Posted on 06/15/2012 4:14:29 AM PDT by SeekAndFind
JPMorgan Chase CEO Jamie Dimon was hauled before Congress yesterday for a finger wagging over the bank's recent $2 billion trading blunder. For all the haranguing and grandstanding, Sen. Jerry Moran asked one of the only relevant questions of the hearing; he wondered if JPMorgan failed, then could it go down without costing taxpayers money? The answer was also the most telling.
"Yes," Dimon replied.
And at 11:42 EDT, reality died.
The timing couldn't have been better. The day before, a JPMorgan internal assessment of what it would take to push the bank into bankruptcy was released. The conclusion: a loss of $50 billion.
JPMorgan had $2.3 trillion of assets at the end of last quarter. A $50 billion loss, then, is the equivalent of just 2.17% of assets. That's one of the scariest simple math equations that exists in today's economy.
No need to worry, the report assures. After failing, the bank could be hosed down, cleaned out, and "returned to private sector as a new bank with a clean balance sheet." Taxpayer money used to keep the bank operating in the interim would be repaid, the report promises. Everyone lives happily ever after.
Maybe that's what would happen, but I doubt it. It's inconceivable to think that a bank JPMorgan's size could fail without the FDIC and other taxpayer-backed bank authorities being utterly overwhelmed. The numbers here are astronomical: JPMorgan has more than $1 trillion in deposits, and its balance sheet equals 15% of the country's gross domestic product. Nothing works as planned with a bank that size.
But let's assume for a moment that JPMorgan could fail without costing taxpayers a dime. Is that the end of this story?
Not even close. Nearly everyone in the country would pay a price.
We don't have to do much assuming here; we have 2008 as a template. If JPMorgan failed, we have a good idea what would happen.
Credit markets would freeze
As the financial system ponders who's holding the bag, everything stops and credit grinds to a halt. Anything not called U.S. Treasuries is deemed too toxic to touch. Even the bluest of blue chip companies suddenly can't access credit markets, and thousands of businesses around the country that rely on credit to fund inventory and payroll go bug-eyed. Nobel Prize-winning economist Robert Solow described this in 2008:
So businesses that would normally be investing in a new computer or a new fleet of trucks or whatever that would need to borrow, can't borrow. And if they could borrow, they would be paying a very high rate of interest. So they stop.
And then the real economy begins to slow down, and people lose their jobs because their firms can't sell to consumers, can't sell to other businesses. A modern economy is a more complicated piece of machinery than a simple barter economy. Production is very complicated. You start with God knows what, and you end up with some extraordinarily complicated piece of equipment or the machinery that appears in my dentist's office when I sit down. That can't be directed without a good deal of action which is taken now and can only pay off many stages later. And that's where the credit mechanism comes in. Industry that depends on it has to slow down, simply because it can't get the funds that enable each stage in production to pay off the previous stage.
Other banks would fail
In May 1931, an 80-year-old, well-connected, highly respected bank called Credit-Anstalt in Vienna failed. The global banking world was stunned. How could such a large and powerful bank fail? And if it can fail, who's next? It was sheer panic. Princeton historian Harold James explains the ensuing chaos: "The Viennese panic brought down banks in Amsterdam and Warsaw. In June and July the scare spread to Germany, and from there immediately to Latvia, Turkey, and Egypt (and within a few months to England and the U.S.)." BusinessWeek's Peter Coy puts it more bluntly: "Thus the failure of Credit-Anstalt accelerated the financial panic that turned a recession into a global depression."
There is never just one cockroach in the kitchen, and there's never just one major bank failure. Panic spreads like wildfire.
Markets would crash
This is standard in any financial crisis. Hedge funds and other institutional investors that do business with or are in any way connected to wobbly banks freak out, sell whatever they can and crawl into a bunker. Selling begets more selling, and on and on. By the time the dust settles the world is a few trillion dollars poorer, confidence is shot, businesses are undercapitalized, and unemployment spikes as consumer spending dries up. The Federal Reserve eventually stems the panic with massive intervention, but God knows what the eventual outcome of that is.
And all of that from JPMorgan losing 2.17% of assets.
This is real, folks
None of this is speculative fiction. It's what history tells us happens every time a large bank fails. The same scenario would play out if Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , Goldman Sachs (NYSE: GS ) , or any other too-big-to-fail bank were to go under. And eventually, they probably will.
Some might make the doubtful argument that JPMorgan's failure wouldn't cost taxpayers a penny. But no one, not even Dimon, can argue with a straight face that horrific damage wouldn't be inflicted on the rest of the economy if a big bank collapsed. Everyone pays the price for too big to fail.
That wasn't a "blunder". It was a cooly calculated very high risk gamble that lost.
Paid off the Chase mortgage in March. Have the title in hand. Closed out all accounts in JPMorganChase.
The BofA purchased our credit card balance three months ago. Now we’re working on paying that off.
While JPM lost 2 bil of it’s own money in bad trades, it also made 19 bil in other investments. If they go BK it would probably be as part of a much larger financial collapse.
