I may love nostalgia, but in my desire to travel back in time, 2008 isn't one of the top settings on my way-back machine. Yet last month's drama of JPMorgan Chase losing $2 billion put me right back into those fun days of the implosion of Lehman Brothers—and the resultant Great Recession.
In a story that's still developing, a failed hedging strategy could cost JPMorgan—one of the “good guy” banks of the meltdown—as much as $5 billion, depending on who you ask.
Of course, heads rolled over the situation—with the exception of the noggin of JPM Chair and CEO Jamie Dimon, whom stockholders rewarded with a vote of confidence and a $23 million pay package. Not bad for a guy who just cost the company billions and publicly stated of the bank's little math mishap: “We know we were sloppy. We know we were stupid. We know there was bad judgment.”
Some observers say there's little to fear from the incident. A $5 billion loss is chump change to JPM, which reported profits of $19 billion in 2011. But others are concerned that the current language of the Dodd-Frank Act allows banks to play fast and loose with other people's money through portfolio hedging.
What's truly mind-boggling is that even with more regulation, something like this could happen—a scant 4 years after the events that culminated in a financial disaster we still haven't recovered from.
When the 2008 meltdown hit, many insurance people were rightfully indignant about being painted with the same brush as the banks and investment firms behind the crash. That issue is still alive and well today, with insurance companies that own and operate savings & loans under the microscope (see “Insurers Face New Federal Regulation from Federal Reserve” at propertycasualty360.com).
The core of the issue lies with the Volcker Rule, which prohibits financial firms under FDIC protection from proprietary trading for their own account. And although the SEC is considering an exemption for insurers, the issue is far from settled.
Back during that other Depression, Congress passed the Glass-Steagall Act, which erected the firewall between banks and insurance. The wall came down in 1999 with Gramm-Leach-Bliley, giving banking and insurance free rein to intermingle.
Once upon a time, both banking and insurance were synonymous with security, stability and strength. For banks, that image has been tarnished by risky schemes like JPM's.
The armageddon that some in the insurance industry feared from bank/insurance blending may not have come to pass, but even deregulation's biggest supporters have to admit that the resulting growth of complex financial derivatives has been a thorn in the side of the conservative-by-nature insurance industry.
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