JP Morgan Chase 2010 Annual Report Download - page 22

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IV. GLOBAL FINANCIAL REFORM: HOW THE KEY ASPECTS
WILL AFFECT OUR BUSINESSES AND OUR COUNTRY
The crisis of the last few years was
proof enough that many aspects of our
financial system needed to be fixed and
reformed to minimize the chance of such
a crisis reoccurring.
As I have discussed in prior letters, a multi-
tude of issues caused, or contributed to, this
crisis: structural issues, such as a critical lack
of liquidity in some of our country’s money
market funds and in short-term financing
markets; high leverage, which was omni-
present in the system; unregulated shadow
banking; poor mortgage underwriting; huge
trade imbalances; and ineective regula-
tion of Fannie Mae and Freddie Mac, among
other factors.
A great number of the regulatory changes
adopted in 2010 were essential. Foremost
among them were higher capital and
liquidity standards and the establishment of
a Financial Stability Oversight Council. This
body has the critical mandate of monitoring
the financial system in its entirety, elimi-
nating gaps and ensuring that all financial
firms are properly regulated while antici-
pating future problems. Resolution Authority
also was necessary in order to give regulators
both the legal authority and the capability
to manage and unwind large financial firms,
just as the Federal Deposit Insurance Corpo-
ration(FDIC)hasdonewithsmallerU.S.
banksforyears.Wealsosupportedstress
testing and well-managed clearinghouses for
standard derivatives.
In addition, we have been very supportive
of certain changes in compensation rules.
In fact, long before they were mandated,
JPMorgan Chase already had instituted most
of these compensation practices. One particu-
larly good new rule, a practice we had estab-
lished but only for our Operating Committee,
was the ability to clawback compensation
from senior executives when appropriate.
Wenowhaveextendedtheseclawbackrules
to cover more senior managers at our firm.
Hadthisclawbackregimebeeninplace
before the crisis, many senior executives who
ultimately were responsible for the failure
of their companies would have had to return
much of their ill-gotten gains.
WithregardtotheDodd-FrankWallStreet
Reform and Consumer Protection Act,
however, we do have some concerns. The
extensive reforms introduced by this legisla-
tion represent the most wide-ranging changes
totheU.S.regulatoryframeworkfornancial
services since the 1930s, and we likely will
have to live with these reforms for the next 50
years. Dodd-Frank is a significant and thor-
ough rewrite of the rules that our industry
must follow. The impact of this legislation will
be significant, and the outcomes – both posi-
tive and negative – will be a function of how
the reforms are implemented.
It is of vital importance that Dodd-Frank
implementation – along with the finaliza-
tion of Basel Committee capital standards
and other regulatory changes aecting our
industry – is thoughtful and proportionate
and takes into account the cumulative eect
of the major changes that already have taken
place since the crisis began. This is the only
way we can hope to avoid unintended nega-
tive consequences, nurture a stable economic
recovery, build a strong financial system and
create a fair playing field for all.
Our System Was on the Edge of Chaos,
and Governments and Regulators Deserve
Enormous Credit for Preventing the Collapse
I have long been on record giving huge
credittotheU.S.governmentandgovern-
ments around the world for the drastic, bold
actions they took to stop this rapidly moving
crisis from getting considerably worse. A
great number of the actions that the Treasury
and the Federal Reserve took, both directly
and indirectly, helped sustain numerous
institutions and probably prevented many