The purpose of this third article on the hearing last Friday by the Senate Permanent Subcommittee on Investigations, chaired by the retiring Sen. Carl Levin, D-Mich., who conducted almost the entire hearing as a sole inquisitor, is to put some forward some observations that might be useful to readers as they consider the issues raised, not to try to convince readers of these views.
Certainly the report and hearing of this Subcommittee can be far more useful than the hearings held in the last Congress by the banking committees, which were marked by fawning statements by legislators who should have been embarrassed to make them. This was particularly true of three statements by Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, that compromised any semblance of objectivity on his part and illustrated why Congress in general has not contributed, either through legislation or oversight, to the development and implementation of measures that might have contained the ongoing financial crisis.
After Levin had given his standard opening statement of about a half hour summarizing the findings of an investigation into the trades of the London Whale that cost JPMorgan Chase about $6.2 billion and virtually presenting the conclusions of the hearing at the outset, and Sen. John McCain, R-Ariz., made a similar statement, thankfully taking fewer words to do it, it was left to freshman Sen. Ron Johnson, R-Wisc., to get to the point.
In just a few words, Johnson observed that, “JPMorgan appears to have developed its business model around the fact that it’s TBTF [too big to fail], and that means that regulation has already failed us. We had regulations in place that should have prevented that years ago.”
After making his brief remarks, Johnson left the hearing, either because he had something else to do, or because he realized that Levin was about to spend the rest of the day wallowing in the details of the Subcommittee’s report, using the witnesses from the bank and the Office of the Comptroller of the Currency (OCC) as props for low-grade political theater, while missing these overriding truths:
Despite the protestations by administration officials, legislators and regulators that the Dodd-Frank Act will put an end to TBTF if the regulations are ever promulgated and implemented, the same pronouncements have been made at every state of the ongoing financial crisis over more than four decades.
Meanwhile, the exposure of the economy to embedded losses has only grown until it has reached the neighborhood of $15 trillion, equivalent to the entire gross domestic product (GDP) of the United States. The authorities are working behind the scenes to fund these losses and avoid their recognition through a host of programs, including quantitative easing and the purchase of selected assets by the Federal Reserve and other government entities.
As was the case with previous iterations of so-called “reform” legislation, the Dodd-Frank Act not only did nothing to restructure the flawed system of bank regulation, but it conferred even more authority on regulatory agencies that have proven time and again that they cannot or will not use their authority to contain the growth of risky activities on the part of highly-leveraged institutions that have no incentive to restrain their forays into trading in derivatives.
Warren Buffett famously labeled derivatives as “financial weapons of mass destruction” because they enjoy the implicit backing of the Treasury and the Fed, institutions that are governed by officials of the same institutions they are supposed to be regulating. It is this combination of reckless banking and feckless regulation that impels the financial crisis to proceed unabated.
Despite several decades of studying these issues, Levin and his hard-working staff have somehow failed to figure this out and have succumbed to thought avoidance.
In conclusion, a viewer of this lengthy, seemingly interminable, hearing might be struck by the seeming failure of anyone to recognize that the admitted ineffectiveness of the OCC in dealing with the Whale trades before they could grow to the extent of $6 billion, having blown through supposed risk limits right under the noses of 65 OCC employees stationed permanently at JPMorgan, is just another of a long series of regulatory failures dating back roughly 40 years.
A common denominator is the dominance of a financial institution by a strong, belligerent personality, such as C. Arnholt Smith, Bert Lance or Jamie Dimon, to name just a few of the most prominent examples. The regime at the OCC is reminiscent of the theme of the 1932 Academy Award-winning movie Grand Hotel: “People come and people go, but nothing ever happens.”
The OCC is funded by the industry and along with the other federal regulators, who together constitute the three monkeys of bank regulation, has done its part to enable the TBTF banks to do as they please. It is clear from the exhibits presented by Levin that JPMorgan managers never thought they had anything to fear from the OCC.
Thus, we are left to question whether anything can possibly change. Will anyone at the OCC be fired over this latest failure? Can the system of so-called bank regulation that has failed so spectacularly over the decades ever be removed from the hands of the banks’ own lawyers and placed in some independent body? Will a bully such as Jamie Dimon ever pay attention to regulators as long as they continue to accommodate the demands of himself and the other TBTF CEOs that they be allowed to pay dividends and buy back stock even as they depend on special federal programs to maintain the appearance of solvency?
Ten years ago, the Sarbanes-Oxley Act was supposed to put safeguards in place to ensure that the “tone at the top” of public companies would foster responsible behavior on their part. Now we see the results, and the stocks of companies like JPMorgan continue to be touted by analysts, much as those of savings and loan institutions and government-sponsored enterprises were when they were promoted by government programs and protected by compliant so-called regulators.
Any effective regulatory program obviously requires three elements: transparency, independence and accountability. The Levin hearing has demonstrated yet again that none of these features prevail under the present antiquated system of captured regulation. The public reaction to all of this, understandably is, “So what?”
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