JPMorgan Chase Threatens The US Financial Stability by Patrick Watson, Mauldin Economics
America’s largest banks are still too big to fail, but Jamie Dimon’s JPMorgan Chase is especially dangerous.
A stark warning appears in a joint Federal Reserve — FDIC “feedback letter” on JPMorgan Chase’s latest Resolution Plan, a kind of “living will” that large banks must file.
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In theory, the resolution plans, which the agencies released on April 13, assure the banks can stage an orderly liquidation if events render them insolvent. The goal is to avoid another 2008-style Lehman Brothers meltdown.
Difficult? Yes, but not impossible. Citigroup (C) passed while Goldman Sachs (GS) and Morgan Stanley (MS) earned partial passing grades.
The good news ends there.
JPMorgan Chase (JPM) failed, as did Bank of America (BAC), Wells Fargo (WFC), State Street (STT) and Bank of New York Mellon (BK).
Shame on all of them, but what’s odd here is that JPMorgan Chase failed differently.
All the feedback letters have a section called “Legal Entity Rationalization.” It deals with corporate structural issues that might impede an orderly wind-down.
In that section of JPMorgan Chase’s feedback letter, the Fed and FDIC said the bank should “mitigate risks that, if not overcome, could otherwise undermine successful execution of the preferred strategy and, more broadly, pose serious adverse effects to the financial stability of the United States.”
Read that again and let it sink in. Here is the full paragraph.
JPMorgan Chase’s feedback letter
The Fed didn’t say this to Bank of America, Wells Fargo or the others. The “deficiency,” whatever it is, apparently exists only at JPMorgan Chase.
So, it appears something about JPMorgan Chase is so uniquely dangerous that it could harm “the financial stability of the United States.”
(Don’t believe me? Read the official press release yourself. At the bottom you’ll see links to each bank’s feedback letter. The quote above is on page 11 of the JPM letter.)
Back in 2014, I wrote about Janet Yellen’s cavalier attitude that left banks still vulnerable to crisis collapse.
Back then, Sen. Elizabeth Warren (D-Mass.) took Yellen to task in a Capitol Hill hearing. The senator noted that JPMorgan Chase at the time had 3,391 subsidiary entities. We don’t know how many they have today, but apparently more than the Fed considers “rational.”
Exchange between Sen. Elizabeth Warren and Fed Chair Janet Yellen, July 15, 2014.
Yellen seems to have woken up since 2014. Fed chairs use the kind of language we see in the JPM letter only after very serious, high-level consultation.
How high level?
Two days before the Fed released the feedback letters, Janet Yellen had a short-notice private meeting with President Obama and Vice President Biden.
The White House said they discussed, among other things, “potential risks to the economy, both in the United States and globally.” Does Yellen think JPMorgan Chase is one of those risks?
I don’t know, but it’s certainly fair to wonder when we see such dire language.
It’s also fair to wonder why the Fed and FDIC aren’t moving more aggressively to control this mysterious risk. The nation’s financial stability is in peril, and their only visible response is to send JPM a strongly worded letter?
Maybe that’s all Obama would allow. We saw last year how his administration changed the rules to protect JPM and other convicted-felon banks from losing business.
Maybe the Fed and FDIC are quietly working to resolve the problem. We should all hope so.
If JPMorgan Chase collapses like Lehman Brothers did, no one will escape unharmed.
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