Comment Text:
Chairman Gensler,
I pass along the following to express my view of the regulations that should come out of Dodd-Frank. I hope it's helpful. Thank you.
14 May 2012
Senator Levin,
Bloomberg reports today that the play that caused the $2 billion loss at JP Morgan was a sale of up to $100 billion in insurance protection for an index of highly rated corporate bonds. That is, they were taking premium payments from holders of that index in exchange for JP Morgan’s guarantee against any losses those holders might suffer due to a default on those indexed bonds. The article says the CIO at Morgan MAY have BOUGHT an offsetting hedge insurance position. The loss Morgan disclosed on Thursday evening is the mark-to-market difference in those two insurance positions, I gather. If they didn’t buy an insurance hedge for themselves, I wonder if they set aside reserves from the premium payments to cover claims. Bloomberg further says that the $100 billion comes from deposits that haven’t been loaned out, an idle liability of $360 billion. Dimon decided several years ago to turn those surplus deposits into a profit center!
Senator, there is a big difference between putting idle deposits in Treasuries and selling insurance on corporate debt. Back in the early 1980’s, when interest rates were approaching 20%, savings and loans were going broke because depositors were taking the money out of S&L’s, which could only pay a nominal interest of, like, 4%, and putting it in money market funds. To prevent a collapse, Congress and the regulators decided to let S&L management take ownership positions in all kinds of investments, from golf courses to residential real estate to whatever. We know how that policy toward risk management worked out! Bankers have caused two systemic financial crises since 1981. They have told us beguiling stories about how deregulation would fix all problems or that it is in bankers’ self-interest to regulate themselves. After the S&L debacle, we should never again have believed them.
Occupy the SEC has submitted a comment letter to the regulators in which they described in detail the loopholes in the language of Section 619 of Dodd-Frank. I’ve read about 100 pages of it and it pretty much says that bankers will get their lawyers to find those loopholes and use them to circumvent the regulators. I believe them. The king of risk management, Jamie Dimon, has just disclosed that that is what he has done. He went into the insurance business with depositors’ funds!
These people cannot be trusted. Congress needs to importune the regulators to draft bright line regulations and then fund their agencies so they’ll be able to hire staff sufficient to enforce those regulations. If that doesn’t work, the firewalls between investment and commercial banking in Glass-Steagall must be re-enacted. Or these banks must be broken up. Depositors could always remove their funds from these banks. That’s called a bank run and would do the economy no good. I hope this is helpful. Thank you.
Robert Abbott
Reno, NV
