MONEY

James and the Giant Losses

What's $2 billion between friends? Apparently not that much, as long as someone is willing to take responsibility for losing it.

U.S. Government photo

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James "Jamie" Dimon, CEO of JPMorgan Chase, certainly seemed willing to take a few body blows as he testified before the Senate Banking Committee last week. But for the most part, the hits weren't very hard.

It wasn't exactly Kumbaya, but Dimon, known as President Obama's "favorite banker," got a much mellower reception than other Wall Street CEOs have had before Congress in recent years.

Maybe that's in part because JPMorgan Chase walked away from the 2008 financial crisis in fairly decent shape compared to its competitors, and because the $2 billion or more the bank lost last month apparently won't hurt taxpayers or clients. Or, perhaps it's because Dimon seemed ready, even eager, to fall on his sword.

Two hours of testimony fell between the first jeers (U.S. Capitol police led about a dozen protestors away), and the final gavel.

Here are the highlights:

1. It's Indefensible...or Is It?

It's hard to keep tearing someone up when they rush to take the blame for whatever you accuse them of.

"We made a mistake," Dimon said, not even setting up the division that took the losses. "I'm absolutely responsible. The buck stops with me."

"This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge. What it morphed into, I will not try to defend," Dimon told the committee. It was a message that has stayed pretty consistent since he first announced the losses.

Last month, Dimon called the trades "stupid" and "sloppy." The bank's chief investment officer, Ida Drew, resigned last month.

2. It Isn't Over

Days after Dimon announced the losses last month, the estimated trading loss had crept from $2 billion to $3 billion. But on the Hill yesterday, Dimon was talking about a $2 billion loss again. The fluctuation underscores that this is still going on. You can't just undo trades like the one that caused the losses, and federal officials are investigating "whether JPMorgan's chief investment office took risks that were inappropriate for a federally insured depository institution."

One of the most surprising things about the whole escapade is the lack of consensus on how much money is involved.

3. It's Going to Cost Some Bankers

Senator Chuck Schumer, a Democrat from New York, known colloquially as the senator from Wall Street, latched onto the so-called clawbacks rule at JPMorgan Chase, which could require some executives to repay salary and bonuses due to the big losses. Only, it's a rule that's never been invoked.

Outside of the hearing, Senator Scott Brown, a Republican from Massachusetts, echoed the call for clawbacks.

Dimon's reply? "It's likely that there will be clawbacks," he said.

4. It Could Have Been Prevented

Next month, a provision of the Dodd-Frank Wall Street Reform and Protection Act will go into effect. It would restricts banks from making speculative trades that don't benefit customers. Would the so-called Volcker Rule have prevented the losses?

Dimon conceded it might have, despite the fact he's become the face of Wall Street opposition to the provision.

The Volcker Rule "may very well have stopped parts of what this portfolio morphed into," Dimon said, but he also noted that doesn't mean it's a good law. "Think of it as traffic laws. Some cars should go 65. Some shouldn't. Some streets should be different. Some lights should be bright. Things should be done right. We have the widest, deepest, and best capital markets in the world. It would be a shame to shed that out of anger."

5. It's Not Even Clear What a Bank Is

Over at Fox Business, David Asman blames the government, going back to the Clinton era, for having stretched the definition of a bank, to the point where just about any financial institution can be included--and thus "guaranteed protections originally designed solely for middle-class bank depositors."

"What's the definition of a bank?" Asman asks. "No one asked that very basic question during the hearings. And it should have been asked, because the bailouts were all about that definition and how it was changed over the past decade in a way that put taxpayers on the hook for bad bets."

Last updated: Jun 18, 2012

BILL MURPHY JR. | Columnist

Bill Murphy Jr. is a journalist, ghostwriter, and entrepreneur. He is the author of Breakthrough Entrepreneurship (with Jon Burgstone) and is a former reporter for The Washington Post.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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