JP Morgan Chase’s chief technology officer, Ina Drew, retired this morning following last week’s disclosure that recent trading losses would cost the bank at least $2.3 billion. The losses, described by CEO James Dimon as “ a terrible egregious mistake”, have reignited debate over what new rules are needed to limit risk at government insured banks. Please join us to discuss managing risk and too big to fail banks.


  • Gregory Zuckerman Reporter, Wall Street Journal
  • Michael Greenberger Director, Center for Health and Homeland Security at the University of Maryland; former senior regulator, Commodities Futures Trading Commission.
  • Gretchen Morgenson Pulitzer Prize-winning business reporter and columnist for The New York Times; co-author of the book, “Reckless Endangerment”
  • Kathryn Dick Managing director, Promontory Financial Group


  • 10:06:56

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Last week's disclosure that JPMorgan Chase suffered a $2 billion trading loss has prompted new scrutiny of proposed bank regulations. Taxpayers rescued the nation's too-big-to-fail bank in 2008. There is broad support for new rules that would ensure that scenario is not repeated.

  • 10:07:24

    MS. DIANE REHMJoining me to talk about efforts to better regulate the banking industry: Michael Greenberger of the University of Maryland -- he's a former senior regulator at the Commodities Futures Trading Commission -- Kathryn Dick of the Promontory Financial Group, joining us from a studio at The New York Times, Gretchen Morgenson, a reporter and columnist for The New York Times. I hope you'll join us, 800-433-8850. Send us your email to Join us on Facebook or send us a tweet. Good morning, everybody.

  • 10:08:10


  • 10:08:10

    MS. KATHRYN DICKGood morning.

  • 10:08:10


  • 10:08:11

    REHMGood to have you all with us. First, joining us by phone is Greg Zuckerman of The Wall Street Journal. Good morning, Greg.

  • 10:08:21

    MR. GREG ZUCKERMANHey, good morning.

  • 10:08:22

    REHMYesterday, it was announced that three JPMorgan Chase officers would be leaving this morning. We hear that Ina Drew has retired. Tell us what role she played.

  • 10:08:37

    ZUCKERMANWell, Ina Drew was among the more senior women on Wall Street, one of the more senior executives at JPMorgan Chase, and under her purview was this group called the CIO group, chief investment office group. And basically, they ostensibly were trying to hedge risk at the bank, but they also were charged with making money. And that's where they got into some trouble. So they do all kinds of trading, and some of it is to offset some broader exposure and risk of the bank.

  • 10:09:09

    ZUCKERMANBut they also started making some big bets. In particular, there was a guy who we identified as the London whale -- they call him the London whale -- and his name is Bruno Iksil. And he made some huge, monumental bets earlier this year on corporate credit, on improving health of various corporations, and that got them into some troubles.

  • 10:09:31

    REHMAnd did she play a direct supervisory role?

  • 10:09:37

    ZUCKERMANWell, not directly, but it's her group and not so many people away. So there's this guy Bruno I mentioned, the big trader, and he reports to an individual and would in turn reports to Ms. Drew.

  • 10:09:45


  • 10:09:50

    ZUCKERMANSo, yeah, she not only had responsibility, but she also apparently reassured people within JPMorgan Chase that everything was fine and not to be concerned. Of course, you wonder about these things after they come out, whether there's a sort of finger-pointing and whether she's getting excessive blame, and she should get blamed. Whether others should as well is also a question.

  • 10:10:12

    REHMCEO Jamie Dimon called this loss terrible mistake, a mistake The Wall Street Journal, I gather, was aware of for a number of weeks. What kinds of efforts did you have to go to to bring this to light?

  • 10:10:32

    ZUCKERMANWell, frankly, it was a little difficult. I heard about this individual and this group. And when I was told about it -- and that was sort of in early April -- I was a little skeptical myself because we all sort of consider Jamie Dimon and JPMorgan Chase to be different from the other banks that we all had to bail out as taxpayers. And JPMorgan got through the crisis in much better health. And they're not known for swinging to the fences and doing risky trading. So I was a little skeptical.

  • 10:11:02

    ZUCKERMANThen we wrote a front page story which was greeted with some skepticism. So I realized that, yeah, you know, they have some issues there, and it's a much bigger and -- bigger trading group and taking bigger risks than people imagined. And we wrote the story, and JPMorgan was dismissive. And people in the markets were a little bit dismissive. And, well, hey, we know all about these trades, and don't worry, Greg, was sort of the reaction. But it's just a real reminder of the risks still at the biggest banks in the country. And we, as taxpayers, have to still be unawares.

  • 10:11:37

    REHMAnd, so far, the losses are said to be about $2 billion. Can we expect this to grow?

