What Will Happen When JPMorgan Goes Bust?

A blog about business and economics.
May 15 2012 8:29 AM

What Will Happen When JPMorgan Goes Bust?

Chairman and CEO of JPMorgan Chase James "Jamie" Dimon and Adm. Mike Mullen, former chairman of the Joint Chiefs of Staff
Chairman and CEO of JPMorgan Chase James "Jamie" Dimon and Adm. Mike Mullen, former chairman of the Joint Chiefs of Staff

Photograph by Jemal Countess/Getty Images for Time.

The scary thing about JPMorgan's recently multibillion-dollar loss in Fail Whale betting isn't just the size of the losses, it's the CEO's response. If Jamie Dimon were prepared to go out there and say that this was all part of a perfectly sound strategy and that a sound strategy simply entails losses sometimes, that would be one thing. But his view of the bank he runs is that it lost billions of dollars on a bad strategy that was badly implemented and that where we should go from here is that he'll keep running the bank like this:

In the years leading up to JPMorgan Chase’s $2 billion trading loss, risk managers and some senior investment bankers raised concerns that the bank was making increasingly large investments involving complex trades that were hard to understand. But even as the size of the bets climbed steadily, these former employees say, their concerns about the dangers were ignored or dismissed.

An increased appetite for such trades had the approval of the upper echelons of the bank, including Jamie Dimon, the chief executive, current and former employees said.
Advertisement

But I do think it's crucial to shift the attention somewhat off the question of stopping banks from making poorly managed risky bets and on to the question of what happens when they bet themselves into bankruptcy. Contrary to myth, there's no such thing as a "small enough to fail" depository institutions in the United States nor are small banks immune to terrible decisions and bankrupting themselves. But what happens is that in the FDIC resolution process the depositors get the overwhelming majority of their money back, the stockholders get nothing, and the managers get fired. It's not a costless outcome and it doesn't replace the need for prudential regulation, but the basic functioning of the system doesn't rely on the prudential regulation being perfect; it relies on the FDIC resolution process halting panics without propping up shareholders and managers.

Dodd-Frank is supposed to create a similar process for dealing with bigger, more diversified institutions and the success or failure of the bill ultimately stands on the success or failure of that part of it. JPMorgan and its peer institutions will keep being profitable on 99 days out of 100 and having trades blow up in their face on one day out of 100. Even if any given bank only blows up so big it becomes insolvent one day in 10,000, then in a world of multiple mega-banks that means at least one mega-bank blowup per decade. When they trade themselves into bankruptcy, will contagion be halted? And will it be halted with measures short of a bailout of all the people responsible for the bad trading? There's some reason for optimism that Dodd-Frank has gotten this right, and there's also some reason for doubt. But what happened at JPMorgan doesn't yet shed much light on the issue.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Politics

Meet the New Bosses

How the Republicans would run the Senate.

Even by Russian Standards, Moscow’s  Anti-War March Was Surprisingly Grim

I Wrote a Novel Envisioning a Nigerian Space Program. Then I Learned Nigeria Actually Has One.

Photos of the Crowds That Took Over NYC for the People’s Climate March

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059

Medical Examiner

Did America Get Fat by Drinking Diet Soda?  

A high-profile study points the finger at artificial sweeteners.

The Government Is Giving Millions of Dollars in Electric-Car Subsidies to the Wrong Drivers

A Futurama Writer on How the Vietnam War Shaped the Series

  News & Politics
Politics
Sept. 22 2014 11:13 AM Your Own Personal Rand Paul How the libertarian hero makes his foreign policy contradictions disappear.
  Business
Building a Better Workplace
Sept. 22 2014 11:42 AM In Defense of HR Startups and small businesses shouldn’t skip over a human resources department.
  Life
Dear Prudence
Sept. 22 2014 12:00 PM Dear Prudence Live Chat For September 22, 2014.
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Science
Sept. 22 2014 8:08 AM Slate Voice: “Why Is So Much Honey Clover Honey?” Mike Vuolo shares the story of your honey.
  Arts
Brow Beat
Sept. 22 2014 11:32 AM South Park Takes on Washington’s NFL Team and Its Terrible Name
  Technology
Future Tense
Sept. 22 2014 11:23 AM Robot Plants Are the Latest in a Long Line of Robot Thingies
  Health & Science
Bad Astronomy
Sept. 22 2014 11:23 AM Two Impacts, One Landslide… on Mercury
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.