Is JPMorgan a farmer?

How the nation's biggest banks use the little-covered House Agriculture Committee to gut regulations

Topics: JP Morgan Chase, Jamie Dimon, U.S. House of Representatives, Agriculture, Derivatives, Wall Street, donations, ,

Is JPMorgan a farmer?JPMorgan Chase CEO Jamie Dimon (Credit: AP/J. Scott Applewhite/smereka via Shutterstock/Salon)

Imagine you’re a finance lobbyist and want to move deregulation and other industry-friendly policies through Congress. While you might think the House Financial Services Committee would be the logical place to do it — since it has jurisdiction over financial issues, naturally — what if there were a sneaky way to maneuver it through a far less scrutinized committee, so most people would have no idea what you were doing?

This is the story of how the world’s largest banks came to love the House Agriculture Committee.

In Washington, we often witness politicians forgetting the lessons of a year or five years or 10 years ago. It takes some special obliviousness to forget the lessons of Friday. Five days ago, Sen. Carl Levin, D-Mich., delivered a critical report and held an explosive hearing detailing the “London Whale” trades, made by a JPMorgan Chase satellite office in London. As you may have read, these trades turned sour and led to a $6.2 billion loss for the bank in a matter of weeks. More important, JPMorgan misled regulators about the nature of the trades, altered its internal processes to take on more risk, and then hid the losses by improperly mismarking the value on its balance sheet, pretending the shortfall was inconsequential to avoid oversight and present a positive financial picture to investors.

The Whale trades, which totaled $157 billion at their peak, are known to the industry as derivatives, massive bets on bets that present outsize risk to financial institutions and the broader economy. And of course, derivatives helped fuel the financial crisis of 2008.

But less than a week after the Levin report, the House Agriculture Committee will hold a markup session today on seven bills designed to gut derivatives regulations passed in the Dodd-Frank financial reform law. If the bills pass, practically every improper and illegal action that JPMorgan Chase took in the London Whale debacle would be either made legal or allowed to foster outside of regulatory oversight. It borders on unthinkable that lawmakers on both sides of the aisle would pick this moment to undermine derivatives rules, right when we get a case study in the dangers of bank misuse of derivatives. (As Bartlett Naylor of Public Citizen told Salon, “At least the NRA isn’t proposing that all citizens should be allowed to own surface-to-air missiles in their homes.”)



You may be asking yourself why some bills on financial regulation run through the House Agriculture Committee. It turns out that the Agriculture Committees have held jurisdiction over derivatives since the mid-19th century, when farmers used derivatives to achieve stability over future prices. Traders still use derivatives for corn and other commodities, but the world of derivatives has grown far more sophisticated over the decades. Nevertheless, congressional committees zealously guard their jurisdictions, and so a bunch of lawmakers from rural states get to determine a major aspect of financial policy.

It’s not as if the House Financial Services Committee actually has more expertise on these issues; most members of Congress take their cues from what they hear from financial lobbyists. All those Wall Street campaign contributions don’t hurt, either. But one advantage the finance lobby gains by working deregulation through the Ag Committee is that they can work in relative anonymity. The Ag Committees simply garner less attention from the press and the public at large, making it easier for Big Finance to operate.

To see how this all works, just look at the hearing on these derivatives bills, held last week. When Ag Committee chairman Frank Lucas wasn’t openly parroting industry scare tactics about energy price spikes from regulation, he called on a list of witnesses that included four industry trade group representatives and one public advocate from Americans for Financial Reform, Wallace Turbeville. (He did great.) Or for an even clearer indication, read these PowerPoint slides created for Ag Committee staff by the Coalition for Derivatives End-Users, an industry-backed lobbyist organization. This extremely one-sided perspective on the issue simply becomes the default position for committee members and their staffs, an example of the “cognitive capture” in D.C. that sidelines alternative voices. And it all happens under the radar.

In this case, a bipartisan collection of Wall Street-friendly congressmen pitched these bills to the Ag Committee as mere “technical corrections” that would prevent “unintended consequences.” In the House, the effort is led by Jim Himes, a former Goldman Sachs vice president who represents the Connecticut bedroom communities of Wall Street traders. Himes, who has aggressively defended the bills, was also just named the national finance chairman of the Democratic Congressional Campaign Committee, the campaign arm for House Democrats. So this effort to bestow gifts on Wall Street comes from the very congressman who has to raise money for his colleagues in the midterm elections, presumably from the same bankers he’s aiding. And of course, his role as finance chair makes him extremely important to his fellow members, who then trust him as he drops legislation to gut derivatives rules.

What we get in the end is a set of bills with Orwellian titles like the “Swaps Regulatory Improvement Act” and the “Inter-Affiliate Swap Clarification Act.” But amid all this improving and clarifying is a near-total rollback of the mild derivatives regulation that made it through Dodd-Frank. For example, HR 992, the aforementioned “Swaps Regulatory Improvement Act,” would virtually nullify Section 716 of Dodd-Frank, the so-called push-out rule. One of the bigger problems with the London Whale trade is that they gambled with “excess deposits,” funds deposited by ordinary Americans that had not been loaned out. JPMorgan was essentially gambling with FDIC-insured money, secure in the knowledge that major losses would be borne by the public while profits would stay in the bank. Section 716 would push out derivatives activity to a separate, fully regulated subsidiary backed by its own capital and responsible for its own risks, far from the insured deposits.