  • 10:11:47

    ZUCKERMANWe estimate at $2.3 billion right now, actually about 2 -- almost $2.5 billion right now. Yeah, I think they will grow. The bank itself is worried about an additional one or maybe $2 billion, so it could grow past $4 billion. You know, they could get lucky, and they do some recovery with some of these assets. But I think it's of concern, and it could go to $4 billion or more, yeah.

  • 10:12:12

    REHMAnd tell me who's actually profiting from these losses.

  • 10:12:17

    ZUCKERMANSo there are a range of hedge funds. We've identified a couple of them in New York and trading floors around the world who were on the other side of these trades. I mean, JPMorgan and this individual, Bruno, they were so huge, they were so big in the market that they really were bigger than anybody else out there by far.

  • 10:12:37

    ZUCKERMANSo, in other words, for them to put on these big, huge trades, it had to be a group, lots of different people on the other side to allow them to do so. So, basically, they started building up their trades, and they needed counterparties. So from around the world -- hedge funds and trading floors around the world took the other side of these trades.

  • 10:12:55

    REHMSo a loss of $2 billion, some might say, is a drop in the bucket. But given what we've seen in the past two years, in reality, what does this mean?

  • 10:13:12

    ZUCKERMANWell, yeah, you could say that two or even $4 billion as a percentage of JPMorgan Chase is not huge, but it is significant. I mean, last year, they made about $19 billion, but that included a big chunk of gains from this very group. The group has done quite well over the years and been successful in racked-up profits. So you take out those gains, and then you subtract them, you reduce it by the $4 billion, let's say, or $2 billion, you know, that's still significant for JPMorgan Chase.

  • 10:13:40

    ZUCKERMANBut it also is just a huge reminder that we haven't solved things. I mean, it's only been four years or so since we, as taxpayers, had to step in and bail out bank after bank or prop them up. And we thought we were past this. And we have this Volcker Rule that we're trying to enact, which is supposed to be improving things and reducing the risky trading going on at banks. And it's just a huge reminder that we haven't really fixed things.

  • 10:14:04

    REHMSo what happens next?

  • 10:14:07

    ZUCKERMANNext, we see how Jamie Dimon weathers the storm. We see...

  • 10:14:12

    REHMWill he?

  • 10:14:14

    ZUCKERMANWill he? Yeah. Listen, he has done more good things than bad. He is in a -- he starts off with a lot of capital. He's done -- the bank actually is doing pretty well, and they keep reiterating that. So setting this aside, the bank is not a bad position. So the question is, how much pressure builds on Jamie Dimon, but also how bad their losses get? And, again, it's not really clear yet.

  • 10:14:41

    ZUCKERMANUsually, when these things come out, when there's a rogue trader -- in this case, it's not really a rogue trader. But when there are bad trading losses, the firm has gotten out of their positions already, and they sort of own up to them. In this case, they haven't, which is kind of interesting and unique and a little bit scary.

  • 10:14:59

    REHMGreg Zuckerman of The Wall Street Journal, thank you for joining us.

  • 10:15:04

    ZUCKERMANSure thing. Nice to talk to you.

  • 10:15:06

    REHMGood to talk with you. Turning to you, Gretchen Morgenson, I asked, will Jamie Dimon weather this storm? What do you think?

  • 10:15:17

    MORGENSONWell, I guess, I agree with Greg. You know, he has -- he, Jamie, has a lot of credibility. He has a lot of political capital. He has a lot of bank capital. He's got a very strong institution behind him. I think what has really put him in a very difficult spot, vis-à-vis this loss, is that he has been among the most aggressive bank executives out there trying to influence the impact of the regulations that have been put forward as part of Dodd-Frank. He's been extremely aggressive in trying to make sure that the Volcker Rule does not have an impact on his institution.

  • 10:16:02

    MORGENSONThe Volcker Rule, of course, is the attempt to -- by regulators to separate risky trades from institutions that have depository base, like a commercial bank. And this was -- the idea was to get rid of the potential for bailouts by taxpayers of risky and reckless trading. So this is very much on point of this entire episode at JPMorgan Chase. And he has been at the forefront of trying to water that down and to reject the idea that banks can't manage these kinds of risks ably and well, so...

  • 10:16:41

    REHMSo it...

  • 10:16:41

    MORGENSON...I think that he's -- I think he survives. But I think that he is tarnished in a very big way because of the aggressive stance that he has taken and because he's been, you know, really out there on this topic.

  • 10:16:57

    REHMGretchen Morgenson, she is a Pulitzer Prize-winning business reporter and columnist for The New York Times, co-author of the book "Reckless Endangerment." And turning to you, Michael Greenberger, would the new rules, as they are now being written, have prevented the kind of trade that JPMorgan Chase got itself into?

  • 10:17:26

    GREENBERGERLet me back up to say the statute from which the rules are to be written, the Dodd-Frank act which was passed in July of 2010, if properly implemented, would have stopped these trades in about three different ways. When Gretchen says that Jamie Morgan (sic) has been very aggressive...

