Proof New Dodd-Frank Is Same Old Dodd-Frank

Everyone understands a $2 billion loss (or is it $3 to $4 billion?). No one really understands JPMorgan Chase CEO Jamie Dimon's explanation of how his bank got caught short making ill-conceived hedging trades and whether those trades would violate the Volcker rule that will take effect under Dodd-Frank in July.

It seems that the new Dodd-Frank legislation passed by the Obama administration that was supposed to prevent such scenarios just served to create a false security, in much the same was that the financial industry oversight work of Senator Chris Dodd and Congressman Barney Frank provided only a false security before the September 2008 financial crisis.

In 2011, JPMorgan Chase had $19 billion in net income on $2.265 trillion in total assets. But 92 cents on every dollar of assets is borrowed money. The equity to absorb losses is only 8 cents on the dollar. At that scale, you don't have to lose very much on each dollar before you've lost a lot of money. Too big to fail but not to big to flail.

The loss of market confidence in JPMorgan Chase is more measured. It's stock price has fallen 8% for an $18 billion loss in market capitalization. Yet the $36 per share it's trading at today is still higher than the $28 it was trading at last October. The market giveth and the market taketh away.

Treasury Secretary Tim Geitner was quick to pounce: "I think this failure of risk management is just a very powerful case for financial reform. The test of reform is not whether you can prevent banks from making mistakes, the test of reform should be: 'Do those mistakes put at risk the broader economy, the financial system or the taxpayer?'" The FBI has also been dispatched to investigate but if they actually find anything I will be very much surprised.

Here's the Charles rule: If you think you can outlaw banks from losing money in the financial markets, whether by hedging or by regulation, you're a fool.

Update: Today on May 15, 2012 JPM closed at $36.240 per share. On December 31, 2011 it closed at $33.250. That means the shareholders lost the opportunity to make even more money than the $3 per share they have made in the last 4 and 1/2 months. Oh, the horror and deprivation of those poor shareholders having to settle for a 9% return with the year not even half over.