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JPMorgan’s “Wild, Crazy Insane Gamble” Puts Global Economy at Risk: Bill Black

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Jamie Dimon was not on Capitol Hill Tuesday but he and JPMorgan's big loss were center stage at a Senate Banking Committee hearing.

"The company's massive trading loss is a stark reminder of the financial crisis of 2008 and the necessity of Wall Street reform," said Committee Chairman Tim Johnson (D-SD).

The Securities and Exchange Commission is looking into the "appropriateness and completeness" of JPMorgan's "financial reporting and other public disclosures," SEC chairwoman Mary Schapiro told the committee.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said the CFTC is also investigating trades that led to JPMorgan's loss of $2 billion -- and counting. (See: "It's Getting Worse": Why JPMorgan Is Struggling to 'Move On' from Its Bad Trade)

At this point, the debate seems to be over whether or not JPMorgan's losses are a reason to strengthen financial regulations -- "it would be wrong for us not to take this example," Schapiro said.

William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former senior financial regulator, agrees and goes a step further. "Regulators need to replace Dimon with a manager who is not addicted to exploiting federal subsidies to gamble on financial derivatives," Black writes, echoing views expressed here by MIT's Simon Johnson. (See: JPMorgan Chase's $2B Loss: Why Simon Johnson Says CEO Jamie Dimon Should Resign)

According to Bloomberg, nearly 50% of JPMorgan's chief investment office portfolio is in debt that is not backed by the U.S. government, that's up from just 7.7% at the end of 2007. At $188 billion, JPMorgan's exposure to non-government debt is larger than the combined exposure of its next three-largest competitors.

More importantly, Black notes JPMorgan is betting on "derivatives of derivatives" and is by far the largest player in the market for the CDX Investment Grade 9 and CDX High Yield 11, the derivatives underlying the trade that earned Bruno Michel Iksil the nickname 'the London Whale.'

"They didn't just gamble, this was a wild, crazy insane gamble," says Black, who calls JPMorgan "the world's largest gambling operation in financial derivatives" in his latest blog at New Economic Perspectives.

To be sure, a $2 billion loss is just 0.1% of JPMorgan's assets, as of March 31. JPMorgan has suspended its share buyback program and would appear to have ample resources to cover the losses, even if they were to double or triple or even quadruple.

But that's not the point, according to Black.

"We don't want any federal insured entity...to be speculating in financial derivatives. That's just nuts," he says. "It's really disastrous when you're talking about an institution like JPMorgan. It will sooner or later have a really bad year...when it has the really bad year, we will all end up having to bail them out or having another global crisis."

Given its size and outsized bets on credit derivatives, "JPMorgan poses a clear and present danger to the global economy," according to Black.

As you might imagine, Black is a strong proponent of strengthening Dodd-Frank, filling in the loopholes put into the Volker Rule -- thanks to an effort led by Dimon -- and regulating derivatives.

"Many of us seem to have forgotten we blew up the entire financial world by making huge best on financial derivatives," he says. "You would've hoped Congress would learn a lesson, regulators would learn a lesson and banks would learn a lesson...and get out of these things. Instead, JPMorgan has gone dramatically toward increased gambles on financial derivatives."

For additional coverage, see:

Dimon in the Rough: JPM Chief Faces Angry Shareholders, Spitzer Sees Conflict with NY Fed

JPMORGAN PROVES IT: Wall Street Is Just Kids Playing With Dynamite

"If You Are Too Big To Fail, You're Too Big": Richard Fisher

Taken to Task: Jamie Dimon's House of Ill Repute

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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