  • 10:17:44

    REHMJamie Dimon.

  • 10:17:45

    GREENBERGERJamie Dimon, sorry. Jamie Dimon is very aggressive in fighting the regulations, I can tell you I was sitting in a conference call of volunteer representatives of consumer interest in Dodd-Frank about an hour before he made that telephone call. And we concluded that judicially, administratively and legislatively, Dodd-Frank was being undone because of the banking lobbying that Jamie Dimon led.

  • 10:18:14

    GREENBERGERSo -- and then we had this announcement. Now, you say, well, does this mean that Dodd-Frank will be implemented correctly? The answer to that is, I can't tell you. What I can tell you is the playing field for trying to get Dodd-Frank in the shape that it would prevent this kind of reckless investing, we have a level playing field right now.

  • 10:18:35

    REHMMichael Greenberger, director of the Center for Health and Homeland Security at the University of Maryland. More of our discussion, your calls, your email when we come back. Stay with us.

  • 10:20:04

    REHMAnd welcome back. Joining me here in the studio: Kathryn Dick -- she is managing editor, sorry, director of the Promontory Financial Group -- and Michael Greenberger -- he is a former senior regulator at the Commodities Futures Trading Commission. On the line with us from New York City is Pulitzer Prize-winning business reporter and columnist for The New York Times Gretchen Morgenson.

  • 10:20:38

    REHMAnd we will take your calls in just a few moments, 800-433-8850. Send us your email to Kathryn Dick, give me your take on what's happened to JPMorgan Chase and whether you feel that this situation reflects back on those eras of too-big-to-fail banks.

  • 10:21:14

    DICKThank you, Diane. What I see with respect to the JPMorgan situation is a number of questions about the risk management of the firm. We've been talking about the regulatory reform and some of the changes that are underway. And, as Michael noted, there's a number of aspects of implementation that are still to be done. At the same time, there's some very basic fundamental questions about risk management that, I think, need answers.

  • 10:21:38

    DICKAnd again, as Greg mentioned, we're waiting for some of those answers from the firm. So, for example, the CIO, the chief investment office, typically in a bank, that office is there to manage risk. They are not there to take or increase the risk profile of the institution. We don't know enough about the underlying assets, positions that this group was trying to manage to have a good sense for whether they were managing risk or, in fact, as seems to be implied, taking risk, increasing the risk profile of the institution.

  • 10:22:10

    DICKThat could happen because the risk management tools, the way they measure risk, were inaccurate, were not being reported properly to the right people in the institution. There's unanswered questions about how they measure risk and where that information was being presented. I think the last important piece -- and it's a part of the reg reform -- is compensation. How were the people in this group incented, because, in fact, they should be incented to manage the risk profile of the firm?

  • 10:22:38

    DICKIf they were incented to increase risk and that's how they were rewarded in their compensation, that needs to be discussed, and it should be evaluated with respect to regulatory reform.

  • 10:22:46

    REHMHere's an email from Greta in Arlington, Va.: "Please explain in words I can understand why the government should get involved in JPMorgan's business troubles. My understanding is this: if a bank routinely makes bad bets, as everyone calls it, and loses people money -- loses people's money, people will take their business elsewhere. Isn't that the best regulation?" Gretchen Morgenson.

  • 10:23:24

    MORGENSONWell, unfortunately, what we learned in the 2008 episode was that the government stepped in to rescue many failing institutions because of the interconnectedness of the financial system. Their arguments, when they rescued, for example, the American International Group, a big insurer, was that if it failed, it would take down other institutions with it and would imperil the entire financial system around the world. So the government is deeply involved, unfortunately, in these operations as the sort of bailer outer of last repute. I mean, it last -- it is absolutely the last refuge.

  • 10:24:10

    MORGENSONAnd it has been used, unfortunately, throughout 2008 and '09, to provide money for banks that did take risks that were reckless and that didn't think through the consequences. So the answer to Greta really is taxpayers may not want the government to be involved in these institutions, but the government showed in this financial crisis that it is absolutely determined not to allow these banks to fail.

  • 10:24:35

    REHMAnd, Michael, here's an email from George, who said, "Could you, please, detail Wall Street's intense efforts on Capitol Hill to water down any form of regulation, for example, Dodd-Frank?"

  • 10:24:55

    GREENBERGERWell, Wall Street and their relevant trade associations are working 24 hours a day, seven days a week, and in this year, 366 days a year. And obviously, in an election season wherein campaign finance is critically important, and these -- as we can see from the paper, everybody's looking to Wall Street for campaign reforms. So they are trying to gut the central protections of Dodd-Frank.

