Dennis M. Kelleher Blog: Jamie Dimon's Decision Time: Statesman or Continued Shill?

For Jamie Dimon and all of Wall Street, it's time to wake up and step up.

They lost on their biggest bets in a long time: defeating President Obama, defeating Elizabeth Warren in Massachusetts and, more important to them, defeating financial reform. They went all in. Spent hundreds of millions of dollars directly and indirectly. They had a presidential candidate expressly vowing to repeal the Dodd-Frank financial reform and Wall Street re-regulation law. All their efforts were for naught. The loss was total.

The question now is whether or not they will learn anything. If past is prologue, they won't, but they have a moment to seize an opportunity, rehabilitate themselves, and do what's right for the country, which will also turn out to be what's right for Wall Street.

So, the question is, will Jamie Dimon allow himself to continue to be the pretty face behind which the ugly business of Wall Street gets done? Or will he, against all evidence, become a statesman that rises above his parochial economic interests and ego and genuinely and truly take on a role that promotes the greater good? (I've written about the total lack of statesmanship on Wall Street before here.)

Reflexive hostility if not hatred, unrelenting opposition to the most modest financial reform, and an inexplicable inability to take even an occasional mild criticism has turned Wall Street into a caricature of itself. Will it move on? Will Jamie see how self-defeating such an approach and attitude ultimately is? Will Wall Street move even lower in the opinion of the American people? Those are the questions confronting Jamie and Wall Street at this electoral cross roads.

What should Jamie do? First, he has to realize that using his influence to address the fiscal cliff and related issues isn't going to do him any good. Actually, it reflects shallow thinking and useless conventional wisdom. Yes, Wall Street and American business have to try to influence the rigid, ideological, right wing who are still opposed to all-things Obama and think compromise is akin to surrendering to the devil. But, doing that is just trying to restore a little sanity into the debate skewed due to unyielding right wing ideologues. Trying to get people to be responsible is not leadership, is not being brave or, frankly, doing more than what should be done as a routine matter anyway. It is also, unquestionably, in their obvious immediate self-interest.

What Jamie and other adults on Wall Street need to do is show real, meaningful leadership. That means call off their war on financial regulation and Obama/Democrats more broadly. Call off the thousands of lobbyists and lawyers; reach out to those fighting for financial reform; give up on those things that help their short-term profits and support those things that promote long-term growth and market confidence.

Just one big example: Jamie has often said he is against too-big-to-fail banks and firms. He has gone so far as to testify recently that if any such firm requires government assistance that it should be "dismantled" and "the name should be buried in disgrace." But, as is so often with Wall Street, what Jamie says isn't what Jamie's lawyers, lobbyists, allies, front groups, purchased academics, political fundraisers and other fellow travelers directly and indirectly on his payroll fight for and against. His bank, JP Morgan Chase, is the biggest of the too-big-to-fail banks in the U.S. and the world. Jamie Dimon alone has the singular and unilateral ability to dramatically and meaningfully change that entire debate by aligning his bank's actions with his words. That would be leadership. That would be a statesman.

This isn't asking Jamie or Wall Street to become public servants or even to act against their own real best interests. The war on financial regulation is not only wrong; it is not even in Wall Street's best interests. For 70 years after the Great Depression Wall Street and the U.S. financial industry was more heavily regulated than any time in history. Yet, our country prospered; we built the largest and most broad-based middle class in the history of the world; American business thrived and Wall Street dominated finance worldwide. All under the heaviest regulation ever, as recently presented at a symposium.

What happened? Deregulation and non-regulation resulted in the biggest financial collapse since the Great Crash of 1929 and has caused the worst economy since the Great Depression, all in just seven years or so. That is going to cost our country no less than $12.8 trillion dollars. It has cost Wall Street as well in terms of prestige, confidence, status, revenue, profits and influence, as so dramatically proved in this election and in the opinion polls.

This all proves the value of Goldman's old in-artful slogan: long-term greedy. A key problem is that Wall Street and its enablers have all become super-short-term super-greedy. That caused the financial collapse and is destroying Wall Street as well as rotting and corrupting the country's political system and culture. Nothing wrong with making money, including lots of it, but it must be done in the service of open, fair and competitive financial markets and a growing real economy rather than just grabbing the biggest bonus as fast as possible.

Decision time, Jamie: Statesman or continue to shill for a discredited Wall Street?

Michael Levin: Why Is Everyone on Wall Street So Rich? You Have No Idea

John C. Bogle is mad as hell and won't take it anymore, or at least as mad as hell as a dignified,

Bible- and Churchill-quoting octogenarian can be. Born just months before the stock market crash of 1929, and the godfather of the mutual fund industry, Bogle is deeply unhappy about how speculators have hijacked the financial markets and kicked investors to Wall Street's famously unforgiving curb.

