Henry C.K. Liu
In an interview on
PBS NewsHour, Treasury Secretary Tim Geithner commented on Dimon’s
and used the “diplomatic language of Treasury communications” to tell
Jamie Dimon, head of JPMorgan,
to resign from the New York Fed Board.
Dimon as head of one of the nation's largest bank should resign
from the Federal Reserve Board, but not because JPMorgan lost $3
counting in CDS (Credit Default Swaps) positions.
As I pointed out in my Asia
On-line article: How
Funds Squeezed JPMorgan (also in Top Wonks website),
Fed itself, together with the Treasury, created regulatory rules that
permit but invite banks to take on CDS to reduce their capital
derived from the amount of risk exposure, allowing banks to show bank
regulators that much of their risk exposure has been hedged with CDS so
banks can lend five times more loans from the reduced capital level
be permitted without CDS hedging.
Dimon should resign from the Fed Board for another reason: it is a
conflict of interest to have the head of a regulated financial
on the Board of the the NY Fed, the bank’s regulator.
The bottom line is that JPMorgan made money to the tune of $4 billion
the same quarter that it lost $2 billion from credit derivative
because its risky CDS positions allowed JPMorgan to make larger profit
more lending to more than cover the loss from the same CDS positions.
how risk hedging becomes a profit center for banks. Of course Dimon
to have the derivative play make profit as well , to be icing on the
without the icing, the cake is very good.
Dimon elects to take off-target criticism by pretending that the CDS
play was a
sloppy mistake. He does so to divert attention from the real problem
the structural regulatory regime that allows banks to make high profit
avoiding high capital requirements as a percentage of its risk
Dimon's mea culpa strategy is
aimed at preventing the enforcement
of the Volcker Rule to restrict banking from risky trading.
The facts remain that:
1) the $3 billion lost by JP Morgan did not vanish into thin air. It
the financial system, going from JPMorgan into the pockets of hedge
2) The guilty parties are not the banks that play by the rules set by
regulators. The guilty parties are the regulators, i.e. the Fed and the
Thus Geithner once more is merely grandstanding, this time at the
Dimon who can be expected to recover as a hero when shareholders begin
actual facts behind the multi-billion dollar loss from CDS trading. The
loss was really
investment to facilitate high profit from bank loans on the same
There are a lot of things wrong with our banking system and its
regime. But forcing Dimon to resign from the NY Fed Board obscures
May 18, 2012