Would Dismantling JPMorgan Chase Prevent Financial Meltdown?

By Lowell Ponte, Special for  USDR

Would America’s economy be safer if today’s “Too Big To Fail” banks like JPMorgan Chase were broken up into smaller companies?

Not according to Craig R. Smith and Lowell Ponte, authors of Don’t Bank On It! The Unsafe World of 21st Century Banking and a new White Paper After the G-20: A Follow-Up: Did Your Dollars in the Bank Just Become Dollars at Risk?

“To halt the collapse of ‘Too Big To Fail’ banks during the 2008-2009 financial crisis, taxpayers and the Federal Reserve bailed out the biggest U.S. and foreign banks by arranging an astonishing $16.115 Trillion in loans – more than the entire annual Gross Domestic Product of the United States,” Smith and Ponte document. [1]

CNN/Money reports JPMorgan Chase – which today is America’s biggest bank by assets – received $25 Billion from the U.S. Treasury’s Capital Purchase Program, and $391 Billion in “Total Transactional Amounts” from various sources facilitated by the Federal Reserve, as bailouts. [2]

On January 5, 2015, analysts at rival bank Goldman Sachs released their study showing that if JPMorgan Chase were today broken up into smaller companies, these would be worth as much as $25 Billion more than its market value today as one big bank, reports The Wall Street Journal [3]

The main reason for this, according to Goldman analyst Richard Ramsden and his colleagues, is emerging government regulation designed to make the biggest banks less profitable…and supposedly less risky.

Until these new rules were announced, the biggest five banks – which among them hold roughly half of all American bank deposits – were so huge that the bankruptcy of any one of them might trigger a collapse of the U.S. economy.

This made them what the government called “Too Big To Fail,” which reassured investors and lenders that in a crisis the government’s taxpayers and Federal Reserve would have to bail these banks out, as happened in 2008-2009. This gave giant banks such as JPMorgan the ability to borrow money more cheaply than smaller competitors.

According to Smith and Ponte, “Governments have been scrambling to prevent future bank bailouts. On November 16, 2014, President Barack Obama at the G-20 meeting of world financial powers in Brisbane, Australia, embraced the new doctrine of ‘bail-ins’ for the United States.”

“In a bank ‘bail-in,’ the government could seize the bank deposits of customers to pay bank shortfalls. In effect, in a bail-in your bank deposits are treated as the property of the bank, not the depositor,” say the authors of Don’t Bank On It!

This bail-in doctrine was first used in the seizure of banks in the Mediterranean island nation Cyprus in March 2013. Months earlier it had been embraced in a joint December 2012 memo of understanding between the Bank of England and the U.S. Federal Deposit Insurance Corporation, which “insures” more than $7 Trillion in American bank accounts.

“The trouble is,” say Smith and Ponte, “the FDIC has only enough assets and vague commitments from the Federal Reserve and U.S. Treasury to reimburse in a crisis at most 1 out of every $14 it now insures. The FDIC is thus propping up our fractional-reserve banking system with what we have called “fractional-reserve insurance.”

“New government regulations are making life more troublesome and uncertain for banks. New regulations have even prompted some of the biggest banks to tell certain depositors to take their cash elsewhere because for these banks such deposits can create more problems than profits,” according to The Wall Street Journal. [5]

Mr. Smith and Ponte explain, “The bail-in idea is intended to protect taxpayers and government money, but in reality it does not necessarily get taxpayers off the hook. The potential for bank losses is so immense it can easily exceed all of the bank’s deposits.”

Consider the nominal exposure our largest banks have to derivatives, conjured contracts that derive their value from other things.

JPMorgan’s total exposure to derivatives has in recent months declined – from around $70 Trillion to around $65.3 Trillion…close to the annual Gross Domestic Product of our entire planet. This small decline does not change the stark reality of risk discussed in Don’t Bank On It!:

“Just 9 major banks on which the world economy depends have derivative exposure of more than $290 Trillion in a global $693 Trillion derivatives market! Listen for a moment and you can hear this time bomb – called by Warren Buffett a “Financial Weapon of Mass Destruction” – ticking. If this explodes, neither the Fed nor the FDIC could put your bank or deposits back together again. The paper dollar would be ashes to ashes, dust to dust.” [6]

The Dodd-Frank law prohibited the placing of such derivatives into banks insured by the FDIC. But during the lame duck session of Congress that followed the 2014 election, this provision of Dodd-Frank was quietly repealed.

As critics noted, the language repealing this was suspiciously similar in wording to earlier draft legislation by Citigroup.  And this other megabank has just surpassed JPMorgan as the American bank with the largest total exposure to derivatives.

“Citi now has total derivative exposure of $70.3 Trillion, which has just been transferred into to a Citi-owned bank insured by FDIC. Taxpayers are very much on the hook for this, and may be at greater risk from a meltdown of derivatives than ever before,” reports Zero Hedge. [7]

In their new White Paper Smith and Ponte explain further, “Under the G-20 bailout protocols embraced by President Obama, the priority of protection for certain derivatives to which a bank is exposed is higher than it is for customer deposits. In a major financial crisis, the FDIC might be directed to cover derivatives before other obligations such as customer bank accounts.” [8]

As documented in Don’t Bank On It!, today’s politicians have come to see our largest banks and the accounts in them as their personal ATM machines

JPMorgan Chase has in recent months agreed to pay the government more than $15 Billion in fees, fines and penalties for purposed wrongdoing…mostly for helping rescue other banks as the government requested it do during the 2008-2009 financial crisis.

“In JPMorgan, as in other major banks similarly squeezed for billions, almost no bank executives have been tried or sent to prison. Those bankers who go along and pay billions get along,” say Smith and Ponte.

Today’s politicians seem more eager to shake down our biggest banks than to break them up. Like the power to tax, today’s political power to regulate involves the power to destroy.

The authors conclude; “We should be seeking ways to break up the monopoly power of Too Big To Jail government and return much of that power to the People. People need to understand that today there are far better and safer ways than bank accounts to secure their nest egg.”

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.