  • 10:25:24

    GREENBERGERFor example, the big protection here, most prominent, is the Volcker rule, and the Volcker rule essentially would say you can't bet with depositors' funds hoping or thinking that if you lose and your bank gets in trouble, the American taxpayer will bail you out to the tune of, in 2008, 2009, trillions of dollars. Volcker would have said this kind of betting, which runs over into trying to make big gains -- because the bank keeps the gains. They make profits. This woman, I believe, who resigned made $14 million last year.

  • 10:26:06


  • 10:26:07

    GREENBERGERYes. So they make the gains. But if one of these banks fails, there will be a claim, oh, every bank will fail 'cause they're so interconnected, and you, the taxpayer, better shell out another several trillion dollars.

  • 10:26:21

    REHMKathryn Dick, do you want to comment?

  • 10:26:24

    DICKYes, I'd make a couple of comments. One is that we need to keep in context the scope of these losses. As reported right now, the $2 billion represents about 10 percent of...

  • 10:26:34

    REHMOr $2.5 billion up to $4 billion.

  • 10:26:37

    DICKRight. So we're talking about those still percentage of annual income for the company and, in fact, a very small percentage of capital, and I think that's important because part of the Dodd-Frank reform was to make the system more resilient, to make banks more resilient. And a primary focus has been raising capital, which these banks have been required to do such that they can take losses, whether they come from loans or securities or hedging activities.

  • 10:27:05

    DICKTo Michael's point, what we need to know is whether or not this bank was actually trying to hedge a risk and, therefore, the specifics of how this hedge went wrong.

  • 10:27:15

    REHMAnd, Gretchen, to what extent do we know that the bet that the JPMorgan trader in London was a hedge against another position that the bank held?

  • 10:27:33

    MORGENSONI think it began as a hedge, Diane, as a hedge against the bank's obvious exposure to corporate risk. You know, a bank makes corporate loans. Therefore it's exposed to potential risks in those loans if the companies that took the money happen to default. It began, I believe, as a hedge against those kinds of positions. But I think that we really have to question the idea that this was a hedge ultimately because hedges are not supposed to lose 2.5 to $4 billion. Hedges are supposed to simply offset potential risks.

  • 10:28:13

    MORGENSONSo I would question the very idea that this was a hedge at all. I think a lot of people want to, perhaps, hide behind that idea because it, again, would not be covered by the Volcker rule, as Michael described it. Hedges are allowed under these kinds of rules that are designed to rein in risky trading. But if it's an outright bet, then, of course, it was supposed to have been or would have been beyond the pale and not allowed. So I think we have to question that it was a hedge at all. It may have begun that way, but it became an outright bet pretty clearly.

  • 10:28:50


  • 10:28:51

    GREENBERGERWell, the other thing I would say is I think the reason this has touched the American taxpayer, American consumer's nerve is they understand that JPMorgan may be able to withstand this. But JPMorgan was deemed by all to be the brightest people in the room. And if Jamie Dimon comes forward and says, hey, I took a $2 billon loss -- it may be $1 billion more. Many people think it will be four billion at the end. If the smartest guy in the room can make this kind of mistake, what does that mean for all the other banks who we already had a bailout in 2008?

  • 10:29:24

    REHMHow does it happen, Michael? Explain what that London trader did.

  • 10:29:32

    GREENBERGERIt is -- he made a very complicated bet on a series of corporations, on whether or not they would fail. The bet is reflected in a value of an index. And he took one side of the bet, and he built up a position. And as the hedge fund saw he was building up the position, they took the other side of the bet. And it's like changing odds in a horse race. When somebody gets bet on an awful lot, the odds may go from 10-1 to 2-1.

  • 10:30:02

    GREENBERGERThe hedge funds went in, took the opposite side of this bet. And the important thing is, as somebody said in this discussion, the -- it's a dynamic bet. It's like betting whether the Yankees will win the World Series when the Yankees are in last place in the American League East. If you bet the Yankees to win the World Series, you want to get out of that bet. The people who are on the other side of your bet don't want to let you out of it.

  • 10:30:26

    GREENBERGERAnd that's why, I think, The Wall Street Journal reporter said what's unusual here is these losses are announced after the bets are over. This is a dynamic bet. There are some estimates, by the time it expires, it could be $8 billion. Again, maybe JPMorgan, in this bet, can withstand this. But do they have other bets? And if they're the brightest people in the room, we just had MF Global in October lose $6 billion. Now, that was not a systemically risky organization, but, again, they were synthetic, derivative bets.

  • 10:31:00

    REHMSo, from your perspective, who ought to take responsibility here?

  • 10:31:06

    GREENBERGERWell, what -- the question was asked, why should the government take responsibility? The government should take responsibility because to protect us against the Great Depression, the government feels it needs to bail these institutions out to the tune of trillions of dollars. Whether it's Occupy Wall Street or the Tea Party, nobody wants to bail these institutions out. Paul Volcker said the way we're going to protect the American taxpayer is we aren't going to let these too-big-to-fail banks do something that they call a hedge, but a lot of people call a bet.

