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What Five Hours From Last Thursday Can Tell Us About Dodd-Frank And JP Morgan

Economy Memo Pad

What Five Hours From Last Thursday Can Tell Us About Dodd-Frank And JP Morgan


In the course of an afternoon, we saw the problems Dodd-Frank is trying to solve, the solutions on the table, and the efforts to roll them back — not in that order.

Let’s take a quick look at a time frame lasting less than five hours from last Thursday, May 10th, 2012.

At 12:10 p.m., Martin J. Gruenberg, Acting Chairman of the Federal Deposit Insurance Corporation (FDIC), gave the keynote at the 48th Annual Conference on Bank Structure and Competition held by the Federal Reserve Bank of Chicago. In the long-awaited speech, he outlined the overall vision, as well as the problems and pitfalls, of the FDIC using “resolution authority” to oversee the failure and unwinding of a Too Big To Fail financial firm. These powers were granted to the FDIC in the Dodd-Frank financial reform bill in order to achieve both accountability and stability while avoiding the panic and contagion that occured in the fall of 2008.

At 2:15 p.m., House Republicans passed H.R. 5652, Paul Ryan’s Sequester Replacement Reconciliation Act of 2012, by a vote of 218 to 199. This reconciliation act does many things; one is that it takes lots of money from poverty relief programs and gives it to the military, and another is that it renegs on automatic cuts that were agreed to as a result of the Super Committee’s failure, which will almost certainly trigger a crisis on the next debt ceiling fight. But for our purposes, one specific thing it does is revoke Title II of Dodd-Frank, which is the resolution authority powers Gruenberg was presenting. It replaces them with nothing.

At 5 p.m., the large, systemically risky firm JP Morgan had a surprise conference call where it announced, following what was disclosed on its 10-Q, that it had a giant loss of $2 billion in the last quarter. This suprised the market and sent analysts running to their phones and computers.

There are two ways to look at the relationship between the Dodd-Frank financial reform framework and JP Morgan’s loss disclosure. One is that it shows the need for a strong implementation of Dodd-Frank broadly and the Volcker Rule specifically, which is designed to separate prop trading from large, risky financial firms. Marcus Stanley of Americans for Financial Reform has a great post up discussing what happened, how the principle of the Volcker Rule should work in this situation, and the threats it faces. Dodd-Frank is designed to make the financial markets more transparent and robust to shocks through such mechanisms as expanding clearing requirements for derivatives and reducing interconnectedness between large financial firms. It is also designed to make it less likely that any individual firm will collapse by having stronger capital requirements for larger financial firms and eliminating certain business lines they can participate in through the Volcker Rule. This is crucial for a Too Big To Fail firm like JP Morgan.

But the second is to acknowledge that businesses run profits and they run losses. There is something to a conservative like Kevin Williamson’s remark that “The odd thing about this is that it is now considered somehow scandalous when a business loses money. It’s a scandal when banks make profits, and it’s a scandal when they make losses.” On a long enough timeline, the survival rate for everyone drops to zero. Though it was clear quickly at 5 p.m. Thursday that JP Morgan wasn’t in danger of collapsing, if things had been different it could have failed.


  1. joyscarbo May 16, 2012

    My husband and I have been applying for government-funded mortgage loan modification. We’ve been turned down twice and then we found out the REAL DEAL with these modifications.
    Every time a homeowner applies for these government-funded mortgage modifications, the lender/bank gets tax credits, so the more applications for modificiations they get, the more $$ from the government they get, even though they’re virtually not helping anyone.
    So I ask, “What about the new banking lending practice regulations?” Those regulations are not being followed by banks because there aren’t auditors to ensure that the regulations are being followed. The banks/lenders are still acting in the same crooked-ass way. This is why virtually every town has a bounty of forclosed and short sale homes for sale. The bank/lenders just string the homeowner along until they are in a position to take your home.

    1. rustacus21 May 16, 2012

      The real problem here is one Edward DeMarco, a holdover (4 some unGodly reason NO ONE can fathom!!!) from the previous administration, whose department is responsible for making (‘SUPPOSEDLY’) refinancing more streamlined & simple. Unfortunantly, this is the consequence of, to put it mildly, allowing a ‘simpleton’ to do the job of a professional. It was during the last administration, carrying over to this current one, that all the REAL professionals were jettisoned out of govt, due to ‘shrinkage’ & replaced w/political/ideological ‘HACKS’ who don’t know they a$@ from a hole in the ground. But don’t give up. Contact U’r Senator/Congressperson & call, write letters, even to the W.H., but DON’T GIVE UP!!!

      1. joyscarbo May 17, 2012

        Thank you for your words of encouragement. It’s a tough time for myself, an RN and my husband, Dietary Department Manager. It appears we will-eventually- lose our home. There is just no reason for the bank/lender to extend a modification….not when they can take my house payments, which is really like paying rent to the bank/lender- they pocket it and it doesn’t reduce my principle at all. It’s money thrown away. We need overseers to make bank/lenders accountable for the regulations that should have been in place to begin with. Its happening every day…and in every community…homes are being lost to their owners and our bank/lenders are laughing all the way to their banks. It’s still all a rigged game. I’m just ashamed that I’m the stoop of republican scams. I will take your advice and contact my congress and senate representatives. I already have. I will keep going until I’m ordered out of my home.

  2. howa4x May 16, 2012

    The shareholders have to take the haircut if a firm fails, no doubt about it. Too big to fail firms need to be broken up to avoid a sestemic risk to the rest of the system. We see in this JPMorgan fiasco that the large banks have learned nothing from the 08 collapse. They continue ot engage in risky bets, this time in Europe out of sight of US regulators. They are still recklass and need to be broken up. Problem is no one in either party has the courage to do it, and because of this allow our economy to sit on a roller coaster. Wall St profits are back thanks to the tax payer. Now we need to force them to make the loans nesscessary to grow business and not just sit on billions of our money and not just play at the global casino. If the incumbants in Congress can’t do this then get out of the way and let people with some courage in the door.


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