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Does JPMorgan's 'Whale' prove that banks should be broken up?

Thursday I wrote a piece on the topic of banks being “too big to fail“. In my article I took the position that the government should not have the authority to step in and limit a bank's size. It goes against everything I believe, but if any company could make me change my mind, it's JP Morgan (JPM).

JP Morgan is once again in the news today, with top executives testifying in front of Congress over last year's massive trading losses by its “London Whale”. While the size of the loss is just a blip on the company's balance sheet, it does hurt the argument that banks should be allowed to grow as big as possible.

At some point, big companies just become impossible to manage, and it appears as though this is exactly what occurred at JP Morgan last year.

Ina Drew, the company's former chief investment officer, attempted to deflect any claims that she had some responsibility in the trading losses in testimoney to the Senate. She claimed that her team had misled her, failed to value positions in good faith, and hid important information from her.

In all fairness, this could happen at any company, but that does not excuse management's inability to keep track of what its its employees are doing, and stay on top of an issue as big as the London Whale.

Most alarming of all is that the company's CEO, Jamie Dimon, May have knowingly misled investors, and lied to investigators about the trading losses.

The Permanent Subcommittee on Investigations issued a report Thursday claiming that the bank's senior managers were made aware of the problems months before they came to light, but did little to correct the situation.

Additionally, lawmakers are accusing the bank of changing its risk models in order to get around capital rules. The report contains emails from one of the bank's quantitative analysts outlining how he could rearrange its modeling procedures in order to hide the increasing risk. Following the email, the analyst was warned about sending out emails with sensitive material.

There has also been a spreadsheet found in which a junior analyst was actually keeping track of the differences in actual losses versus what was being reported.

Mr. Dimon has been one of the most outspoken CEOs against the new Volcker rule, which among other things would put limits on a bank's ability to bet with their own funds. Dimon has argued that tighter regulations are not necessary, and that the banking industry is capable of regulating itself.

While I would love to agree with Dimon, JP Morgan's actions make it tough to make that argument. One on hand, he is against additional regulations on the industry, but on the other hand, he is defending himself in this issue saying that he did not know what was taking place at the institution he is charged with managing.

If the bank is so big that top-level executives can't stay on top of trading losses as big as these, is it time to consider that the bank really is too big for its own good?

Mr. Dimon, you are really making it hard for us to agree with your stance!

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.


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Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.