Bank risk-taking is once again in the news with J. P. Morgan’s recent $2 to $5 billion losses (no one seems to know for sure), which occurred just when its CEO James Dimon was actively lobbying to forestall the implementation of new banking regulations. All of which makes me nostalgic for the bank that George Bailey runs in It’s A Wonderful Life (1946). The idea of the townspeople working in conjunction with a local bank to finance their community may be hopelessly passé, but it stirs something deep.
Banks, especially the big ones, have metamorphosed dramatically since the 1940’s so it was somewhat comforting to see Nobel economist and New York Times columnist Paul Krugman conjuring up the Bedford Falls bank to explain the J. P. Morgan debacle.
Krugman goes after Mitt Romney’s explanation that this is just how capitalism works. Romney, who has been campaigning against what he regards as excessive bank regulations, said,
This was a loss to shareholders and owners of JPMorgan and that’s the way America works. Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain.
Krugman begs to differ and uses It’s a Wonderful Life to press home his point:
What’s wrong with this statement? Well, suppose that someone — say, Jimmy Stewart in the movie It’s a Wonderful Life — runs a bank that takes in deposits and invests the money in various ways. And suppose that one of those investments is a risky bet on some complex financial instrument, with Mr. Potter, the evil plutocrat, on the other side.
If Jimmy Stewart’s bet pays off, we’re in Romneyworld: he’s made money, Mr. Potter has lost money, and that’s that. But suppose Jimmy Stewart loses his bet. If the bet was big enough, he no longer has enough assets to pay off his depositors. His bank collapses, probably in a chaotic bank run that takes down the whole town’s economy as collateral damage. Mr. Potter makes money on the deal, but so what?
The point is that it’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out. And the prospect of such bailouts, of course, only strengthens the case that banks shouldn’t be allowed to run wild, since they are in effect gambling with taxpayers’ money.
For a while, however, Dimon was proving an effective lobbyist against banking regulation because he had some credibility: J. P. Morgan had avoided the risky derivatives and other irresponsible banking practices that led to the 2008 banking meltdown. Krugman points out that Dimon has been playing the Jimmy Stewart role, trying to reassure nervous Congressmen and women as George Bailey reassures the frightened clients who are storming his bank. Here’s Krugman:
[I]t goes without saying that Jamie Dimon is no Jimmy Stewart. But he has, in a way, been playing Jimmy Stewart on TV, posing as a responsible banker who knows how to manage risk — and therefore the point man in Wall Street’s fight to block any tightening of regulations despite the immense damage deregulated banks have already inflicted on our economy. Trust us, Mr. Dimon has in effect been saying, we’ve got this covered and it won’t happen again.
Now the truth is coming out. That multibillion-dollar loss wasn’t an isolated event; it was an accident waiting to happen. For even as Mr. Dimon was giving speeches about responsible banking, his own institution was heaping on the risk. “The unit at the center of JPMorgan’s $2 billion trading loss,” reports The Financial Times, “has built up positions totaling more than $100 billion in asset-backed securities and structured products — the complex, risky bonds at the center of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses.”
Returning to the movie, it’s as though Jimmy Stewart turned a blind eye to an Uncle Billy who was playing fast and loose with the bank’s money. The difference is that (1) in the movie, banking regulations are still in place so that the auditor catches discrepancies as soon as they happen and (2) George takes full responsibility for what has happened—so much so that he tries to commit suicide. Dimon, by contrast, has been returned as CEO by J. P. Morgan stock holders and, I suspect, will continue lobbying against bank regulations, will not experience a pay cut, and will eventually retire with a golden parachute.
At the end of the film, George’s brother toasts him as “the richest man in America.” He’s being metaphorical, however, whereas Dimon probably is one of the richest men in America.
Welcome to Pottersville 2012. In full living color.
Additional film fact: Did you know that the figure of Thatcher in Citizen Kane is based on J. P. Morgan, just as Kane is based on William Randolph Hearst? In the film, Thatcher calls Kane a communist, foreshadowing the way that today’s Wall Streeters call Obama a socialist.