  • 10:31:39

    GREENBERGERNow, if Jamie -- Jamie Dimon had had his way in the lobbying, this very transaction would have been exempt from the Volcker Rule. So the question now is -- for people sitting at home who are worried about unemployment and their pensions, and yet having to bail out another couple trillion dollars -- when you hear people want to weaken Dodd-Frank, make technical fixes, take 30 percent of it away, which Jamie Dimon said yesterday in "Meet the Press," grab your wallet and call your congressman.

  • 10:32:12

    REHMKathryn Dick.

  • 10:32:13

    DICKI think I would lever on some comments that Michael made about the too-big-to-fail, too. There's a very important aspect of that, which is the entire resolution of large banking companies. And there was an important speech made last week by Martin -- Marty Gruenberger, (sic) who runs the FDIC, which is our Federal Deposit Insurance Corporation, at the Federal Reserve Bank of Chicago, both esteemed regulators.

  • 10:32:36

    DICKAnd in the speech, Marty made it clear that, with the reforms of Dodd-Frank, he does feel that his agency has the capacity to unwind a large banking company. That's important because, again, to Michael's point, the taxpayer wants to know this loss is not threatening the solvency of JPM. Another loss could. And we need to know that all the reforms in Dodd-Frank are moving forward and implemented in ways that the entire package together will make the system and financial institutions stronger.

  • 10:33:09

    REHMKathryn Dick, managing director of Promontory Financial Group. And you're listening to "The Diane Rehm Show." Gretchen Morgenson, do you want to comment?

  • 10:33:23

    MORGENSONI think that it's, as far as the resolution authority is concerned -- I know that the FDIC has been working very hard on how to implement it. I do think that there are many questions that remain about the ability of the authority to really stand up and unwind an institution in times of stress. There is a requirement that regulators overseeing these institutions agree to unwind such an institution rather than to bail it out.

  • 10:33:51

    MORGENSONAnd I think a really $64 trillion question would be is, do the regulators have the gumption to stand up and say, yes, let's resolve this, let's unwind this institution rather than let's bail it out? Because what we had in the last go-around was a lot more of the let's bail it out.

  • 10:34:10

    REHMAnd what you're -- you're using the phrase unwind. What do you really mean, Gretchen?

  • 10:34:18

    MORGENSONWell, what they mean by that is to resolve an institution with -- you know, in the same way that the FDIC resolves a failed bank, which they do, you know, regularly, weekly. And that is to go in and to, you know, basically, put it into some kind of a chapter 11-type proceeding where they separate out the assets, the liabilities and try to arrange for an orderly, you know, change into a new institution, if possible, so...

  • 10:34:48

    REHMSo even if JPMorgan Chase -- let's just speculate wildly here. Let's just say JPMorgan Chase's losses do go up to $8 billion, which would be about a third of their assets, how likely, Michael, do you see the government going in and unwinding that institution?

  • 10:35:14

    GREENBERGERMy gut reaction is it still would not be enough for the government to go in. But, again, we're not worried about JPMorgan. We're worried about weaker institutions: Bank of America, Citibank, et cetera. And also, this is what Wall Street is telling us, oh, the government could go in and resolve this and unwind this. Well, take these bets, for example. You've got to go tell somebody, who may win $8 billion by unwinding their bet with JPMorgan, leave the bet alone. Those people are not going to -- they're going to sue the government. They're going to enjoin it.

  • 10:35:48

    GREENBERGERThey're going to say, this is a contract we have. So -- and also, you can't resolve things that you don't know about. This -- the government was in no better position than Jamie Dimon was if we had transparency, which Dodd-Frank brings us. The government and everybody would have seen, clearly, six or seven weeks ago when this Wall Street Journal reporter was trying to light a fire, hey, look, there are bets out there that -- they're betting that a Little League team will beat the New York Yankees. Let's get them out of that bet.

  • 10:36:22

    REHMWhy didn't Jamie Dimon step in right then and there?

  • 10:36:26

    GREENBERGERBecause his chief investment officer, the woman who made $14 million a year, was telling him, don't worry about this. We're hedged. That's what Enron was being told as Enron was collapsing. Jeff Skilling was being told by his chief investment adviser, we're hedged. They don't -- Jamie Dimon didn't understand this transaction. The chief investment officer didn't understand this transaction. And, I think, when we get to the bottom of it, the London Whale, the trader will not have understood this transaction.

  • 10:36:59

    REHMIs he still on the payroll?

  • 10:37:02

    GREENBERGERWell, that's a question -- I think he's one of the people who's going to go. There's rumors that the entire London operation will be shut down, this trading operation.

