By Simon Johnson. An edited version of this short post appeared today on the NYT.com’s Room for Debate: “Are Global Banking Rules Anti-American?”
Jamie Dimon claims that the new rules on bank capital “anti-American” because they somehow discriminate against American banks and American bankers. This framing of the issues is misleading at best.
The term “bank capital” is often poorly explained in the debate on this issue. It is just a synonym for equity – meaning the amount of a bank’s activities that are financed with shareholder equity, rather than debt. The advantage of equity is that it is “loss absorbing,” meaning that it takes losses and must be wiped out in full before any losses fall on creditors.
More capital means that a bank is safer, both from the perspective of shareholders and for creditors. Bankruptcy has become less likely. Continue reading
JP Morgan Debacle Reveals Fatal Flaw In Federal Reserve Thinking
By Simon Johnson
Experienced Wall Street executives and traders concede, in private, that Bank of America is not well run and that Citigroup has long been a recipe for disaster. But they always insist that attempts to re-regulate Wall Street are misguided because risk-management has become more sophisticated – everyone, in this view, has become more like Jamie Dimon, head of JP Morgan Chase, with his legendary attention to detail and concern about quantifying the downside.
In the light of JP Morgan’s stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model. But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed. Continue reading →
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Tagged Jamie Dimon, JP Morgan