Orcun Kahyaoglu
JPMorgan Chase
is one of the oldest, largest and best-known financial institutions in the
world. The firm was chartered in New York City in 1799, and it was built on the
foundation of more than 1200 predecessor institutions. Its major heritage firms
are J.P. Morgan, Chase Manhattan, Chemical, Manufacturers Hanover and Bank One,
First Chicago, and National Bank of Detroit. They were tied closely for
innovations in finance and the growth of the United States and global
economies. These firms also made significant contributions to their local
communities. JP Morgan Chase was formed in 2000 with the merger of Chase Manhattan Corporation
and J.P. Morgan
& Co. In 2008, JPMorgan Chase & Co. acquired The Bear
Stearns Companies Inc. and the deposits, assets and certain liabilities of
Washington Mutual's banking operations. These acquisitions not only
strengthened the firm’s capabilities across a broad range of businesses,
including prime brokerage, cash clearing and energy trading globally, but also
expanded its consumer branch network into California, Florida and Washington
State and created the nation's second-largest branch network with locations
reaching 42% of the U.S. population (JPMorgan Chase & Co.).
There are some
facts that brought JP Morgan Chase into trouble. Issuing huge amounts of credit
derivatives is one of the facts. Tett states in her book that JP Morgan did not
invent credit derivatives, it was the first to “industrialize” them;
mass-producing derivative deals which could cover large numbers of loans at
once (2009, p.46). JP Morgan aimed to block regulatory capital requirements by
issuing those credit derivatives. The company successfully convinced regulators
that it could use credit derivatives to shift risk associated with the loans it
made. Hence, it did not need to divide capital to cover losses in the event
that borrowers defaulted. With credit derivatives, JP Morgan not only succeeded
in shifting risks off its own books, but also created a rapidly expanding market,
which raked in billions in fees for financial institutions (Tett, 2009). As a
second fact, when Jamie Dimon became CEO of JP Morgan in 2006, he set the goal
of diversifying its trading department into mortgage-backed securities, an area
where his competitors were getting huge profits. By mid-2006, JP Morgan hired
bankers to expand its CDO team and got to work. McLaughlin reported that in
2007 the number of subprime mortgages that JP Morgan Chase had originated
jumped by 11% in first quarter of the year (2007). Eisinger & Bernstein
argue that Magnetar which is a hedge fund that specialized in betting against
the US mortgage market, JPMorgan Chase, and other financial institutions
enabled the housing crisis to grow into a critical financial crisis by finding
markets for risky assets, in spite of indications that there were problems in
the housing market (2010).
In 2004, the
bank agreed to buy Bank One, creating a $1.1 trillion bank holding company. JP
Morgan Chase acquired Bear Stearns on March 18, 2008, for $10 per share. On
September 25, 2008, the FDIC closed Washington Mutual, and the bank was sold to
JPMorgan Chase for $1.9 billion (Cho & Irwin, 2008). JP Morgan's growing
strategy, lead them to become a "too big to fail" bank, requiring
government support during the financial crisis. On October 28, 2008 the
Treasury Department started the Capital Purchase program; therefore, JP Morgan
was among the eight large U.S. banks to receive the Treasury Department's
initial round of capital investments and received $25 billion of TARP funds
(ProPublica, 2012).
JP Morgan is
always using its contacts to obtain government contracts. For example, the most
recent one is that the bank has hired former U.S. Securities and Exchange
Commission enforcement chief William McLucas to help respond to SEC’s investigations,
enforcement actions, and regulatory probes of the firm’s $2 billion trading
loss in May 2012. Stephen Cutler who is JPMorgan’s general counsel and most
senior lawyer, also previously served as the head of enforcement at the SEC and
worked with McLucas (Gallu & Kopecki, 2012). The Senate Banking Committee
respond to JP Morgan’s loss in customer money because of a risky trading
strategy. However the bank has already been ready for any action because the
staff director for the Senate Banking Committee was Dwight Fettig who is a former J.P.
Morgan lobbyist. He was hired to work on financial services
regulatory reform and the Restoring American Financial Stability Act of 2009.
He oversaw the hearings on J.P. Morgan’s risky proprietary trading and moving
through the revolving door. K Street is the center of lobbying firms in Washington,
DC. K Street lobbyists occupy some of the most important positions in Congress.
In 2010 these lobbyists were hired by some Republicans in Congress as their
chiefs of staff. Chairman Rep. Spencer Bachus commented about the recent
trading loss of JP Morgan to the press and defended the bank’s decision. In
addition, Senator Mark Warner is one the JP Morgan’s defenders in Capitol Hill
invested the bank’s hedge fund, which was clashed by Dodd-Frank reforms on
proprietary trading (Fang, 2012).
JP Morgan sends
former government officials to lobby the regulators who are working on the
rules for Dodd-Frank. The bank used its team that is included a former
assistant secretary of the Treasury and a former official of the Fed for the
discussions with Treasury officials and Fed officials. It is stated that the
bank has at least 36 contacts with federal regulators since August 2010 (Khimm,
2012).
There is also a
revolving door between JP Morgan and House Finance Committee. The bank has
three lobbyists who are serving in-house. Rick Lazio is the chief government
relations of the bank served as a congressman from New York from 1993 to 2000, Tom
Koonce is a lobbyist who was the legislative director for Brad Miller, and Bart
Gordon who was a former Democratic congressman from Tennessee. In 2012 election
period, JP Morgan has given $168,000 to members of the committee (Currier,
2012).