But HR 992 massively expands the exemptions to Section 716, allowing virtually any kind of derivative risk to remain housed inside the insured depository institutions. Marcus Stanley of Americans for Financial Reform writes that, “HR 992 is supported by major Wall Street banks for one simple reason – because it is cheaper for them to engage in derivatives dealing when their activities receive a public subsidy through access to the taxpayer-supported safety net.”

The other bills in today’s markup travel well-worn paths the financial industry uses to work in the shadows. HR 677, the “Inter-Affiliate Swaps Clarification Act,” would allow financial entities to move swaps, a type of derivative, between its various affiliates. It’s not difficult for JPMorgan Chase or Goldman Sachs to shift their derivatives into any one of literally thousands of affiliates, especially those that afford the least possible oversight of their activities.

Another bill limits jurisdiction by the Commodity Futures Trading Commission on derivatives trades outside the U.S. – precisely the kinds of trades we saw U.S. bank JPMorgan Chase engage in at its London office. Another bill would force the CFTC to make a number of new “cost-benefit” analyses on any proposed rules, simply forcing delays in rule making that banks and their lobbyists exploit to maintain the status quo. Wall Street has become so successful at these delaying tactics that only one-third of the proposed rules under Dodd-Frank have been implemented.

I asked Bartlett Naylor of Public Citizen what would be the worst possible outcome if these Wall Street-backed Ag Committee bills passed into law. “The worst would be an inter-affiliate swap, hidden, moves trades from the U.S. to the U.K., escapes oversight, blows up, and the trades are located inside the bank, which now needs a bailout.” This describes almost exactly the London Whale trade, proving why this activity must be tightly regulated in the public interest.

About the only time any Agriculture Committee has approved firm regulation on derivatives trading in recent memory came in 2010, when Blanche Lincoln, spooked by a progressive-led primary challenge, unexpectedly cracked down on the industry in an effort to strike a populist pose.

This shows the power of making meaningful change in Washington simply by raising awareness of an issue. Wall Street and their allies in Congress hope you forget this lesson, turn away from what’s happening in the House Agriculture Committee today, and let them roll back any restrictions on the very activities that could cause another financial crisis. And they really hope you’ll think that all the Agriculture Committee does all day is talk about agriculture.

David Dayen

David Dayen is a contributing writer for Salon. Follow him on Twitter at @ddayen.

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 11
  • Close
  • Fullscreen
  • Thumbnails

    Ten spectacular graphic novels from 2014

    Beautiful Darkness by Fabien Vehlmann & Kerascoët
    Kerascoët's lovely, delicate pen-and-watercolor art -- all intricate botanicals, big eyes and flowing hair -- gives this fairy story a deceptively pretty finish. You find out quickly, however, that these are the heartless and heedless fairies of folk legend, not the sentimental sprites beloved by the Victorians and Disney fans. A host of tiny hominid creatures must learn to survive in the forest after fleeing their former home -- a little girl who lies dead in the woods. The main character, Aurora, tries to organize the group into a community, but most of her cohort is too capricious, lazy and selfish to participate for long. There's no real moral to this story, which is refreshing in itself, beyond the perpetual lessons that life is hard and you have to be careful whom you trust. Never has ugly truth been given a prettier face.

    Ten spectacular graphic novels from 2014

    Climate Changed: A Personal Journey Through the Science by Philippe Squarzoni
    Squarzoni is a French cartoonist who makes nonfiction graphic novels about contemporary issues and politics. While finishing up a book about France under Jacques Chirac, he realized that when it came to environmental policy, he didn't know what he was talking about. "Climate Changed" is the result of his efforts to understand what has been happening to the planet, a striking combination of memoir and data that ruminates on a notoriously elusive, difficult and even imponderable subject. Panels of talking heads dispensing information (or Squarzoni discussing the issues with his partner) are juxtaposed with detailed and meticulous yet lyrical scenes from the author's childhood, the countryside where he takes a holiday and a visit to New York. He uses his own unreachable past as a way to grasp the imminent transformation of the Earth. The result is both enlightening and unexpectedly moving.

    Ten spectacular graphic novels from 2014

    Here by Richard McGuire
    A six-page version of this innovative work by a regular contributor to the New Yorker first appeared in RAW magazine 25 years ago. Each two-page spread depicts a single place, sometimes occupied by a corner of a room, over the course of 4 billion years. The oldest image is a blur of pink and purple gases; others depict hazmat-suited explorers from 300 years in the future. Inset images show the changing decor and inhabitants of the house throughout its existence: family photos, quarrels, kids in Halloween costumes, a woman reading a book, a cat walking across the floor. The cumulative effect is serene and ravishing, an intimation of the immensity of time and the wonder embodied in the humblest things.

