Jamie Dimon has enjoyed the enviable reputation of being “the least hated banker on Wall Street” for his remarkable act in navigating a passage for his bank through the global financial crisis, (though this may have had far more to with the good sense of his predecessor as JP Morgan CEO, Bill Harrison who minimized the bank's exposure to exotic mortgage derivatives and passed on to Dimon a clean balance sheet in 2006). 

Untouched by the embarrassment of his peers for their performance during the financial crisis, Dimon was emboldened to demand of the US Federal Reserve Chairman, Ben Bernanke, whether regulatory overreaction to the crisis was now slowing the pace of economic recovery?

Dimon was one of the most outspoken critics of the proposed Volcker Rule, preventing federally guaranteed conglomerate banks trading on their own account, and successfully pushed with other bankers for an exemption that allowed banks to make trades for their own profit if they are hedging against risk.

The enormity of the loophole created was revealed in the recent $2 billion losses of the JP Morgan Chief Investment Office, which was responsible for hedging the bank’s loan book. This speculative hedging (known as a spledge in the oil industry) shows how little the culture of US investment banking has changed despite its recent near-death experience.

“JPMorgan Chase has a big hedge fund inside a commercial bank,” said Mark Williams, a professor of finance at Boston University who also served as a Federal Reserve bank examiner. “They should be taking in deposits and making loans, not taking large speculative bets.”

The Federal Reserve is now examining the scope of the growing losses and the nature of the original bet, along with whether JPMorgan’s Chief Investment Office took risks that were inappropriate for a federally insured depository institution.

A contrite Jamie Dimon (fearing further losses from the bank's enormous unclosed position) is full of apologies.  “We had audit, legal, risk, compliance, some of our best people looked into all that. We know we were sloppy. We know we were stupid. We know that there was bad judgement. We don’t know if any of that is true yet. Of course regulators should look at something like this. It’s their job. We are totally open kimono with regulators. And they will come to their own conclusion and we intend to fix it, learn from it and be a better company when it’s done.”

However serious questions need to be asked about the viability of the JP Morgan business model, its risk management and corporate governance, and, most of all, how Dimon and his friends have effectively captured the regulatory bodies responsible for supervising the Wall Street banks.

Firstly, JP Morgan’s business model has become a frightening reincarnation of the “too big to fail” (and “too big to rescue”) model that informed the pre-global financial crisis dinosaurs of the industry. With US$2.3 trillion in assets, the bank has been carried away in its reckless search for super-profits by mega-trading in complex derivatives.

The bank has a nearly a hundred trillion dollars derivative book. It claims this does not represent a systemic risk to the global financial system as it is book-matched. The thirst for profit at JP Morgan from credit default swaps has effectively made the bank the market, now trapping the bank through its illiquidity. The bank cannot reduce its exposure without incurring further huge losses. Should the stability of the world economy rest on the risk management skills of a bank whose risk management unit, charged with the responsibility to cover the risks of the bank’s other operations, succeeds in losing US$2 billion and counting? 

What is worse is that as CEO Jamie Dimon, by some accounts, encouraged pushing back the boundaries of risk management. These, it is alleged, suggest Dimon originally dismissed suggestions that the Chief Investment Office was responsible for unsettling the credit derivatives market. Commentators are now suggesting that either Dimon misled the market while unwinding positions, or alternatively really was not aware of what was happening.

The pivotal position of Dimon as both Chief and Chairman suggests the governance of the bank may be as weak as in the other failed Wall Street investment banks, where boards of directors dominated by non-executive directors, largely inexperienced in finance, perform little more than a ceremonial role.

When all else fails, the investing public depend on the regulators as the last line of defence of the integrity of the financial institutions. However in this case, Jamie Dimon is a regulator at the New York Federal Reserve, the body with the most immediate responsibility for ensuring good conduct within the New York-based banks. Dimon is a board director of the New York Fed, and a member of the key Management and Budget Committee.

Elizabeth Warren who oversaw the Troubled Asset Relief Program which rescued the US banks after the global financial crisis, and who was the architect of the Consumer Financial Protection Bureau has called on Mr Dimon to resign from his post on the Federal Reserve Bank of New York's board, citing the need for "responsibility and accountability" in the financial industry. She has insisted that 'we have to say as a country, no, the banks cannot regulate themselves.'   

The JP Morgan saga graphically demonstrates the regulatory impasse that still prevails in the United States.

Despite years of effort by legislators in the Dodd-Frank reforms, the US banks remain a threat not only to themselves, but a profound risk to the stability of the international financial economy.