JP Morgan Chase
predicted in 2010 that the newly Republican-controlled U.S. House will create
conflict with the still-Democratic-controlled U.S. Senate to the point where
progress on large legislation is completely failed, according to a confidential
memorandum dated Nov. 3 and obtained by Open Secrets Blog (Wilson, 2010). In
the memo it is speculated that the tax cuts signed into law by President George
W. Bush will be extended for at least one year, questioning whether the administration
can find support for extending only the tax breaks for middle-class filers. The
memo generally does not provide deep detail of the JP Morgan Chase’s lobbying
strategies, but it maintains the company will have “newfound opportunities to
play a constructive role in the development of important public policies”
(Wilson, 2010, para. 8). JPMorgan Chase has spent $5.8 million in 2009 to lobby
the federal government. In 2010, the firm has spent $6.1 million, according to
a Center for Responsive Politics analysis of lobbying reports. Wilson
also states that the JPMorgan Chase memo offers President Barack Obama some clear
criticism, noting Obama will be under pressure to reach beyond the Congress and
appeal directly to the American people for support. Going forward with the new
112th Congress, JPMorgan Chase concludes that the Obama administration will
pursue less aggressive legislative goals at the same time it uses its
regulatory powers to continue pushing its agenda.
JP Morgan gives
money to the campaigns of the people on Senate Banking Committee. Moreover, the
bank has been the second largest contributor to Senator Tim Johnson, Democrat,
and the chairman of the committee. JP Morgan was also one of the biggest donors
of both President Obama’s and John McCain’s campaign in 2008. Bill Moyers also
stated that one of Senator Johnson's former staffers is now one of JPMorgan's
chief lobbyists and the chairman's present top assistant used to be a lobbyist
for a law firm that worked for JPMorgan. Based on the Federal Election
Commission data released on September 2011, JP Morgan has contributed $808,799
to the Obama’s election campaign.
The CEO of JP
Morgan, Dimon, had a few problems with new regulations in the Dodd-Frank
financial reform bill, including the so-called Durbin amendment, which prevents
banks from charging fees on debit card use. Until the
recent trading loss of $2 billion, Dimon had been one of the most effective
critics of the Dodd-Frank Act, but now he accepts the case for why limits on
risky trades by big banks are needed (Schroeder, 2012).
To sum up, JP
Morgan Chase is deeply integrated to the revolving door and the political
economy of financial regulation issues. Its lobbying team, and in-committee and
in-company lobbyists are always in contact with the federal regulators. By this
way, it can receive funds from federal government in case of any need and
control the contracts of regulators. Being the largest bank of the U.S., it has
total assets of $2.2 trillion and such a huge amount requires huge connections.
Although these kinds of relationships seem unethical, large-scale financial
institutions have to have such connections in order to survive in the market.
Cho, D., & Irwin, N. (2008). The
Washington Post. J.P. Morgan Raises Its
Offer for Bear Stearns. Retrieved from: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/24/AR2008032400265.html
Currier, C. (2012). The revolving door between JPMorgan Chase and the House Finance
Committee. Retrieved from: http://www.alaskadispatch.com/article/revolving-door-between-jpmorgan-chase-and-house-finance-committee
Eisinger, J. & Bernstein, J. (2010). The Magnetar Trade: How One Hedge Fund
Helped Keep the Bubble Going. Retrieved from: http://www.propublica.org/article/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going
Fang, L. (2012). Republic Report. Former J.P.
Morgan Lobbyist Manages The Banking Committee Expected To Investigate J.P.
Morgan’s Trading Loss. Retrieved from: http://www.republicreport.org/2012/jpmorgan-banking-committee/
Gallu, J., & Kopecki, D. (2012).
Bloomberg. JPMorgan Hires Ex-Sec
Enforcement Chief McLucas In Probes. Retrieved from: http://www.bloomberg.com/news/2012-05-22/jpmorgan-said-to-hire-ex-sec-enforcement-chief-mclucas.html
JPMorgan Chase & Co. (n.d.). History of Our Firm. Retrieved from: http://www.jpmorganchase.com/corporate/About-JPMC/jpmorgan-history.htm
Khimm, S. (2012). The Washington Post. How JPMorgan Exploits Washington’s Revolving
Door. Retrieved form: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/06/21/how-jpmorgan-exploits-washingtons-revolving-door/
McLaughlin, T. (2007). Reuters. JPMorgan Quietly Climbs Subprime Ladder. Retrieved
from: http://www.reuters.com/article/2007/06/01/idUSN3041717020070601
ProPublica. (2012). Capital Purchase
Program. The ‘Healthy Bank’ Program. Retrieved
from: http://projects.propublica.org/bailout/programs/1-capital-purchase-program
Schroeder, P. (2012). JPMorgan mess could strengthen Democrat
efforts with Dodd-Frank. Retrieved from: http://thehill.com/blogs/on-the-money/banking-financial-institutions/226983-jp-morgan-mess-boosts-dems-efforts-with-dodd-frank
Tett, G. (2009). Fool's Gold: How the
Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed
and Unleashed a Catastrophe. New York: Free Press
No comments:
Post a Comment