    Ten spectacular graphic novels from 2014

    Kill My Mother by Jules Feiffer
    The legendary Pulitzer Prize-winning cartoonist delivers his debut graphic novel at 85, a deliriously over-the-top blend of classic movie noir and melodrama that roams from chiaroscuro Bay City to Hollywood to a USO gig in the Pacific theater of World War II. There's a burnt-out drunk of a private eye, but the story is soon commandeered by a multigenerational collection of ferocious women, including a mysterious chanteuse who never speaks, a radio comedy writer who makes a childhood friend the butt of a hit series and a ruthless dame intent on making her whiny coward of a husband into a star. There are disguises, musical numbers and plenty of gunfights, but the drawing is the main attraction. Nobody convey's bodies in motion more thrillingly than Feiffer, whether they're dancing, running or duking it out. The kid has promise.

    Ten spectacular graphic novels from 2014

    The Motherless Oven by Rob Davis
    This is a weird one, but in the nervy surreal way that word-playful novels like "A Clockwork Orange" or "Ulysses" are weird. The main character, a teenage schoolboy named Scarper Lee, lives in a world where it rains knives and people make their own parents, contraptions that can be anything from a tiny figurine stashable in a pocket to biomorphic boiler-like entities that seem to have escaped from Dr. Seuss' nightmares. Their homes are crammed with gadgets they call gods and instead of TV they watch a hulu-hoop-size wheel of repeating images that changes with the day of the week. They also know their own "death day," and Scarper's is coming up fast. Maybe that's why he runs off with the new girl at school, a real troublemaker, and the obscurely dysfunctional Castro, whose mother is a cageful of talking parakeets. A solid towline of teenage angst holds this manically inventive vision together, and proves that some graphic novels can rival the text-only kind at their own game.

    Ten spectacular graphic novels from 2014

    NOBROW 9: It's Oh So Quiet
    For each issue, the anthology magazine put out by this adventurous U.K.-based publisher of independent graphic design, illustration and comics gives 45 artists a four-color palette and a theme. In the ninth issue, the theme is silence, and the results are magnificent and full of surprises. The comics, each told in images only, range from atmospheric to trippy to jokey to melancholy to epic to creepy. But the two-page illustrations are even more powerful, even if it's not always easy to see how they pertain to the overall concept of silence. Well, except perhaps for the fact that so many of them left me utterly dumbstruck with visual delight.

    Ten spectacular graphic novels from 2014

    Over Easy by Mimi Pond
    When Pond was a broke art student in the 1970s, she took a job at a neighborhood breakfast spot in Oakland, a place with good food, splendid coffee and an endlessly entertaining crew of short-order cooks, waitresses, dishwashers and regular customers. This graphic memoir, influenced by the work of Pond's friend, Alison Bechdel, captures the funky ethos of the time, when hippies, punks and disco aficionados mingled in a Bay Area at the height of its eccentricity. The staff of the Imperial Cafe were forever swapping wisecracks and hopping in and out of each other's beds, which makes them more or less like every restaurant team in history. There's an intoxicating esprit de corps to a well-run everyday joint like the Imperial Cafe, and never has the delight in being part of it been more winningly portrayed.

    Ten spectacular graphic novels from 2014

    The Shadow Hero by Gene Luen Yang and Sonny Liew
    You don't have to be a superhero fan to be utterly charmed by Yang and Liew's revival of a little-known character created in the 1940s by the cartoonist Chu Hing. This version of the Green Turtle, however, is rich in characterization, comedy and luscious period detail from the Chinatown of "San Incendio" (a ringer for San Francisco). Hank, son of a mild-mannered grocer, would like to follow in his father's footsteps, but his restless mother (the book's best character and drawn with masterful nuance by Liew) has other ideas after her thrilling encounter with a superhero. Yang's story effortlessly folds pathos into humor without stooping to either slapstick or cheap "darkness." This is that rare tribute that far surpasses the thing it celebrates.

    Ten spectacular graphic novels from 2014

    Shoplifter by Michael Cho
    Corinna Park, former English major, works, unhappily, in a Toronto advertising agency. When the dissatisfaction of the past five years begins to oppress her, she lets off steam by pilfering magazines from a local convenience store. Cho's moody character study is as much about city life as it is about Corinna. He depicts her falling asleep in front of the TV in her condo, brooding on the subway, roaming the crowded streets after a budding romance goes awry. Like a great short story, this is a simple tale of a young woman figuring out how to get her life back, but if feels as if it contains so much of contemporary existence -- its comforts, its loneliness, its self-deceptions -- suspended in wintery amber.

    Ten spectacular graphic novels from 2014

    Through the Woods by Emily Carroll
    This collection of archetypal horror, fairy and ghost stories, all about young girls, comes lushly decked in Carroll's inky black, snowy white and blood-scarlet art. A young bride hears her predecessor's bones singing from under the floorboards, two friends make the mistake of pretending to summon the spirits of the dead, a family of orphaned siblings disappears one by one into the winter nights. Carroll's color-saturated images can be jagged, ornate and gruesome, but she also knows how to chill with absence, shadows and a single staring eye. Literary readers who cherish the work of Kelly Link or the late Angela Carter's collection, "The Bloody Chamber," will adore the violent beauty on these pages.

  • Recent Slide Shows

Comments

0 Comments

Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>