Dim(on) and dimmer

Supposedly, Jamie Dimon of JPMorgan Chase has the distinction of being President Obama's favourite banker.  (Who knew that accolade existed?  And what does it say about Obama?  A favourite basketball player or a favourite rapper or even a favourite Marx brother, maybe, but a favourite banker??)  Anyway, being near the top of Barack's Christmas list doesn't seem to have curbed Dimon's behaviour very much.  As we have learned over the last few days,  JPM has racked up monster losses ($2 billion and counting) by continuing to indulge in the kind of trading practices that regulators have been vowing to curb ever since the financial crisis hit.

The exact details of the loss-making trades are not known, but they seem to have involved large positions in structured derivatives, including credit default swaps (CDS).  The very name "credit default swaps" seems to imply that these are an instrument for hedging risk,  but once you recall that the volumes of CDS outstanding far outstrip the volume of underlying bonds, you soon realise that the role of the market has moved way beyond risk hedging and into outright speculation.

In seeking to reform financial sector regulation in the aftermath of the crisis,  the Obama administration's underlying principle has been that low-risk transactional banking activities should be kept separate from investment banking -- the so-called "Volcker rule".  Despite his apparent closeness to the administration, Jamie Dimon has been among the leaders of Wall Street's steadfast opposition to the Volcker rule, or even to less stringent regulatory reform. The revelations of the last few days show that JPM has been flouting the spirit of the Volcker rule on a massive scale, booking gargantuan speculative trades in London while attempting to maintain the fiction that they were being undertaken for risk management purposes.

It's instructive that the announcement of a $2 billion loss has wiped $15 billion off the value of JPMorgan Chase's shares, while hitting confidence in banks generally.  Dimon has admitted that the losses could well end up much higher, and markets are well aware of the oft-proved cockroach theory: there's never just one, and who knows whether the next one or six will crawl out at JPM or at one of its competitors?  Meantime, all the hedgies on the other side of JPM's disastrous trades will be seeking to maximise their own profits by making it as hard and expensive as possible for JPM to unwind its positions.  Thus does the financial services industry add to the sum of human happiness, or as Goldman's Lloyd Blankfein put it,  "do God's work".  

In an egregious piece of bad timing, David Cameron last week dismissed any attempts by the new French President, Francois Hollande, to impose curbs on the activities of the City of London, saying that Europeans were just "envious" of the UK's success.  I'd say they're worried and angry about the UK's unwillingness to admit there's a problem,  rather than envious.  In the meantime, back in the US, the events at JPM have given a fresh impetus to the Volcker rule.  Here, for example, is a cogent analysis, together with a set of specific proposals, from Eliot Spitzer.  It contains one remarkable yet somehow unsurprising fact: Jamie Dimon is a member of the board of the New York Fed!