By Pam Martens and Russ Martens: March 25, 2021 ~
Yesterday, during a Senate Banking hearing with witnesses Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, Senator Elizabeth Warren grilled Yellen on why BlackRock wasn’t being investigated for posing a systemic risk to the U.S. financial system. Warren stated:
“BlackRock is the world’s largest asset management firm, overseeing nearly $9 trillion in assets. That’s more than double where it was 10 years ago. It also holds a stake in just about every company listed on the S&P 500. To put that in perspective, Blackrock manages more assets than the entire GDP of Japan, or Germany, or Great Britain or any other nation in the world, except the United States and China.”
BlackRock may, indeed, pose a systemic risk to the U.S. financial system but it’s not because it holds a stake in just about every company listed on the S&P 500. It’s because it produces Exchange Traded Funds (ETFs) which promise intraday liquidity for buyers and sellers, which clearly is not the case during a market panic. During the market panic over the pandemic last year, the Fed gave a no-bid contract to BlackRock to manage its corporate bond buying programs, which included allowing BlackRock to bail out its own junk bond and investment grade bond ETFs that were tanking. (See Icahn Called BlackRock “An Extremely Dangerous Company”; the Fed Has Chosen It to Manage Its Corporate Bond Bailout Programs.)
But if we’re going to seriously talk about systemic risk to the U.S. financial system we need to start at the top rung of the ladder. That’s JPMorgan Chase. According to the Office of the Comptroller of the Currency, the regulator of national banks, JPMorgan Chase “maintains one of the world’s largest and most complex fiduciary businesses with total fiduciary and related assets of $29.1 trillion, including $1.3 trillion in fiduciary assets and $27.8 trillion of non-fiduciary custody assets.”
Not to put too fine a point on it, but $29.1 trillion is 5.8 times the $5 trillion GDP of Japan in 2020 while BlackRock’s assets are just 1.8 times Japan’s GDP in 2020.
In addition, BlackRock has never been charged with a felony by the U.S. Department of Justice. JPMorgan Chase has been charged with five felony counts by the Department of Justice in the last seven years and admitted to all of them.
Making it appear that felonious behavior is a feature, not a bug, at JPMorgan Chase is the fact that its Board of Directors has seen fit to keep Jamie Dimon as its Chairman and CEO throughout this unimaginable crime spree at the largest federally-insured bank in the United States. The Board has also very generously compensated Dimon. (See Jamie Dimon Gets $31.5 Million Pay Despite Bank’s Criminal Charges as U.S. Slides Below Uruguay on Corruption Index.)
And it’s not like the U.S. Senate isn’t aware of the systemic risk that JPMorgan Chase poses to the U.S. financial system. In 2012 and 2013 the Senate’s Permanent Subcommittee on Investigations conducted a nine-month investigation into the London Whale scandal at JPMorgan Chase. The bank had used as much as $157 billion of deposits at its federally-insured bank to make wild gambles in derivatives in London. The bank lost at least $6.2 billion on those trades.
Senator McCain was the ranking member of the Senate’s Permanent Subcommittee on Investigations at the time its 300-page report on the London Whale was released. At the hearing on March 15, 2013 that accompanied the report, Senator McCain said this:
“This investigation into the so-called ‘Whale Trades’ at JPMorgan has revealed startling failures at an institution that touts itself as an expert in risk management and prides itself on its ‘fortress balance sheet.’ The investigation has also shed light on the complex and volatile world of synthetic credit derivatives. In a matter of months, JPMorgan was able to vastly increase its exposure to risk while dodging oversight by federal regulators. The trades ultimately cost the bank billions of dollars and its shareholders value. These losses came to light not because of admirable risk management strategies at JPMorgan or because of effective oversight by diligent regulators. Instead, these losses came to light because they were so damaging that they shook the market, and so damning that they caught the attention of the press. Following the revelation that these huge trades were coming from JPMorgan’s London Office, the bank’s losses continued to grow. By the end of the year, the total losses stood at a staggering $6.2 billion dollars…”
During the 2008 Wall Street crash, Americans learned the meaning of “too big to fail” when it came to mega banks on Wall Street holding federally-insured deposits while also being allowed by their regulators to run trading casinos in stocks, subprime debt, commodities and derivatives. The banks and the foreign counterparties to their derivative trades were bailed out – to the cumulative tune of $29 trillion in secret loans made by the Fed from at least December 1, 2007 through July 21, 2010.
In the next crash on Wall Street – which is only a matter of when, not if – the American people will finally grasp that the Dodd-Frank financial “reform” legislation of 2010 did nothing meaningful to actually reform Wall Street. It simply allowed these mega banks to grow even bigger and more systemically connected to one another, creating a domino effect of failures when one of the mega banks becomes insolvent.
In 2016 researchers at the U.S. Treasury’s Office of Financial Research (OFR), Jill Cetina, Mark Paddrik and Sriram Rajan, meticulously spelled out for federal regulators and the general public the potential for contagion and systemic counterparty risks building up inside these Wall Street banks. The report found that the Fed’s stress tests were not capturing the real risk on Wall Street. According to the researchers, the critical issue is not what would happen if the largest counterparty to a specific bank failed but what would happen if that counterparty happened to be the counterparty to other systemically important Wall Street banks.
The researchers explained that the Fed’s stress test “looks exclusively at the direct loss concentration risk, and does not consider the ramifications of indirect losses that may come through a shared counterparty, who is systemically important.” By focusing on “bank-level solvency” instead of the financial system as a whole, the Federal Reserve is very likely dramatically underestimating the fragility of the U.S. financial system in times of stress.
According to the 2019 Systemic Risk Indicators released by the National Information Center, part of the Federal Financial Institutions Examination Council (FFIEC), JPMorgan Chase ranks at the very top of the list for risk in eight out of the 12 risk indicators measured.
The scariest statistic is where this five-felony bank stands in the U.S. payments system. According to its own data submitted on its Y-15 filing, JPMorgan Chase was responsible for $337 trillion in payments over the prior four quarters. That’s $168 trillion larger than the next largest bank in the payments category, Bank of New York Mellon.