The JP Morgan fiasco has raised a lot of questions: how did this happen? Are regulators to blame? Is another bailout around the corner? Will taxpayers foot the bill?
On Tuesday, Guardian business reporters Jill Treanor and Dominic Rushe along with Akshat Tewary, founder of Occupy the SEC, attempted to provide some answers.
Here are a few highlights from the live chat (see the full transcript below):
On the financial industry's culture of risk
It seems to me that it is all about the message that comes down from the top of organisations. If it is all about taking risk, generating big profits, earning big bonuses and being faster than your regulator then that is the attitude that staff will adopt. If the message is about helping customers, moving money around the financial system and being forthright with regulators that should change behaviour, don't you think? –Treanor
Dodd Frank gave the Fed expansive powers to limit unreasonable compensation, especially if its promotes too much risk-taking. However the US regulators have focused more on capital and equity drawdowns that actual compensation...which is a huge drain on a bank's finances. –Tewary
The culture of bonuses is what the City and Wall Street has been about for such a long a time. The structure of bonuses in the City is changing - deferred, paid in shares etc - but the sums are still enormous compared to payout side the financial sector. Link bonuses to customer wellbeing and financial stability rather than revenue generation and I wonder what would happen... –Treanor
On the question of regulation
This incident actually shows how little we can trust the banks to vigorously apply the applicable standards. That is why we need structural reforms - ring fences or bans on prop trading. Otherwise there is too much scope for manipulation. –Tewary
It strikes me that regulatory change moved at a snail's pace. The Vickers reforms in the UK won't come in to effect until 2019 - more than 10 years after the crisis. –Treanor
This incident is particularly hurtful for Jamie Dimon and the anti-Volcker lobby as it highlights just one of the many ways that banks can skirt the Volcker regulations (i.e., by disguising prop trades as "hedges"). In my view neither the type of trade undertaken (CDS index) nor the size of the loss ( $2-4 billion) is so egregious as the manner in which these trades were done (disguising gambling as hedging). The US regulators are definitely aware of this and have confirmed so in private...hopefully that translates to tougher regulation. –Tewary
On the criminal investigation
There have only been a handful of criminal actions since the Crisis. Madoff, Raj Rajaratnam, etc. The government goes after the "big names" and the "rogue traders" while leaving the system in place largely untouched. In contrast, compare the S+L crisis from the 80's when thousands went to jail. –Tewary
Bernie Madoff rip off scheme is small change in comparison to what the credit crisis cost the global economy. That's what's so scary I think. It's not even a colossal loss for JP. They are so massive they can easily see off a $2bn loss. –Rushe
