Break Up the Big Banks

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz professor of entrepreneurship at the M.I.T. Sloan School of Management. He is a columnist for Economix.

UPDATED JANUARY 12, 2014, 7:00 PM

Our largest banks have grown far beyond the point where things fall apart, repeatedly. They are so big and complex that top management cannot understand, manage and control what is happening

Jamie Dimon, the C.E.O. of JPMorgan Chase, not only had no idea of the highly risky trades engaged in by his firm’s so-called London Whale trading – when confronted with the facts in early 2012, he denied this was anything other than a “tempest in teapot.” In fact, it amounted to losses of over $6 billion, plus fines and civil lawsuits that will end up being very expensive to shareholders.

More recently, Dimon and his top management colleagues have apparently persuaded prosecutors that they knew nothing of Bernie Madoff’s fraud – information about what was going wrong was ignored or not communicated properly by responsible people. (See these documents from the Department of Justice; I recommend reading from p.13 of the pdf version, as this explains exactly what JPMorgan did wrong.)

This was not mismanagement of complex derivatives, but a very straightforward failure of internal anti-money laundering controls, of the kind that have been required since at least 1970.

From October 1986 through December 2008 (when he was arrested), Madoff’s Ponzi scheme “was conducted almost exclusively through” JPMorgan Chase Bank (see p.3 of the charges, on p.15 of the pdf linked above). JPMorgan employees in London raised alarms – and filed a report with the U.K. Serious Organized Crime Agency. But the company never reported these concerns to the relevant U.S. authorities....

Full editorial:
http://www.nytimes.com/roomfordebate/2014/01/12/are-big-banks-out-of-control/break-up-the-big-banks