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JPMorgan Inside the Whale

CAMBRIDGE – It has been a bad few weeks for JPMorgan Chase (JPM), the multinational financial-services firm that by some measures is America’s biggest bank. Two of its traders were indicted, and the bank agreed to a billion-dollar fine for failing to report the extent of its “London Whale” losses fast enough and accurately enough. Now it faces even bigger fines – perhaps exceeding $10 billion – for mortgage activities, mostly by two of the financial firms, Bear Stearns and Washington Mutual, that it bought up during the financial crisis.

The conventional wisdom is that the United States government would not have gone after JPM had these setbacks and errors become salient during the financial crisis. The London Whale trades, for example, were from early 2012; had they occurred in 2008, when the financial system was fragile, JPM, it is said, would have gotten a legal pass.

This view seems well founded, because the government was then propping up the big banks in a concerted effort to overcome the financial crisis. Weakening the big banks further seemed likely to deepen and prolong the crisis. So JPM, according to this view, has been unlucky: too many of its legal problems postdate the financial crisis or came to light well after it erupted.

That, however, is not the only way to view JPM’s – and the economy’s – luck. If the $6 billion London Whale losses had occurred in 2008 instead of 2012, then, yes, the government would not have piled on with fines and criminal indictments. But what would JPM’s trading partners have done in 2008, when the economy was in turmoil, if the losses hit then?