Caution, falling moral hazard

In early June, J.P. Morgan Chase CEO James “Bull-Mouth” Dimon will sit before both the Senate Banking Committee and the House version for questioning. Dimon and the bank he represents are in what professionals would call “deep shit” after Bruno “London Whale” Iksil and the Chief Investment Office in London lost between $2 billion and $5 billion.

This figure depends on how liberal the news publication is. In the pursuit of journalistic integrity, I’ll settle that it’s a lot of god damn money.

These trades included credit default swaps, built on layers of offsetting bets with credit derivatives tied to corporate bonds. This is fancy, businessman talk for trading risk. They were essentially selling insurance that certain corporate bonds would not default. When they did default, J.P. Morgan was left with the bill.

Derivatives themselves are not illegal because they can be used to hedge risk, emphasis on “can.” They do not always work as intended. They more likely exacerbate the riskiness of trading. And as a result of the financial crisis in 2008, there has been a push by Washington to reduce the chances of moral hazard through regulation — for example, the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Poor Mr. Dimon, who is known for his salty tongue, will surely not do so well sitting before angry, unfair congressmen. Thankfully, Dwight Fettig “totes” has Dimon’s back as the staff director of the Senate Banking Committee. It has been disclosed by the Ethics Committee that before Fettig got his kush public service job with full dental benefits, he earned a meager $448,225 lobbying for J.P. Morgan and Freddie Mac.

Half a milli sounds like a whole lot of paper, but in D.C. it barely covers your Metro fare and a medium-quality D.C. call girl. Trust me, I’ve watched the first eight episodes of the West Wing.

Now, some people call this a problem of moral hazard similar to derivatives, in that there is no guarantee Fettig will act objectively and truthfully in his position in the Senate Banking Committee. They argue Fettig stands to make an immeasurable amount of money in private consulting or lobbying once he leaves the public sector.

Well, those people should stop questioning things and remain quiet because hiring lobbyists for professional staff is all the rage with the kids, like Pokémon. At least 13 of the newest set of congressmen in 2010 hired former K-Street lobbyists to be their chief of staffs. Anyone who opposes hiring lobbyists is obvi a Digimon fan.

Regulations are a complicated mess of words and rules, and doggone it, sometimes you don’t have time to actually learn about the industry you’re writing laws for. When you run for a two-year office you have to spend most of your time campaigning and taking vacations. Legislating is kind of a side job. What’s more, Wikipedia can only tell a congressman so much. So, why not just let the nice man in a suit with free pens tackle all that nonsense for you?

If you say moral hazard again, I’ll slap you.

­— nicjacob@indiana.edu