Hearing Senator Chuck Schumer (D., N.Y.) and other members of the Senate Banking Committee lecture J.P. Morgan (JPM) chief Jamie Dimon today about incentives and proper business practices was simply bizarre. At one point, Sen. Schumer counseled Dimon that he should set up reverse incentives -- claw backs of bonuses and salaries if divisions lose money.
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Was I the only one watching who wanted Dimon to shoot back: “What about applying the same principle to you, Senator, where your salary would be clawed back if you fail to even pass a budget, which you have failed to do for three years?”
Apparently I wasn’t the only one thinking that, because that’s exactly what Senator Jim DeMint suggested when it was his turn for questions.
But the circus in the Senate Banking Committee today begged the most basic question: Why on earth are the worst managers in the world wasting our time and money by lecturing a good manager about a bad deal?
The bad deal never put the bank’s future at risk or led to the kind of systematic breakdown that would have required some kind of taxpayer bailout. The only reason for the hearing was for the awful managers in Congress to take center stage, talking about something they know little to nothing about.
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It was all very strange and frankly ridiculous, even in an election year.
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Is banking a legitimate subject for Congressional inquiry? Of course it is, particularly since taxpayers have put up so much money bailing out the banking industry. Hundreds of billions of that money is still caught up in institutions, some of which are not really banks, like AIG (AIG) and car companies. And that’s really the problem, and leads to what should be the main point of discussion.
What’s the definition of a bank?
No one asked that very basic question during the hearings. And it should have been asked, because the bailouts were all about that definition and how it was changed over the past decade in a way that put taxpayers on the hook for bad bets.
Remember all the institutions that began calling themselves “banks” at the time the TARP bailouts began (think American Express)? That process of breaking the definition of a bank actually began about 10 years earlier with the demise of Glass Steagall, the Depression-era law that divided commercial banks from financial institutions. It prevented Wall Street traders from tapping into taxpayer guarantees, like deposit insurance and access to easy money windows at the Federal Reserve.
All that changed during the Clinton Administration, when Clinton Treasury Secretary Robert Rubin led the charge to end Glass Steagall, which was finally buried in 1999. From then on, practically any institution engaged in financial activities could be defined as a bank, and as such they were guaranteed protections originally designed solely for middle class bank depositors.
I submit that this is where our problems that led to the financial breakdown really began.
If politicians want to talk at all about the banking industry, they should focus on this. But of course they’re not. It’s easier to take pot shots at Jamie Dimon, even though he was having none of it. He hit back much harder than he got. One Senator looked positively shell shocked after Dimon straightened out his goofy description of what happened with the TARP bailouts.
The bottom line is this: Financial institutions should be free to make any bets they want, as long as they pay the price. They should not be insured by taxpayers the way middle class depositors are. I’m not usually a fan of regulation, but clearly we dumped Glass Steagall too quickly. If we don’t bring it back, we have to figure out some way to prevent financial institutions from getting taxpayer bailouts and access to the Fed’s money pipelines.
But frankly, I don’t think the clowns engaged in hypocritical lectures on Capitol Hill today have a clue about how to do that.