for you.

And there is the matter of bankers in popular culture, where Hollywood might have gotten things right:

Dimon gets so defensive when people trash banks and bankers because he thinks his bank makes the world a better place. He thinks that JPMorgan making as much money for itself as possible is good for everyone, because… capitalism. Much as today’s super-rich, the .01 percent who are largely CEOs and financial industry professionals, are a bunch of rentiers who’ve convinced themselves that they are job-creating titans of industry, Dimon has convinced himself that his firm is making our economy function better instead of just playing incredibly complex computer games with unimaginable sums of other people’s money.

So a trial may be the answer:

Let’s haul him before a judge (I would be fine with Judge Judy) and ask him to explain, without jargon, what positive role JPMorgan plays for the American and world economies that a few much smaller, less leveraged firms couldn’t also play while not being at risk of losing billions of dollars by accident in a “hedge” and sending world markets reeling.

I mean, I’m sure he’d never admit to any sort of culpability for our current morass (it’s the government’s fault!) because he clearly believes his own bullshit and he’s never faced any sort of serious challenge to his viewpoint – but it still might be very good television.

And of course it won’t happen. But what’s the alternative?

Kevin Drum calls for more regulation even if it’s not perfect:

Dumb, blunt rules are the only kind that can work in the playpen of modern finance. We simply don’t understand the world well enough to pretend that we can regulate things in minute detail, and we sure as hell don’t have regulators who are either smart enough or can move fast enough to stay ahead of the rocket scientists trying to outwit them. That’s not just impossible in practice, it’s pretty much impossible even in theory. It’s just plain impossible. …

Bottom line: financial regulations are only effective if they’re so dumb that traders simply can’t maneuver around them. Those are the kinds of rules we need.

Peter Suderman isn’t so sure about that:

Markets don’t evolve by preventing mistakes entirely. They learn by making mistakes, by experimenting with new business models, some of which prove unsuccessful, and then further refining the process, and usually making more mistakes along the way. But it’s incredibly difficult for anyone – regulator or market player – to know what will fail in advance, and regulations that prevent some failures also typically end up blocking a lot of potential successes. What JPMorgan’s blown deal mostly proves is that complex systems sometimes fail, and that it’s very hard to know exactly when and how those systems will fail until they do.

But Jared Bernstein sees no alternative to regulation:

Financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. That’s not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We don’t know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JP’s loss should be taken as a warning that our tendency is to set them too low.

But Adam Sorensen isn’t sure that would have worked here:

The bet in question would not have been banned under the Volcker rule if, as Dimon says, the position was classified as a hedge – insurance against another position – rather than a pure money-making scheme for the bank. The Volcker Rule is still being written, and its scope could be expanded, but even then, there’s no guarantee that bets of this kind would be prohibited.

But was it a hedge? Who knows? And this still leaves Mitt Romney hanging, having supported the Dimon position on regulation so far. What does Mitt say now?

Romney clearly needs that Richard-Gere-discovers-his-humanity moment from Pretty Woman, and James Pethokoukis has just the idea for him, the happy ending, where Romney actually advocates breaking up the big banks:

Romney would undercut the charge that he’s a creature of Wall Street and the financial super-elite. And given how many hedge fund managers and other investment pros dislike the mega-banks, Romney probably wouldn’t even take a fundraising hit. At the same time, he would outflank Obama on the financial reform issue by portraying Obama-Dodd-Frank as a sop to the big banks that failed to fix the problem.

And Time’s Joe Klein toys with the idea:

This would be a move supported by discerning liberals and conservatives… Jon Huntsman proposed it during the primary campaign; Paul Volcker favors it, too. And out in America, where Big Wall Street is about as popular as Big Government, this would be very popular with the independent voters who will decide this election.

Ah, but life isn’t a movie. And Romney seems to truly believe that America really loves Big Wall Street and the Big Banks – or should, and will.

But America has seen those two Oliver Stone films, and Pretty Woman – and there are those nasty Goblins. There’s no getting around all that. You can’t reverse the tide of popular culture. And someone should write a book about bankers in popular culture. Mitt needs a copy.

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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