“Too Big to Fail” has been a standard for a number of international investment banks, including JP Morgan (JPM) for many years now. We’ve seen that turn into “Too Big to Jail” where major violations of law result in nothing more than fines which have clearly been absorbed into the cost of doing business as they please. But the real problem is one of consistent hubris from a company too big for anyone to understand or even manage effectively. That’s the conclusion of the report issued by Sen Carl Levin into the “London Whale” losses at JPM’s London Office last April.
What happens when a company this large becomes so reckless that a major problem is inevitable? We might soon find out – at terrible expense. No matter what, their behavior is becoming a major problem that could give life to a movement that puts an end to the cozy relationship once and for all. Assuming, of course, we aren’t already too late.
The event that precipitated this is still murky, but the details are coming through. The “London Whale” was the nickname of trader Bruno Iksil who earned it by making trades that were so large they moved markets. Once everyone saw that JPM had a position in something, a stampede towards their direction was considered normal and natural – guaranteeing that the position would wind up a winner. That was what Iksil was counting on when he took a huge and complex position against a portfolio of US corporate bonds – except over time the weakness in Europe started to make that position look very wrong.
What was Iksil to do? As the London Whale, he did what he always did – doubled down (and then some) to increase his position and force the market to move his direction. The risk taken on was way ahead of what is allowable under market capital requirements for a portfolio and red flags were raised. Word reached JPM head Jamie Dimon, who sent a terse email offering his take on the position – “I approve”.
In short, this is what JPM does – forcing markets to its own will no matter what it looks like. But this time the market bit back and forced them into at least $6.3B in losses before the bleeding stopped.
Why is this important? Because the “Too Big to Fail” designation and implied backing by taxpayers gives JPM a 0.8% advantage in the markets to start with, according to an IMF report. When you have a portfolio in the trillions that’s worth a lot. Combined with their tendency to throw their weight around to move markets in their direction the advantage they hold is outrageous. Which begs the obvious question – why aren’t they insanely profitable and, indeed, why did they spend 2012 underperforming the market as a whole?
The short answer comes from the London Whale and many smaller screw-ups directed by this hubris every single day. A company with all of these advantages that is not turning serious coin is obviously not very well run after all. And how can it be? How can anyone possibly understand everything about the risk held by their massive position in Credit Default Swaps, now over $100B total?
This may explain the action taken in the House Agriculture Committee that would strip the meager regulations from this industry and even allow JPM and other investment banks more freedom to move money around internationally than they have ever had. As word gets out on this massive over-step that is very unlikely to pass the Senate it can only result in blowback. Why take this kind of risk? As Irish comedian Dave Allen once noted, “When you are up to your lower lip in muck, there is but one rule – don’t make waves.”
Not with JPM. They are out pushing the markets and now the US Congress around to fit their will. And this implies that there is even more wrong deep inside this company than we already know. After all, a behemoth like this should be able to quietly make more money than anyone can possibly imagine. But they don’t.
So what happens when something really goes wrong? What do they do when it’s not $6.3B on the line, but more like their entire $100B Credit Default Swap portfolio? Their behavior is enough to make anyone wonder.
Meanwhile, this is very possibly the first big issue of the 2014 election – or at least it should be. How and when someone steps up and takes the Levin report to the next level, demanding that JPM be broken up for the good of both the markets and their own shareholders, is the big question. But this story is not going to go away – not as long as JPM continues to do whatever the Hell they feel like.