At a speech to a group of Texas bankers, Dallas Federal Reserve President Richard Fisher was asked to comment on the news of the $2 billion trading loss reported by JPMorgan Chase & Co. (NYSE: JPM) last night.
The Wall Street Journal reports that Fisher responded by repeating his call for smaller banks:
We don’t feel that we should have institutions that are ‘too big to fail. We don’t think we should allow a system that gives big institutions a subsidy over you of 20 to 100 basis points on their cost of borrowing. …
What I’m very worried about is that you can reach a size of complexity that risk management becomes a mathematical modeling exercise and you lose touch with your customer. What concerns me here, without referencing that bank, is … at what size do you not realize what’s going on underneath you? If you’ve gotten to that point, you’re too big. Period.
Fisher seems to be saying that ‘too big to fail’ is also ‘too big to manage’. His implication is clearly that Jamie Dimon could not possibly know what JPM’s traders were doing all the time and that when that’s the case, the bank is too big to manage.
Yet the Federal Reserve has done little to call the country’s largest banks to account. Capital requirements have been raised, but many critics argue that the requirements haven’t been raised enough.
In the recent round of bank stress tests, JPMorgan was recognized as one of the better capitalized and better run banks. If JPMorgan’s $2 billion loss is only the tip of a much larger iceberg, we’ll soon find out if the stress tests measured anything worth knowing.
One final point: JPMorgan was given approval to pay dividends and re-purchase stock following the stress tests. Dimon said yesterday that he wants to continue both practices. The Fed should stop that immediately, at least until the extent of the damage to JPMorgan’s balance sheet is determined. The added advantage is that by hitting the bank’s shareholders in the wallet, perhaps shareholders will get more interested in how their bank is run and whether Dimon is the crackerjack CEO and risk manager he is purported to be.
Paul Ausick
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