  • 10:37:10

    REHMDo you agree that that's what should happen, Kathryn?

  • 10:37:15

    DICKI think we need more information before we can make a decision about what should happen, but I do think it's imperative --- and we've seen news reports -- that the regulators are in, asking questions. Again, a typical problem in the risk management function can be when management is in one location and the traders executing a trade are located somewhere else.

  • 10:37:35

    REHMKathryn Dick, managing director of Promontory Financial Group. We'll open the phones when we return.

  • 10:40:04

    REHMAnd it's time to open the phones as we talk about the latest in our concerns about what's happening in the banking industry. Let's go first to Tampa, Fla. Good morning, Tracy. You're on the air.

  • 10:40:24

    TRACYGood morning, Diane. Thank you for taking my call.

  • 10:40:25


  • 10:40:28

    TRACYThis past week, the new edition of Rolling Stones came out and featured an article written by Matt Taibbi, and it directly ties into what your guests are talking about, not specifically about JPMorgan but about the way that the banking industry and the financial industry is systematically attacking the Dodd-Frank litigation.

  • 10:40:50

    TRACYSpecifically, they talked about litigation, delays on enactment, the heavy influence of lobbying by the banks and financial institutions on politicians to get the changes in with the legislations that are most desirable to them. And they basically say that the government is outgunned, outfinanced, outmanned by the financial industry. And my question is, can the government ever be successful in implementing reform?

  • 10:41:24


  • 10:41:25

    GREENBERGERThe answer to that is yes, as long as the American public keeps their eye on the ball. What had happened was that we had the failures 2008, 2009, and the banks were saying, in a sense, this is a one-off. Don't get in our way. Don't punish us. We will help the economy grow. And the MF Global and the JPMorgan are a reminder to the average American taxpayer, who does not represent it in this lobbying or, if they are, by volunteers such as me, that you have got to be diligent.

  • 10:41:58

    GREENBERGERThat's why I say, when you hear -- Mitt Romney's platform was repeal Dodd-Frank, well, that's pretty embarrassing. So today, he's saying, substitute Dodd-Frank for fair and balanced regulation.

  • 10:42:12

    REHMAll right. Here's an email to counter that very point. It's from Janey, (sp?) who says, "It's astonishing that we are discussing a $2 billion loss of a bank with over $2 trillion in assets. That's fairly a blip and done with the bank's own money. Let's discuss Jon Corzine and the loss of over $600 billion of investor money and why is nothing happening to him or to correct that disaster. Well, it's because he's a Democrat and Obama-Biden's economic guru. The Congress cannot tie the hands of banks to create no risk. Risk is inherent in the industry." Gretchen Morgenson.

  • 10:43:12

    MORGENSONWell, I think that it's fine to have risk, and your listener is right, that there is risk in this industry. It's fine to have risk if it is taken by institutions that will -- who live by the sword and die by the sword, OK. So hedge funds, institutions that are not using depositors' money, institutions that will go bankrupt if they make enough bad decisions, that is fine. I think we have zero problem with such risk-taking in our society. But it's when you have the situation we had in 2008 where the risks were taken, the money was made by the top executives, and then, when the losses came up, the taxpayers paid it.

  • 10:43:59

    MORGENSONThat was privatizing gains and socializing losses. It's not fair. And that's why we have to worry about big institutions that are part of the federal safety net taking risks, like JPMorgan Chase has. I agree. It's a blip on the screen as far as their financial position is concerned. But it is an indication of the kinds of risks that could be taking place across other institutions. And, therefore, we have to take notice.

  • 10:44:27

    REHMAll right. To Cincinnati, Ohio. Good morning, Richard.

  • 10:44:32

    RICHARDGood morning. I would like to see a return to Glass-Steagall. What's impressed me throughout the entire argument is that this hedging activity, which seeks to do the impossible and eliminate risk for one person, winds up magnifying the risk. And we saw that in the real estate bubble. The size or value of the real estate asset was small compared to the number of side bets that were being placed on them. And I'd just like to recommend to your listeners, if they haven't already, that they read Michael Lewis' book about that bubble, "The Big Short."

  • 10:45:14

    REHMAll right, sir. Thanks for calling. Michael.

  • 10:45:16

    GREENBERGERWell, I agree with that recommendation. I have my students read "The Big Short" because it shows that these kind of risky bets on synthetic derivatives are nothing more than gambling. And we should call it what it is. That's what the Volcker Rule -- we're talking about return to Glass-Steagall. What the Volcker Rule, in its essence, is saying, these big banks who have our deposits, which are ensured by our money and who expect to be bailed out if they reach a crisis, will use taxpayer's money.

  • 10:45:44

    GREENBERGERThey should -- let's not worry about risk management. Get them out of gambling. If you want to gamble, go to Las Vegas. By the way, the Nevada Gambling -- Gaming Commission would do a better job of overseeing this than our regulators.