RE: While JPM lost 2 bil of it’s own money in bad trades
Some have said that because this is a derivative trade, the total extent of the lose is still to be determined. It could be as high as 4 times that. We have to see...
These aren't 'banks'. They're casinos.
Well despite all the terror in the article these TBTF 'banks' must be allowed to fail. At this point a credit crash or hyperinflation or both are inevitable.
To deal with a credit crash, buy money which has no counterparty risk. Gold and Silver.
To deal with hyperinflation, buy money which acts as a store of value. That's Gold and Silver again.
RE: While JPM lost 2 bil of it’s own money in bad trades
Some have said that because this is a derivative trade, the total extent of the loss is still to be determined. It could be as high as 4 times that. We have to see...
ok, the problem is the businesses all drank the credit koolaid. No one runs on cash.
If JP Morgan fails, maybe the big corps will have to run on cash. That will force them to trim down instead of being so colossal.
Smaller corps will be more nimble, less crooked. We all win
I'll go one further: it was also intended as a test of the current system.
It's important to remember that Taxpayers are on the hook for any bank losses that jeopardize the bank's ability to "do business." That includes banks like JP Morgan Chase that are both retail banks (read that: checking, savings, cd's..) and Investment Banks just like JP Morgan Chase.
If those losses put the bank at any risk you and I would be bailing them out again. That's just the way Jamie Dimon wants it. Notice nowhwere in his testimony did he advocate changing the system, such as re-instating Glass-Stegall, to protect us poor taxpayers.
Rather, Dimon likes the system as it is so Banks can take all the risk they want without any fear of repercussion. In fact, they take all the risk and we are the ones stuck re-fueling their capital (read that: Bailouts, Taxpayer dollars!)
Even Larry Kudlow on CNBC said the other night that he believes he was now wrong for opposing re-instating Glass-Stegal because of situations just like JP Morgan Chase and their recent 2 billion dollar "loss."
I'm a strict financial Conservative, both in my own finances and my views towards government spending our tax dollars. I do not believe we should be responsible to bail out banks that act irresponsibly as JP Morgan Chase has done. In fact, I don't believe we're responsible to bail out banks that lose money at all!
Glass-Stegall should be re-instated to protect us, the poor taxpayers who've seen our dollars diminish in value due to all the quantitative-easing, money pumping and bank bailouts from ever happening again, period.
Let failed banks (and other companies..) suffer the consequences of their own financial decisions, and separate Retail banking from Investment banking NOW.
FDIC insurance is there to protect Retail Banks and consumer banking clients from losing money. It should NOT be there for Investment Banks where risk taking is prevalent and expected to generate high returns. Those who take the risks (and ONLY those who take the risks!) should be the ones who suffer the consequences of bad decisions.
Sorry for the rambling post, this entire topic gets me completely worked up, and I work in the Banking Industry. The damage that JP Morgan Chase, BoA, Citi, etc.. are doing is having an adverse, overly negative impact on the rest of us who generally are trying to do the right thing.
No need to apologize - it needs to be said. When you privatize gain and socialize loss in the banking industry there in no incentive for the bankers NOT to make the most dangereous high risk/high reward trades possible because they can't lose. And we can't win.
My biggest problem is with the taxpayer bailouts, but there are some who say Glass-Stegall actually prevented the 2008 crisis from being far worse than it was by allowing larger banks to absorb the bad debts of the smaller ones, and that the bigger issue regarding the cause of the crisis goes back to things like the community reinvestment act. Just saying.
Bill Clinton himself as President wanted Glass-Stegall repealed according to a Feb. 27th, 1995 Time Magazine article.
Ask the same fools who say Glass-Stegal "helped" stop the damage from the 2007 collapse from being worse than it was repealed 8 years prior to the 2007 financial collapse.
Suggest you don't hold your breath waiting for a response.
The sky is falling?
Ask the same fools who say Glass-Stegal "helped" stop the damage from the 2007 collapse from being worse than it was, when the law was repealed 8 years prior to the 2007 financial collapse.
I need to walk away from the computer and head to work. Thanks for getting my blood pressure through the roof already with this thread. It's gonna be a long day now.
Exactly. The level of freak out surrounding this loss is utterly ridiculous. If JPM goes down the the whole world is totally screwed anyway. They are the most solid of all the banks.
How would Glass-Steagall have protected banks from the massive mortgage losses they suffered?
FDIC insurance is there to protect Retail Banks and consumer banking clients from losing money. It should NOT be there for Investment Banks where risk taking is prevalent and expected to generate high returns.
It is also there to protect bank clients who had money in banks that ended up with risky plain vanilla mortgages.
Agree about reinstating Glass-Stegall. That needs to be done.
Who did that?
because they can't lose.
Banks had hundreds of billions in losses and you don't think they can lose? Is that your claim?
Didn't the fourth largest bank in Italy fail last November...an event that was not well reported ....?
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