JPMorgan and Solyndra: Opposite Outcomes?

It is indicative of the corporate dominated culture we now live in that, in the wake of JPMorgan’s Chase $2 billion-and-counting trading loss, we expect nothing to come of it. Nothing will change.

The “Volcker Rule” is meant to curb such trading. It is an ever-expanding part of the Dodd-Frank financial reform that is not yet in effect two years after passage of the law because regulators are still writing its rules. First expressed by former Fed Chairman Paul Volcker in a three-page letter to President Obama, it urged that banks be prohibited from trading with their own capital, which puts at risk consumer depositor money that the government insures against loss.

The Volcker Rule was still a modest 10 pages when the bill went to Congress, but when regulators went to work to turn the law into rules, lobbyists for the banks, JPMorgan Chase foremost among them, swooped in to persuade the rule makers that it would make American banks uncompetitive unless its strictness were relaxed. When it went for public comment last October, it had swelled to 298 pages with a torrent of exceptions. By February it was 530 pages. Having engineered this monstrosity, the banks could now complain that it is impossibly complex.

Banks need the ability to protect their balance sheets by hedging against the risk that loans could turn non-performing. The original rule allowed for banks to hedge against specific loans or positions. But the banks — with JPMorgan Chase and Dimon arguing for it intensely — chipped away at this constraint until the heavily-diluted Volcker Rule allowed them to hedge against entire portfolios of loans. In effect, anything goes — anything that the banks’ legal staffs can contrive to call a hedge rather than a bet.

Senators Carl Levin and Jeff Merkley, who had worked on the law, objected in a letter sent to regulators that, “There is no statutory basis to support the proposed portfolio hedging language,” they wrote, “nor is there anything in the legislative history to suggest that it should be allowed.”

That’s what the JPMorgan Chase trade supposedly was — a hedge against the bank’s entire $724 billion loan portfolio. Except New York Times columnist Joe Nocera nailed it when he said that an investment office chief who was paid $14 million last year is not a risk manager, she was a risk taker expected to make money — lots of it.

If elements of that portfolio turned sour, the hedge would increase in value. But then the London chief investment office went a step further and took out a hedge against the hedge in the form of credit default swaps linked to an index of corporate bonds. If it wasn’t already, that’s where the hedge became a bet and the bank became a casino.

In reaction, there are renewed calls to return to Glass-Steagall, the simple (37-pages) 1932 law that forbade banks from risking federally-insured depositor money in other than loans to businesses and people. It worked to produce a safe banking industry for 60 years. So we got rid of it.

Its resurrection won’t happen, of course. Instead, we will again see the banks inundate the regulators with lobbyists and bring pressure to bear to leave untouched all the exemptions to the law that they jointly orchestrated. Dimon, who has railed against the limits imposed by the Volcker rule (“Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me”), has begun skillfully to cast the errant trades as rogue blunders, calling them “sloppy” and “stupid” and “poorly vetted and poorly executed”. By telling us “what this hedge morphed into violates our own principles”, Dimon wants to persuade us that this is an anomaly, as if it cannot recur in his shop or elsewhere, and that the watered-down Volcker Rule should be left as is.

He will have the backing of most Republicans, who detest the Dodd-Frank law (Mitt Romney says he would repeal it) and the two Democratic New York senators who are on the take from the city’s banking industry. Obama, too. He’s a fan of Jamie Dimon, calling him “one of the smartest bankers we got”, and with a huge account at the bank, and a need for Wall Street money for his re-election campaign.

Which is why we expect nothing to change.

Now compare that with another case of big losses — the $535 million Solyndra collapse. True, the JPMorgan Chase loss — now said to have risen possibly to $4 billion — will be absorbed by the bank whereas Solyndra impacted taxpayers. But, left in place, the broad weakening of the Volcker Rule sets the stage for the banks to indulge in the same risky behavior that brought about the 2008 bailouts, and that would add to the debt to be borne by taxpayers.

But risky investments in alternative energy? That’s quite another matter. Republicans are steadfast in protecting taxpayers from this form of folly.

Solyndra was an ugly matter with crony overtones, pushed forward by the Obama administration against contrary advice because they were eager that to parade it as an exemplar of green technology and green jobs. Above all, it was an outsize bet on a single company that had come up with a different technique for solar energy that became far too expensive when the high cost of silicon, used by other solar technologies, plunged. But it is the Republican script not to view Solyndra as an isolated blunder; the name is reflexively used to ridicule any and all attempts by government to nurture renewable energy.

It is inescapable that humans will continue to rely on fossil fuels for well into the future. Discovery of ever more sources has dispelled any notions of “peak oil” and improved recovery techniques have created a natural gas bonanza. But that oil is found in ever more inaccessible places at greater risk of colossal spills, and natural gas drilling is both draining aquifers and fouling them with runoff and chemical-laden drilling fluids improperly disposed of. Little heed is paid to either of these problems by those in Congress, virtually in the employ of the oil and gas interests that fund their campaigns. They find it their job to stand in the way of any other form of energy development. Solyndra is rigorously invoked to characterize all government funding of renewable energy as failed policy.

So the public doesn’t hear about the government guaranteed loans such as the $737 million given to a company in Nevada that is building an array of 17,500 mirrors to generate power from the sun. The company has advance contracts to sell the power, so the risk is minimal. Nor does the public hear of the grants of $156 million in awards last fall, in amounts of typically $2 and $3 million, to 60 companies and labs that are developing better batteries to store such energy, or exploring plants that grow fuel molecules in their leaves, or teaching tobacco plants how to do the same, or working on high-efficiency motors using magnets that do not need rare earth materials, or attempting to increase the per acre yield of camelina plant oil to substitute for jet fuel or diesel, or to the company that has halved the cost of silicon wafers used in crystalline solar cells.

Instead, various funding measures are about to expire, and House Republicans, hostile to anything other than the ongoing subsidies to the biggest oil companies, have shown no indication of their continuance in their cost-cutting budgets. If nothing is done to renew these programs, support for clean energy projects and research is slated to plummet by 75% beginning next year.

Such limited vision boggles. Lack of a vigorous energy policy has already allowed China to make off with a solar industry that we pioneered and that was to have been a new industrial frontier for the U.S. It should be clear that solar will become the ultimate energy source and that it is rank stupidity that government programs are not in place to develop it to the fullest. Sunlight falling on Earth is free, inexhaustible, non-polluting and delivers more energy in an hour than humans consume in a year. Instead all we hear is “drill here, drill now, drill, baby, drill”.