The insolvent United States banking system: lessons from J.P. Morgan Chase
Why the banks must be nationalized
Horace Campbell
2012-05-17, Issue 585
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central bankers from China to Venezuela and from Argentina to Japan are
seeking ways to exit from the contagion of the speculative trading of
US bankers, progressive forces must renew the call for the
nationalization of the big banks, which are supposed to be too big to
fail.
Since September 15, 2008 the United States economy has been like a
ticking time bomb with the unregulated activities of the banks the fuse
that is slowly burning. This fuse has affected the international banking
system and while citizens of the United States are focused on an
electoral contest, the issues of the future of the U.S banking system,
the future of the dollar and the future of the Euro are bringing home
the reality of the capitalist depression. Two weeks ago, Paul Krugman
released a book entitled, End this Depression Now. This book sought to
galvanize action by the US government to stimulate the economy based on
the twentieth century Keynesian ideas of stimulating growth.
Increasingly, it is becoming clearer that far more drastic political
measures will be needed if the international financial system is to be
protected from the gambling of the top bankers in the United States.
Wealth creation and a new economic system are needed to meet the needs
of human beings.
This reality was brought home last Thursday, May 10, when it was
revealed the J. P Morgan Chase, the largest bank in the United States
had been involved in the most risky type of speculative trading that was
not supposed to be undertaken by a federally insured depository
institution. The nature of the speculative trading is still covered up
by the media but from what has been coming out there were bets placed by
a derivative trader who was placing US$100billion bets that the US
economy would recover. One report called the operation ’trades in the
synthetic derivatives hedging business.’
Whether this is the real cause of the attention to JP Morgan Chase
will only come to light when the media and the representatives of the
people call for the removal of Jamie Dimon, the CEO of this bank and
takes over the bank. While the information on the $3 billion loss is as
opaque as the business world of the financial system, the nature of the
risk that was being undertaken is reserved exclusively for the big banks
and offers multi- million dollar profits in this ether world that is
called financial capitalism.
JPMorgan Chase is currently one of the biggest banks in the world
supposedly with $2.1 trillion in assets and more than 239,000 employees.
I used the word ‘supposedly’ because JP Morgan Chase was one of the
recipients of more than$26 billion of Troubled Asset Relief Program
(TARP) funds after the collapse of Lehman Brothers and the American
International Group (AIG) in September 2008. Troubled Assets was the
term coined by the US government to hide from the world the state of the
insolvency of the US banking system where the big banks had
overextended themselves in the housing bubble issuing what was then
called mortgage backed securities. These banks are still mired in the
toxic mess from the orgy of speculation of that era and JP Morgan
compounded its own risky position by taking over the bad bank,
Washington Mutual.
The Bank JP Morgan Chase grew bigger and riskier after absorbing two
of the failed banks at the center of the MBS debacle. JPS acquired
Bears Stearns and Washington Mutual. Hence on top of its own involvement
in the casino economy, JP Morgan Chase had taken on two failed banks in
an attempt to save the US financial system.
The Tarp instrument was the means through which the US government
had ‘bailed out the banks and investment houses in 2008. JP Morgan Chase
was involved in the same credit default swaps (CDS) that was at the
core of the gambling that brought down the system in 2008. The
speculative activities of the Banks have increased since 2008 and now
the press is seeking to lay the blame on one derivatives trader in
London. According to the media, speculation by a derivatives trader in
London has produced a $2 billion trading loss for JP Morgan Chase. It is
still not clear the extent of the loss but we know that it is in the
same category as the losses at MF Global last year. These losses add to
the scandal after scandal and are supposed to be on par with the other
debacles of 2008 when two major Wall Street institutions, Bear Stearns
and then Lehman Brothers went bankrupt. This year the progressive forces
must renew the call for the nationalization of the big banks which are
supposed to be too big to fail.
THE ARROGANCE OF THE BIG BANKS
The rise and impending collapse of J P Morgan Chase is a cautionary
tale about the fortunes (or currently misfortunes ) of the US banking
system. Older readers will remember the name Chase Manhattan Bank and
the era when David Rockefeller and this bank stood at the apex of US
capitalism. Today Chase Manhattan no longer exists and has been absorbed
through the mergers and acquisitions of the years of neo-liberal
capitalism. Then there was the other major US capitalist whose fortunes
were made when there were the most brutal forms of exploitation of
workers. This was the banker and industrialist, John Pierpont Morgan.
The career of JP Morgan was symbolic of the merger of industrial and
bank capital to create financial capitalism at the turn of the twentieth
century. Today at the start of the 21st century JP Morgan Chase is the
result of the combination of several large U.S. banking companies over
the last decade including Chase Manhattan Bank, J.P. Morgan & Co.,
Bank One, Bear Stearns and Washington Mutual. Going back further, the
predecessors of the current banking behemoth include major banking firms
among which are Chemical Bank, Manufacturers Hanover, First Chicago
Bank, National Bank of Detroit, Texas Commerce Bank, Providian Financial
and Great Western Bank.
