A gigantic Wall Street bank, complex derivatives, $2 billion in unexpected losses based on faulty models, and executives hemming and hawing over exactly how it happened. Sound familiar?
When news broke last week that JPMorgan Chase lost a couple billion due to faulty investments by its chief investment office, many, including myself, reacted with some combination of anger, disappointment, and depressed reservation. It has become par for the course.
“Rise and shine and don't forget your booties 'cause it's cold outside.”
That line greets Bill Murray every morning as he awakens to live out the same day in the 1993 classic, Groundhog Day.
He wakes up and every day is the exact same. Nothing changes. He doesn’t learn, doesn’t grow, doesn’t change, while every day the people around him live out the exact same day.
Like Murray waking up to Sonny and Cher, JPM’s situation is not only a wake up call that nothing much has changed since the financial crisis, but that we’re also a long way off from any serious reform.
Let’s first try to wade through a few of the specifics, since they are important to the more general point. The chief investment office of JPM is a division tasked with hedging against risk, and was long considered one of the safest parts of the bank for that very reason. The news shook the US financial sector and has re-ignited a debate over risk in the current US financial system and whether some banks have become too big to responsibly operate in our modern economy. (Check out a great explanation by Ezra Klein here)
Sound familiar? It should – we went through the exact same thing during the financial crisis. And like Murray, we’re living through an era where nothing has changed, nobody has learned, and everybody is acting the exact same.
JPM came out of the financial crisis as well as any other bank in the US, and far better than many others. Its CEO, Jamie Dimon, was lauded as the pinnacle of executive leadership. Charismatic in the press, he led the charge against various financial reforms that were proposed to try to prevent banks like his from engaging in certain types of transactions that helped to perpetuate the crisis.
Dimon made very persuasive arguments that things like the Dodd-Frank Act and the Volcker Rule would prevent banks from providing effective markets.
However the Volcker Rule – which does not allow banks backed by federally insured consumer deposits from playing the speculation market – may not have applied to this situation, since the loss was on products that would have been considered a hedge against existing risk. While the entire story is not yet known, the general consensus seems to be the usual cocktail of greed and stupidity. JPM was attempting to insure itself against certain positions it held, but did so in a such a big way that it left itself unknowingly exposed.
With the help of regulation-averse Republicans, the banking industry and its lobbyists succeeded in consistently putting off and rewriting most reforms. Years after the original crisis sank the US into a recession that continues to affect the lives of millions of Americans, as well as people across the world, nothing of material importance has changed. It’s still Groundhog Day, and it looks like six more weeks of winter ahead.
This is the part where you’ll need your booties.
The US economy has had difficulty gaining traction. Major US corporations are reporting record profits, yet the unemployment rate (and particularly the underemployment rate) remains elevated. Europe continues to teeter on the precipice of yet another crisis. Nothing has changed, and it’s still very, very cold.
Furthermore, as explained earlier, this is generally considered one of the savviest banks around performing a risk hedge that regulators aren’t even targeting. The best and brightest on Wall Street have just shown us that the system continues to have risks that we’re not even thinking about addressing.
Beyond showing us that we are essentially stuck with the same system (if not worse, since the major banks are even bigger after the financial crisis), JPM’s losses have struck at the heart of one of the industry’s key beliefs: that the best and smartest know better, and therefore the system in general is safe.
JPM was supposed to be the best. So were Lehman Brothers and Bear Stearns. Whether it was stupidity, greed, or a mix of both, the case continues to be made that the system is allowing these companies to put themselves in precarious positions that threaten the economy as a whole. And it just doesn’t have to be that way.
It owes to both the tremendously short attention span of US citizens as well as the complete lack of faith in the US government from roughly half the nation that not only is there not overwhelming calls for serious financial reform, there’s barely a whimper from anyone not on the far left. Even moderate Democrats seem to shrug their shoulders and assume that change is basically impossible in the current political environment.
At the end of Groundhog Day, Murray lives to see the next day, but only after making significant changes to himself and how he lives his life. The US government is going to need to do the same for the finance industry, otherwise we’re going to be stuck in this nightmare scenario of boom and bust that has only served to destroy jobs, increase the wealth gap, and hurt the overall competitiveness of the US economy.