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President and CEO of JPMorgan Chase Co. Jamie Dimon testifies before a Senate Banking Committee hearing on Capitol Hill June 13, 2012 in Washington, DC. The committee is hearing testimony from Mr. Dimon on how JP Morgan Chase lost what could amount to five billion dollars in complex trades.
At the L.A. Times, Michael Hiltzik has a Money & Co. post about JP Morgan CEO Jamie Dimon's congressional testimony today. Hiltzik zeroes in on an exchange between Dimon and Sen. Bob Corker of Tennessee:
Corker: "Mr. Dimon, you've said that the biggest risk a bank takes is making loans, is that correct?"
Let's unpack this, just for a moment. If what Dimon says is true, he's essentially pleading that his entire industry is operated by hopeless incompetents.
Which sounds about right. Except that it isn't. Incompetence isn't the problem. Because when Dimon says making loans is a big risk, he's not talking about the risk of losing money. He's talking about the risk of not making money.
Here's what happened with JP Morgan's now $5 billion trading loss, centered on its London office. The bank had an historically immense amount of "excess deposits" on its books — that is, deposits that it wasn't lending out, in the form of various products (Felix Salmon has a chart.). A bank can use excess deposits to "hedge" against the risk of loan defaults. And this is what Dimon says JP Morgan was doing. Because if the bank wasn't hedging but rather making bets with those excess deposits...well, that's potentially a violation, because JP Morgan's deposits are guaranteed by the FDIC. You can't play poker with taxpayer money!
You might be wondering what all this brouhaha is over JPMorgan Chase and its now $3 billion trading loss. It's all enormously complicated.
But at Reuters, Felix Salmon does an excellent job of not just explaining it but also turning a spotlight on the real scandal: it's bad that JPMorgan lost billions, but it's even worse that JPMorgan was doing the trade in the first place.
One small addendum: Note that JPMorgan takes the excess deposits that Felix mentions and "ships them off" to London. By which he means the City of London, England's equivalent of Wall Street — if Wall Street were even more reckless than Wall Street was in the lead-up to the financial crisis. This is a place that went into such a cold sweat when the European Union proposed restraints on buccaneer trading activity that Prime Minister David Cameron had to step in and throw his weight around to rescue what is effectively a solid square mile of pure unadulterated hedge fund.