  • 10:45:57


  • 10:45:58

    DICKYes. I would just add there that, as Gretchen mentioned earlier, this particular position of JPM, our understanding is it didn't start as a hedge. And this also should highlight for us the complication that regulators have in diving through the types of activities banks are involved in because, frequently, what starts as a hedge can morph into something, to Michael's point, that no longer is hedging risk on a balance sheet, but, in fact, there's probably increase in risk in the institution.

  • 10:46:28

    REHMWhat about the fact that this was a London trader, Michael?

  • 10:46:34

    GREENBERGERWell, that's very important because, again, up till Thursday afternoon last week when this report was made, legislation was raising through -- at the House of Representatives. On the argument the -- our U.S. banks were saying, oh, don't regulate our London facility. That's unfair because the London banks -- our London banks compete against real London banks, and the British aren't regulating them as much. This shows the point that, if the London banks of U.S. holding companies aren't regulated, the British citizens aren't going to have to bail them out. We're going to have to bail them out.

  • 10:47:09

    REHMWhat about that, Gretchen?

  • 10:47:12

    MORGENSONYeah. This is the refrain that you hear constantly, Diane, when any -- anytime anyone is trying to rein in operations of these large global institutions, and that is that, oh, you can't rein us in because we will not -- we'll no longer be competitive with other large institutions around the world. Well, you know, if you want to do a race to the bottom, that's fine.

  • 10:47:34

    MORGENSONBut I don't think that the taxpayer really is interested in competing with other countries whose requirements are far lower than ours. Let's not lower the bar. Let's raise the bar so that our taxpayers don't have to bail out a unit of our institutions, which are, you know, more risky because they're overseas.

  • 10:47:54

    REHMAnd on that very point, Kathleen in Falmouth, Mass. has a question. Good morning to you. Kathleen.

  • 10:48:06

    KATHLEENThank you. Yes, good morning.

  • 10:48:08

    REHMGood morning. Go right ahead.

  • 10:48:10

    KATHLEENWell, we have watched for a number of years, through close relationships and friends on the Canadian side of our border, that, number one, they have fortunately not gone through the depths of recession that we've all been subject to. And then I read an article a couple of years ago in Newsweek, I remember. I can't recall his exact name, very fine columnist. Is it Fareed Zakaria?

  • 10:48:47


  • 10:48:48


  • 10:48:48


  • 10:48:49

    KATHLEENHe wrote an explanation of the difference between the Canadian banking system and our own. And, unfortunately, I haven't been able to lay my hands on it.

  • 10:49:01

    KATHLEENAnd, apparently, they are not permitted to -- perhaps to use a gentleman before I spoke to -- able to engage in what amounts to gambling, I gather.

  • 10:49:14


  • 10:49:16

    MORGENSONWell, it's true the Canadian banks have really gone through much less of the turmoil than we have. They certainly didn't experience the kinds of bailouts that we did in this country. The nation's economy was more commodities oriented in Canada, and so, therefore, it was not as heavily financially oriented. But I think that, also, you have to remember that Canada has different rules about mortgage lending, for instance.

  • 10:49:43

    MORGENSONIt does not have the tax deduction for taking on a mortgage. So there -- it seemed that during that period anyway, they were not so into a real estate bubble as we were, so they were able to survive. But it's also a very concentrated banking system. There are a lot of differences, and I think it's well worth examining those.

  • 10:50:05

    REHMAll right. To Hillsdale, Mich. Good morning, Julie. You're on the air.

  • 10:50:11

    JULIEThank you. I worked for the FDIC as a liquidator. I closed hundreds of banks during the '80s and the '90s when we were taking down the savings and loans and all that other stuff. And in '84, when we took down the seventh largest bank in the world, which was Continental Illinois National Bank, we -- as you guys talked about, we did sell off the good assets, but we have internally thousands of people that worked on all the bad assets. And we were able to get a return of over 90 percent to the taxpayer by the time we were all said and done around '92, '93.

  • 10:50:50

    JULIEBut the FDIC went through some big changes in the '90s where they took away our authority, and they even let go of, oh God, 50, 60 percent of the people. And, you know, when the banking debacle happened in 2007, there was no -- nobody consulted the FDIC because we -- we've done it for years. I mean, we took so many things down. They could probably rev it up, but I'm just saying that we knew how to do it.

  • 10:51:18

    JULIEBut we're -- the liquidators, we're out of the loop right now, the FDIC. I don't think we could take what's happening now because they deregulated everything. We saw the tsunami coming back in the '90s. We...

  • 10:51:29

    REHMInteresting. Michael?