Bogle writes about this clash of cultures between investors and speculators in a new book titled, fittingly enough, The Clash of the Cultures: Investment vs. Speculation (John Wiley & Sons, $29.95). He demonstrates, in sprightly if mournful tones, that the average share of stock was traded once every seven years when his career started back in 1951 and is now traded every four months. Wall Street is supposed to be about allocating wealth to businesses so they can create jobs and do all those things Romney keeps talking about. Instead, it's just a big casino, and it doesn't even have Celine Dion or a buffet.

The book is a gem. Well-researched and carefully argued, there's simply no way to argue with Bogle's premises -- that the little guy always loses, that the more you churn the more you lose, that most people's retirements are dramatically underfunded, that management looks out for itself and not the stockholders, and that greed is driving the bus. The book ends with a compelling pitch for Bogle's own Wellington Fund, demonstrating that the author is clearly a salesman to the last.

But you have to ask this question: If Bogle were 33 instead of 83, would he have written this book? Or would he instead have written a series of tweets collapsing the same material that takes 363 pages into a few hundred syllables?

The broader question is this: If you have something to say today, why bother writing a book? Why not just post a blog piece somewhere, or tweet something, or stick something on your Facebook page? Or even just have somebody hold up an iPhone and make a video you can upload to YouTube?

I doubt Bogle tweets. He's the kind of person who takes deep pleasure in a well-crafted sentence or argument. He shows his work, as my sons' fourth grade math teachers demand. To use his own terms, the reader is fully invested in his beliefs and there is no room for speculation. In short, he is the master of a dying art.

His book also reveals a second, deeper culture clash in our society today: the gulf between people who have ideas and people who have no idea. About 97% of the population basically made a commitment, around the time they reached their early 20s, never to learn another thing as long as they lived. By that point, they knew how to drive, how to use an ATM, how to date, and how to hold a basic job. But the idea of actually cracking a book that wasn't on a final was foreign. Learning stuff you don't need to know? What a bore. What a colossal waste of time.

That leaves around three percent of society, the people who love learning for its own sake, the intellectual and cultural and financial elite, the people who would actually pick up a Bogle book and read it cover to cover. The problem is that these folks (you among them, of course) are, sad to say, not just a slender minority but a dying breed.

Bogle epitomizes clear thinking and organized writing, the intelligent marshaling of facts, opinion, and personal experience into a sustained work of prose that transforms the way readers think. The problem is that fewer and fewer people have the attention spans, the time, or the interest to follow an author down a long passageway and actually learn something.

The barbarians aren't just at the gates of Wall Street, Mr. Bogle. They're everywhere.

When I lived in Boston 25 years ago, there was an older European gentleman who worked as a clerk in Filene's Basement. Once I found a sport jacket that almost fit and I asked him if he knew a tailor who could turn my bargain into sartorial splendor.

"They're all dead," he sighed.

Real readers, and real writers, are going the way of those long-departed tailors.

Read Bogle, not just to learn about how to protect your investments and understand what really happens on Wall Street. But more than that, read The Clash Of The Cultures and declare yourself into the three percent who have ideas and aren't afraid to use them.

Mark Cuban: What Business Is Wall Street In?

Wall Street doesn't know what business it is in. Regulators don't know what the business of Wall Street is. Investor/shareholders don't know what business Wall Street is in.

The only people who know what business Wall Street is in are the high frequency and automated traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It's a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, high frequency traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you.

A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade or the rebate they are getting from the exchange because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn't the important issue.

The important issue is recognizing that Wall Street is no longer serving the purpose that it was designed to. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days?

I started actively trading stocks in 1992. I traded a lot. Over the years I've written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

Over just the past five years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF. Combine that with the leverage of derivatives tracking companies, indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game that I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.

So back to the original question. What business is Wall Street in?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than one percent of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn't shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which I think are always a mistake), than flows into companies in the form of equity.

My two cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether it's through a use of taxes on trades (hit every trade on a stock held less than one hour with a 10 cent tax and all these problems go away), or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for one year or more, and no tax on dividends paid to shareholders who have held stock in the company for more than five years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won't come from traders trying to hack the financial system for a few pennies per trade.

And solutions won't come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value add of liquidity does not compensate the U.S. and world economy nearly enough for the risk of collapse they introduce into the system.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The government needs to create simple and obvious incentives for this business and extract compensation from the traders/hackers for the systemic failure risk they introduce.

There will be another flash crash, and probably a crash far worse than the May 2010 flash crash simply because there are too many players looking for the trillion dollar score. They can't all win, yet how many do you think wouldn't risk everything, even what is not theirs, for that remote chance to score big? Put another way, there is zero moral hazard attached to any trade. So why wouldn't traders take the biggest risk possible?

There is value to trading automation. It is here to stay. There is absolutely NO VALUE to high frequency trading. None. We need to bring our markets back to their original goals of creating capital for business. It's impossible to guess how many small to medium size companies have been held back from growing and creating jobs and wealth because of lack of access to capital from the stock market. It's not impossible to know that our economy has suffered because Wall Street equity markets are no longer a source of equity for helping companies grow, it is not a platform for hackers and that needs to change. Quickly.

Order flow toxicity in the hours prior to the Flash Crash.