Jamie Dimon’s testimony yesterday before the Senate Banking Committee — the week of the anniversary of the passage of the Glass-Steagall Act in 1933 — is ironic, to say the least. He objected to the Volcker Rule’s prohibitions against proprietary trading by federally insured banks (acting like hedge funds, in the words of Senator Merkley), characterizing the re-instatement of a separation of commercial banks and trading markets as an imprudent act taken by Congress in anger. He would, of course, prefer the public to rely on bank capital reserves (“fortress capital,” in his words) and the vaunted risk management systems of the sophisticated 21st century banks.
The hearing was to inquire about the massive trading losses experienced by JP Morgan Chase in its Chief Investment Office group that was tasked with hedging risks and managing excess deposits. In an attempt to disarm criticism, Dimon readily admitted that the bank made mistakes in its evaluation of the risk taken on by the CIO and how, by allowing it to stray from its mundane mission, it was turned into a massive and risky trading operation.
In a phrase popular in my native state of Tennessee, “that old dog won’t hunt.” Admitting mistakes is a fine thing, but it is irrelevant to the question whether activities are definitionally too risky for a too-big-to-fail bank that is subsidized by the safety net of federal deposit insurance and Fed window access. If some activities are permitted, “mistakes” of a certain type are more likely to occur and their consequences are likely to be far more severe. The safety net even encourages the excessive risk-taking by limiting adverse consequences because bailouts are inevitable.
Dimon certainly did not intend it, but his testimony provided compelling justification for the re-imposition of some form of the Glass-Steagall firewall between commercial banking and the trading of securities and derivatives.