JP Morgan Chase is a textbook case of what happened to US banks
during the era of neo-liberalism when the Glass Steagall Act was
repealed separating investment banking from federally insured deposit
banks. Much attention has been paid to the two poster children of the
new casino type operators who claim to be bankers, Jamie Dimon of JP
Morgan Chase and Lloyd Blankfein of Goldman Sachs. These two are just at
the top of the massive political structure that squeezes the mass of
the citizens of the world for the top 1 per cent. In the book ‘13
Bankers: The Wall Street Takeover and the Next Financial Meltdown’, the
authors Simon Johnson and James Kwak have detailed the evolution of the
neo-liberal world that was spun by these bankers. According to Johnson
and Kwak, the bankers created new money machines with new schemes such
as securitization, high yield debt, arbitrage trading and derivatives.
On top of these serial innovations we now have a new one called value at
risk. Later we will be told what is synthetic derivatives hedging
business. These “serial innovations created the new money machines that
fueled the rapid, massive growth in the size, profitability and wealth
of the financial sector over the last three decades.”
It is the accrued power of these bankers that now threatens the
global system of capitalism. After the tremors of the financial markets
in 2008 these same banks that called for deregulation called for bail
outs because they were too big to fail. For a while, there had been word
of the depth of the hole in other banks and we are still waiting for
the information on Bank of America which is still under wraps with
Wikileaks. Only two months ago, the Federal Reserve completed a “stress
test” of the 19 largest US banks, which gave all of them a green light
in terms of solvency and approved increased dividends or stock buybacks
for 15 of the 19 banks. This exposure of JP Morgan exposes the fraud of
the so called stress tests.
Although the banking system was propped up and we are informed in
the media that these banks recently passed ‘stress tests,’ the news
about the risky bets of JP Morgan is a stark reminder that the time bomb
is ticking. Since that fateful week in September 2008, far from
resolving the crisis of the US financial system, the bailout of Wall
Street that had been orchestrated by the Federal government has resulted
in a further centralization of financial assets in a handful of giant
institutions that dominate American society. The further centralization
now means that five of the 13 banks—JP Morgan Chase, Bank of America,
Citigroup, Wells Fargo and Goldman Sachs — held $8.5 trillion in assets
at the end of 2011. The big five have increased their viselike grip on
the US economy over the past five years: in 2006, their financial
holdings amounted to 43 percent of US gross domestic product. By the end
of 2011, that figure had risen to 56 percent.
JP MORGAN AT THE FOREFRONT OF OPPOSING REGULATION
JP Dimon is the CEO of JP Morgan Chase. He has been the most active
among the bankers in manipulating the system playing both sides of the
political game and arguing against the regulation of the banks. Jamie
Dimon was paid over US $23 million last year and now it is coming out
that it is the accounting scams that produced the paper profits that
enabled the big bonuses for Dimon and the traders who were urged to make
riskier bets. Dimon has been the most active in the press and in his
visits to the Obama White House. He has argued for the ‘markets’ to take
their course when his bank has been in operation in a world that is
beyond the reach of markets. While the world of these bankers is beyond
the ‘market’ these are the financiers who promote the myth that the
development of a generalized market (the least regulated possible) and
democracy are complimentary to one another. The same bankers who argue
that the economic sphere and the political sphere are separate and that
the market does not need the state are the same bankers who are
expending billions to lobby so that the limited regulations proposed by
the Dodd-Frank legislation of 2010 are not affected. The Dodd-Frank
legislation included one particular clause called the Volcker rule that
was supposed to ban proprietary trading by the lords of the universe.
Jamie Dimon has been described by Barack Obama as one of the
smartest bankers in the United States. Obama was simply exposing the
subservience of the federal government to the bankers who are the same
group pouring millions into both campaigns. The bankers are ensuring
that whichever party wins in November, the US banking system will be
protected. Barack Obama timidly called for regulating JP Morgan while
actively engaging the soliciting of funds from one of the most notorious
‘private equity’ firms in New York. The close relationship between the
private equity firms and the bankers constitute the power of the top one
per cent and the US government acts to serve this one per cent. After
the big scare of 2008 there was fear internationally that there would be
a run on the dollar. It was this fear that induced the members of the
US government to pass the Dodd-Frank Legislation to prevent the obscene
conflict of interest of the banks and investment houses. The expedient
which was supposed to prevent the conflict of interest was the Volcker
rule, named after the former Treasury Secretary of an era before
financialization. The rule placed trading restrictions on financial
institutions. In the 2010 legislation, the Volcker rule separates
investment banking, private equity and proprietary trading (hedge fund)
sections of financial institutions from their consumer lending arms.
Banks are not allowed to simultaneously enter into an advisory and
creditor role with clients, such as with private equity firms. The
Volcker rule aims to minimize conflicts of interest between banks and
their clients through separating the various types of business practices
financial institutions engage in.
JP Dimon has been the leader in opposing the Volcker rule because
his organization has been at the forefront of the practice where a hedge
fund is operating inside a commercial bank. Commercial banks are
federally insured and are different from investment banks. Under the
rules of the so called market, bankers are not supposed to take deposits
from customers and then use the same deposits to make speculative bets.
