Explaining Southern California's economy

JPMorgan under investigation for manipulating California energy markets

Mark Lennihan/AP

JPMorgan, the largest bank in the United States, in under investigation by the federal government for manipulating energy markets in California and the Midwest.

JPMorgan Chase was the darling of the U.S. financial system after everything fell apart in 2008. The bank, now the country's largest, picked up a lot of respect for avoiding the high-risk game that took down Bear Stearns and Lehman Brothers and threatened many of the country's biggest banks, including Bank of America and Citigroup (in fact, it stepped up to buy Bear Stearns in an early effort by the government to stem the crisis).

Californians have gotten used to seeing the "Chase" logo because atfer JPMorgan took over bankrupty Washington Mutual in 2008, it changed hundreds of West Coast WaMu branches to Chase branches.

But things haven't been so rosy for JPMorgan of late. It's been dealing with a trading scandal that could wind up costing it $9 billion, in a worst case scenario. It's CEO, Jamie Dimon, has had to testify before Congress. And just last week, we learned that JPMorgan is being investigated by the Federal Energy Regulatory Commission (FERC), for "[manipulating] power markets in California and the Midwest, according to the New York Times.

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Jamie Dimon Testifies At Senate Hearing On JPMorgan Chase

Mark Wilson/Getty Images

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?"

Dimon: "Yes."

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!

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