JP Morgan Chase CEO Jamie Dimon went before the Senate Banking Committee this week in what should have been a kind of ritual apology tour. Dimon has spent much of the last year and a half dismissing and belittling critics of Wall Street and harshly criticizing the major financial regulatory reform legislation that President Obama signed into law. The message has been: you guys in Washington don't understand our business, so you should keep to yourself and let the professionals like us, the smartest guys in the room, do what we do best.
Which is why it was more than a little embarrassing for Dimon when it was revealed that a single unit of JP Morgan Chase, indeed a single trader in a division of the firm that Dimon personally oversaw, had somehow managed to lose about $3 billion and counting on a huge bet on credit derivatives.
There are two ways to look at the fall-out from news of this loss. The optimistic one is that the position was uncovered and exposed and dealt with quickly enough that the losses didn't bring down JP Morgan Chase or the entire financial system.
The pessimistic one, is Lord knows what other uncovered positions are lurking out there, or what the next big Wall Street screw-up might look like.
This is the specter that haunts us after the spectacle of what I refer to in my book as "the fail decade." The notion that we can't simply trust our elites, the big decision-makers like Jamie Dimon, to actually run their institutions competently. And we know that if they screw up, we're likely all screwed. Dimon opened his testimony by eating some crow, but what followed in the hearing was downright bizarre.
While Dimon was there to apologize, many of the senators-- Republicans especially, but not exclusively-- were there to apologize to him, to seek his wise counsel.
Sen. Jim DeMint: I would like to come away from the hearing today with some ideas on what you think we need to do... Sen David Vitter: Is there a true, real version of the Volcker rule that you think makes sense?Sen Chuck Schumer: What can you suggest to the regulators...Sen. Bob Corker: What would you do...
To me this entire hearing was a perfect microcosm of what I call the crisis of authority in American life. A nation whose pillar institutions are helmed by the "smartest guys in the room," like Jamie Dimon, who've overseen a cascade of crisis, and yet face little to no sanction for it. Elites oddly blinded to the destruction they have caused.
And in their ceaseless attempts to discredit government, Republicans are only too happy to point out that It's the same for the United States Congress, one of the only institutions in American life that garners less trust than Wall Street and as we've previously noted on this show, is even less popular with the US public than Paris Hilton and the prospect of the US going communist.
Rob Johnson, an economist, former hedge-fund trader and a man who once worked on the Senate Banking Committee, put it to me this way. "For years, the Right has worshiped markets and now they have reason to be skeptical," he told me. "Meanwhile, the Left has romanticized government and now they have reason to be skeptical. So what you've got now is a society that is demoralized because they have nothing to believe in."
We have seen a tremendous amount of institutional failure over this past decade, and in writing my book I spent a lot of time thinking about how it is that institutions break down, what happens inside them that creates the conditions for incompetence or corruption or both. What is it about the big banks, or the culture of Wall Street or the very process of selecting and forming our elites, that made the housing bubble and financial crisis possible? What made it possible for Enron to implode on itself in a wave of scandal, even created the conditions for the epidemic of steroids in baseball. What about the way our Congress works enables the banks to take big profits and make the taxpayer take on the risk?
I wrote my book, because I think understanding institutional failure, and elite failure, is the most important challenge we face, because as the Dimon episode illustrates, while much has changed in the last three years, while our trajectory has moved away from total disaster and towards recovery, Congress and Wall Street remain in many deep ways unreformed and on a path toward bringing us, once again to the edge of crisis.