This was not supposed to happen but when the banks became huge money
machines, they operated above the law. This is how a bank such as JP
Morgan controls assets that are worth 20 per cent of the GDP of the USA.
BANKS MUST BE NATIONALIZED
Jamie Dimon sits on the Board of the Federal Reserve of New York.
This is the most important position of the US financial system because
this is the reserve system that holds the foreign reserves of 60 per
cent of the economies of the world. JP Morgan Chase is a particularly
critical financial institution, since in addition to its vast holdings;
it serves as one of the two main clearing banks in New York City, along
with Bank of New York Mellon, handling financial transactions for all
other banks. Any challenge to its solvency immediately puts a question
mark over the whole financial system. Central bankers all over the world
are following with interest the call for Jamie Dimon to be removed from
the Board of the Federal Reserve of New York because of conflicts of
interest. The Federal Reserve Bank of New York carries out foreign
exchange-related activities on behalf of the Federal Reserve System and
the U.S. Treasury. In this capacity, the bank monitors and analyzes
global financial market developments, manages the U.S. foreign currency
reserves, and from time to time intervenes in the foreign exchange
market. The bank also executes foreign exchange transactions on behalf
of customers.
Tim Geithner now Treasury Secretary was the former President of the
Federal Reserve Board of New York. It was under Geithner when billions
were handed over to the bankers after 2008. Then Geithner was trying to
save the US financial system so that foreigners will not pull their
reserves out of the dollar. As Treasury Secretary, Geithner was reported
to have had secret meetings with Jamie Dimon in March this year when
news first surfaced of the synthetic trades.
Elizabeth Warren, now running for a Senate seat in Massachusetts,
has called for the resignation of Jamie Dimon from the Federal Reserve
Board of New York. Every citizen will understand that there is a
conflict of interest between sitting on a board that is supposed to
regulate the operations of JP Morgan Chase. But conflict of interest has
never been a problem for the US capitalists. They changed the rules to
suit themselves. However, this was before the era when other societies
had alternatives. From China to Venezuela and from Argentina to Japan,
central bankers are seeking ways to exit from the contagion of the
speculative trading of US bankers.
Last year the world was exposed to the realities of the insolvency
of the US financial system when there was the debate on the debt
ceiling. Now it has been revealed that the debt ceiling will have to be
raised again. This is sending shudders down the spine of financial
institutions around the world.
The political struggles over the future of the US financial system
are maturing. In order to pre-empt utter disaster the President of the
Federal Reserve Bank of Dallas has called for the big banks to be broken
up. The big banks continue to act on the assumption that the US dollar
will be the reserve currency of international trade, especially now that
the Euro is in disarray. These big banks are of the view that the US
government will continue the devaluation of the US dollar without a
response from the rest of the world. It is this understanding which has
influenced the bankers to believe that the US government will intervene
to bail them out when they make speculative bets that the US economy
will improve. Many refuse to accept that this is a depression.
Sober elements understand that the banks must be broken up and this
was stated explicitly in the annual report of the Federal Reserve Bank
of Dallas. The letter from the head of the Dallas Federal Reserve is
entitled, Choosing the Road to Prosperity Why We Must End Too Big to
Fail—Now. In this letter, Richard Fisher from the Dallas Federal Reserve
argues that the situation of the bf banks is a disaster in waiting.
Fisher would force the big banks to reorganize and get much smaller. And
he would require “harsh and non-negotiable consequences” for any bank
that ends in trouble and seeks government aid, including removal of its
leaders, replacement of its board, voiding all compensation and bonus
contracts and clawing back any bonus compensation for the two previous
years.
It is now understood by these sober elements in the USA that the Big
Banks may be not only too big to fail, but also too big to save.
The politicians in the USA are compromised and refuse to see the
reality. It is the task of the progressive forces to keep the
discussions on the JP Morgan losses on the table in order to educate the
people on the nature of the depression. The major media houses such as
the New York Times are attempting to manage this story saying that this
$3-4 billion loss is a drop in the bucket. From the financial papers
there is the buzz that one’s loss is another person’s gain. This is cold
comfort to the poor all over the world who are suffering in the midst
of this depression. In 2008 the government socialized the losses while
the profits were privatized. The bailout was one of the biggest
transfers of wealth from the poor of the world to the rich. These
bankers now need another bail out and the US government will have to
increase the debt ceiling.
For the moment the Occupy Wall Street Movement has made it
impossible for the government to bail out the banks again. However, far
from bailing out the bankers, speculators such as Corzine of MF Global
and Jamie Dimon should be prosecuted. It is not enough to say that what
JP Morgan was doing was inappropriate from a federally insured
depository institution. It is time for the people to call for these
banks to be taken over and the big bankers removed.
It is now time for audacity and more audacity. Nationalization and
political education at the moment is more important than the elections.
Bankers like JP Morgan profit from war and these forces want another big
war so that the capitalists can recover. The peace and justice forces
must be more vigilant. The JP Morgan Chase debacle heightens the
desperation of the top one per cent in the USA.
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* Horace Campbell is Professor of African American Studies and Political Science at Syracuse University.
