When JPMorgan Chase Bank (JPM), CEO Jamie Dimon appeared before the Senate Banking Committee on June 13 wearing cufflinks bearing the presidential seal, .CNBC editor John Carney asked: “Was he… subtly hinting that he’s really the guy in charge?”

The groveling of the Senators was a subject of much commentary (“Senators Grovel, Embarrass Themselves at Dimon Hearing“) and satire (“Jon Stewart Blasts Senate’s Coddling Of JP Morgan Chase CEO Jamie Dimon.”)

Stewart’s explanation was a news clip showing that JPMorgan Chase is the biggest campaign donor to many of the members of the Banking Committee.

A Matter of Covert National Security?

Financial analysts Jim Willie and Rob Kirby say that the $3 – 7 billion losses can be traced, not to European sovereign debt, but to the record-low interest rates maintained on U.S. government bonds.

With the national debt growing at $1.5 trillion per year, low interest rates prevent the debt from overwhelming the government budget. And for the banks, even a moderate rise could cause multi-trillion dollar derivative losses, erasing their chief income stream – the arbitrage afforded by borrowing at 0% and investing at higher rates.

The low rates are maintained by interest rate swaps, as explored by Willie here and Kirby here.

Kirby believes that only the U.S. Treasury is large enough to act as counterparty to some of these trades. He notes that the Treasury’s Exchange Stabilization Fund is “a covert entity without oversight and accountable to no one.”

Kirby also notes that if publicly-traded companies (including JPMorgan, Goldman Sachs (GS), and Morgan Stanley (MS)) are deemed to be integral to U.S. national security (meaning protecting the integrity of the dollar), they can legally be excused from reporting their true financial condition – and are therefore allowed to keep two sets of books.

Interest rate swaps are now over 80% of the derivatives market, with JPMorgan holding $57.5 trillion of them. Without the protective JPMorgan swaps, interest rates on U.S. debt could follow those of Greece and climb to 30%. CEO Dimon could, then be controlling the lever propping up the whole U.S. financial system.

Hero or Felon?

In Seeking Alpha, Ellen Brown asks whether Dimon should be regarded as a national hero. In her judgment, not, for various reasons that suggest to her “we could actually have a felon at the helm of our ship of state”:

  • The $3 billion in losses looks more like illegal speculation than legal hedging.
  • JPMorgan used its conflicting positions as clearing house and creditor of MF Global to siphon off funds that should have gone into customer accounts.
  • JPMorgan doomed Lehman Brothers by withholding $7 billion in cash and collateral.
  • Dimon sat on the board of the New York Federal Reserve when it lent $55 billion to JPMorgan in 2008 to buy Bear Stearns for pennies on the dollar.
  • Dimon then owned nearly three million shares of JPM stock and options, in clear violation of 18 U.S.C. Section 208, a conflict of interest that could be a felony.
  • JPMorgan received an additional $25 billion in TARP payments from the Treasury, which were evidently paid off by borrowing from the NY Fed at a low 0.5%, and paid executives very large and suspicious bonuses called Stock Appreciation Rights and Restricted Stock Units. In 2009, these bonuses were granted on the day JPMorgan stock reached its lowest value in five years. The stock quickly rebounded thereafter, substantially increasing the value of the bonuses – a pattern that recurred in 2008 and 2012. Financial analyst John Olagues has evidence of systematic computer-generated selling of JPMorgan stock immediately prior to and on the dates of the granted equity compensation. Collusion to manipulate the stock to accommodate the grant of options is called “spring-loading” and is a violation of SEC Rule 10 b-5 and tax laws, with criminal and civil penalties.

Olagues points out that the$55 billion loan was guaranteed by $55 billion of Bear Stearns assets, and, if Bear had that much in assets, the Fed could have given it the loan directly, preventing it from being swallowed up by JPMorgan – but Bear did not have a director on the board of the NY Fed.

There is a movement to get Dimon replaced on the Board, since his directorship is a conflict of interest. Massachusetts Senate candidate Elizabeth Warren said:

“Four years after the financial crisis, Wall Street has still not been held accountable, and that lack of accountability has history repeating itself—huge, risky financial bets leading to billions in losses. It is time for some accountability. . . . Dimon stepping down from the NY Fed would be at least one small sign that Wall Street will be held accountable for their failures.”

Propping Up a Pyramid Scheme?

Willie and Kirby believe that this shell game will ultimately fail, if it hasn’t already. They point to evidence that the JPMorgan losses are not just $3 billion but $30 billion or more, and that JPMorgan is actually bankrupt.

Ellen Brown writes:

The derivatives casino itself is just a last-ditch attempt to prop up a private pyramid scheme in fractional-reserve money creation, one that has progressed over several centuries through a series of “reserves”—from gold, to Fed-created “base money,” to mortgage-backed securities, to sovereign debt ostensibly protected with derivatives. We’ve seen that the only real guarantor in all this is the government itself, first with FDIC insurance and then with government bailouts of too-big-to-fail banks. If we the people are funding the banks, we should own them; and our national currency should be issued, not through banks at interest, but through our own sovereign government.

Is there an alternative? The U.S. government could to issue its own dollars or borrow them interest-free –  buy back its bonds and refinance them at 0% interest through the Federal Reserve, which currently buys them on the open market. The approach need not be inflationary, since Canada borrowed from its own central bank effectively interest free from 1939 to 1974, stimulating productivity without creating inflation, and Australia did it from 1912 to 1923, and China has done it for decades.

Despite a quadrillion dollar derivatives edifice propping up the national debt, Willie and Kirby think that the private creation of money at interest is a pyramid scheme that will, like all pyramid schemes, eventually collapse. They say it’s time to ready public and cooperative systems to replace the old system when it comes crashing down.

No Solution in Sight

Bloomberg Businessweek points out that the government’s prescription for preventing speculation by banks – The Volcker Rule – is flawed. It is intended to ban speculation while allowing trading for hedging and market-making. But it draws no clear line between what’s legal and what’s not. The Office of the Comptroller of the Currency still can’t even say whether the transactions that led to JPMorgan’s embarrassing loss would have been prohibited under the implementation of the Volcker Rule that was drafted by regulators last October, and, under the law, legality depends on intent, which is difficult to discern.

While the whole thing reads like a spy novel, what’s clear is that the kid glove reception Dimon received in Washington indicates that something is being kept from us that we’re not supposed to know. And there’s not a heck of a lot that any of us can do about it,  economically or politically.

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