JP Morgan Chase CEO Jamie Dimon has an op-ed in The Wall Street Journal that does an impressive tightrope walk of spin and pandering. The language of the article is apologetic, though sometimes unnecessarily so. He writes:
Above all, no matter what the regulatory framework is, it means recognizing that our accountability is not only to our shareholders, customers and employees, but also to the broader public. The gulf that grew between Wall Street and Main Street has hurt everyone. Americans must see that the work we are doing is not just about earning a profit, but also about creating value that helps consumers, small businesses, government agencies, nonprofits and the whole economy.
I disagree that Wall Street must be held accountable to Main Street, that kind of thinking skews investment decision making processes as much as government regulations, but I do agree that Americans should realize that the profit Wall Street earns is a good thing, a sign that the nation is moving forward, growing, prospering. Profit isn’t bad. And a rising tide lifts all ships.
On the spin side, as Noam Scheiber also points out, he somehow manages to support tougher regulations for financial products that drive his competitors, while favoring a lighter touch for his bread and butter. On derivatives, a $5 billion cash cow for JPMC in 2008, Dimon writes:
We applaud the administration’s plans to expand the use of the central clearing house for standardized “over-the-counter” derivatives traded between significant financial institutions. However, let’s not forget that businesses large and small still need customized derivative products to hedge risk. These products are not easily traded on an exchange, and there are serious economic, competitive and systemic consequences for doing so.
I do agree with Dimon on this point. An open exchange for derivatives would allow for anyone in the market to see what the value of certain insurance contracts was at any given moment. Significantly, it would also standardize the types of contracts (as part of the private sector changes plan to do). While the transparency is helpful for bringing more knowledge into the market, the limitations of standardization destroy much of the value derivatives offer in the first place, decreasing the number of investors. Allowing a financier to craft a unique contract based on the needs of the consumer is an important part of the success of these types of financial products.
In the late 1990s, Jersey City created a unique security from pools of collateralized residential tax liens. Investors, buying up millions of this special derivative wound up keeping the city from going into bankruptcy (because the city was struggling under the weight of unpaid liens). Under current proposals for standardizing the trade of derivatives, this type of contract would not have been allowed.
The flexibility of financial products, matching financier with consumer, is a key part of the wealth creation process. If derivative regulation moves forward, lawmakers should consider how to best structure standardized derivatives on an exchange while allowing for product innovation, maximizing the creation of wealth. As the private sector changes to processing OTC derivatives suggest, it is possible to standardize some of these financial products while leaving others open to meeting consumer demand with provider services and vehicle structure.
Consider the Dimon op-ed another salvo fired into treaturous territory of regulation overhaul. A battle that is being overshadowed by health care and environment debates, but is just as hot and complicated.