  • 10:51:31

    GREENBERGERWell, I think it's -- points well taken. And, by the way, many people have the discussed the fact that Continental Illinois looks like a picnic compared to what we've gone through, that was before all these complicated synthetic derivatives were created. But the second thing is, and that the listener should know, that there's a successful effort being made to fight Dodd-Frank by defunding the regulators who have to enforce it.

  • 10:51:58

    GREENBERGERThat is to say, besides saying we're going to weaken the substance of it -- for example, the SEC and CFDC are threatened and have been held back, they don't have enough enforcers to do the job. And this is sort of the silent vetoing of Dodd-Frank. But it's imperative that if the American taxpayer wants to be protected, they have to see that the cops on the beat are multitudinous and well paid.

  • 10:52:24

    REHMAnd, you know, one of our earlier emailers brought up Jon Corzine. What's happening there?

  • 10:52:32

    GREENBERGERWell, I think, unfortunately, Mr. Corzine is probably going to be looked at very hard for criminal problems, but I want to make a point about that. The point was he is a Democrat. Nobody has prosecuted him. There is a fundamental problem here in that nobody has prosecuted anybody from the subprime meltdown, anybody from the MF Global situation. The president has now three times asked the Justice Department to investigate manipulation in gas prices.

  • 10:53:01

    REHMAnd why hasn't that happened?

  • 10:53:03

    GREENBERGERThat is a very good question. But the result of what has happened -- and, by the way, last week, the first indictment of BP oil spill came down, and it's a low-level BP person for deleting text messages. The best friend of Wall Street right now is the Justice Department.

  • 10:53:23

    REHMHow can you say that, Michael?

  • 10:53:24

    GREENBERGERBecause there are no indictments. The American public wants accountability. It's not just Mr. Corzine.

  • 10:53:29

    REHMBut is it because the Justice Department simply doesn't have enough to go on?

  • 10:53:36

    GREENBERGERI was a high-level official in the Justice Department for two years, and I was a market regulator. My view is there should've been a ton of indictments brought. That was done after Enron. It was done after the savings and loans scandal. I don't know why there's nothing being done, but there is nothing being done.

  • 10:53:57

    MORGENSONDiane, I'll throw in -- I'm sorry.

  • 10:53:57

    REHMAnd you're listening to "The Diane Rehm Show." Gretchen Morgenson, why is nothing being done in your view?

  • 10:54:06

    MORGENSONWell, that's a long conversation. There are two elements I think we can throw in here and to Michael's point about the S&L crisis. Eight hundred and thirty-nine executives went to jail as a result of the S&L failures, so that's a data point that, I think, is worth making.

  • 10:54:22

    MORGENSONOne element that I've spoken to prosecutors about -- and they've made this argument to me, and it's sound -- is that because the regulators were so inert during the years leading up to the crisis, during the mania years, they did not collect the kind of information and material and data that they -- that prosecutors now need to effect -- you know, to have effective indictments and prosecutions. I think that's very interesting. I am not a prosecutor, so I can't analyze that. But it certainly tracks, and it makes sense to me.

  • 10:54:52

    REHMSo where does this go? Are we likely, in your view, Michael Greenberger, to see anybody charged with anything over this JPMorgan Chase fiasco?

  • 10:55:09

    GREENBERGERIf I had to bet today the way things have gone -- and, by the way, MF Global happened after the period where the regulators weren't collecting the data. This is happening when regulators are supposedly collecting data. My view is you will not see any indictments over this. You won't see any indictments over MF Global. You virtually haven't seen any indictments over the BP oil spill.

  • 10:55:32

    GREENBERGERThe president hasn't created an anti-fraud task force over the subprime meltdown. The New York Daily News couldn't find those people on the Justice Department. There was no telephone number for that group. The -- what's the Justice Department right now is the person that's essentially -- is the institution's essentially saying, have at it.

  • 10:55:52

    REHMSo, Gretchen Morgenson, Wall Street has government by the scruff of its neck?

  • 10:56:05

    MORGENSONWell, Wall Street is in a very powerful position. And this is quite mysterious to me because they helped us into the biggest recession and the biggest economic crisis since the Great Depression. And I truly would have thought that they would have had a little bit more -- they'd been a little bit more subdued about their attempts to manipulate the regulation that would be a normal outcome of the crisis.

  • 10:56:28

    MORGENSONThey haven't. They have been aggressive. They have been absolutely swaggering around Washington, and I think it is an enormous -- points to an enormous problem with the dysfunction of Washington today. People like you and me, we do not have a voice in Washington. People on Wall Street have a very loud voice, and they have a very big megaphone.

  • 10:56:52

    REHMAnd we'll leave it at that, continuing to try to focus our small megaphone on these issues and how they occur. Thank you, Gretchen Morgenson of The New York Times, Kathryn Dick of the Promontory Financial Group, Michael Greenberger of the University of Maryland. Thanks to all of you for listening. I'm Diane Rehm.

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