Jamie Dimon's Best Friend: Elizabeth Warren

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) chief Jamie Dimon has grabbed headlines this week complaining about excessive regulation, but maybe he just doesn't know what's good for him.

In the wake of the crisis, Dimon has emerged as the most pugnacious banking industry CEO, and not without justification. Unlike Bank of America ( BAC) and Citigroup ( C) which received exceptionally large bailouts, or Wachovia which essentially imploded ahead of its acquisition by Wells Fargo ( WFC), JPMorgan was relatively careful not to load up its balance sheet with too many risky loans.
Jamie Dimon, CEO of JPMorgan

Dimon's latest criticism of excessive regulation came Tuesday in an exchange with Federal Reserve Chairman Ben Bernanke during a banking industry conference in Atlanta.

"I have a great fear someone's going to try to write a book in 20 years, and the book is going to talk about all the things we did in the middle of the crisis to actually slow down recovery," Dimon told Bernanke, according to a rough transcript of the exchange provided by JPMorgan.

But history has shown that while business can generally be counted on to push back against regulations, in many instances regulations end up boosting economic activity.

Dan Carpenter, the Freed Professor of Government at Harvard University, says the pharmaceutical industry has benefitted enormously from tighter regulation.

"The Food Drug and Cosmetic Act in 1938 was greeted by a lot of these same claims--that you were going to retard pharmaceutical innovation, you were going to retard science and economic progress, and yet the major strides in the development of the modern pharmaceutical industry came after the Federal government had gatekeeping power over the pharmaceutical marketplace--not before," Carpenter says.

Another example of regulation boosting economic activity can be found in research by MIT professor Michael Greenstone, which showed the Clean Air Act Amendments of 1970, while leading to the loss of about 100,000 manufacturing jobs, added $45 billion to property values.

An article in this week's issue of The New Yorker magazine makes the case that the Consumer Financial Protection Bureau (CFPB) could perform a similar service for the banking industry by making consumers more comfortable about banks. Harvard Professor Elizabeth Warren, who has been credited with coming up with the idea for the agency and who many Democrats in Congress would like to see appointed as its head when it opens its doors July 21, has met with fierce opposition from many Congressional Republicans, however.

Warren or no, many observers see a role for the CFPB in helping banking improve its standing with consumers.

"Banking has turned into a 'gotcha' industry, where we offer you the free checking, but oh, if you overdraw, we gotcha," says Georgetown University professor James Angel. "Consumers generally dislike such industries with a passion, and for good reason."

Dimon argued in his annual shareholder letter earlier this year that JPMorgan supported the CFPB but opposed the notion that it should operate as a standalone agency, which, he wrote, would have created "overlap, confusion and bureaucracy." (JPMorgan got its way: the CFPB will operate within the Federal Reserve System.)

Still, Dimon in his comments to Bernanke voiced frustration with other regulatory measures, such as newly-higher capital standards, an apparent reference to a speech by Fed Governor Dan Tarullo last week. In the speech, Tarullo called for a capital cushion that, according to a report from Stifel Nicholas, was as much as double what the banking industry had been expecting.

Tarullo's comments "caught the investment community completely off guard," Stifel's report stated, adding the capital requirements he proposed are "unrealistically and unnecessarily high and would have profoundly negative effects on both the U.S. economy and U.S. banks' ability to compete globally."

But Harvard Business School professor David Moss believes the Fed's leverage targets for the largest institutions are "in the ballpark," in terms of what is needed.

"A highly levered, supersized financial institution poses a significant danger, and so it's imperative that we bring down that leverage," Moss says.

John Kanas, CEO of BankUnited ( BKU) who ran North Fork Bank until it was sold to Capital One Financial ( COF) says he is sympathetic to both sides.

Dimon, he says, "is expressing a frustration that many others in the industry would like to express as well. The problem is, unfortunately banks right now are targeted in the minds of both Congress and consumers, and probably for good reason, as having been a big contributor to the problems in our economy and so when Jamie says 'Mr. Chairman, don't you think it's possible that excess regulation will hold back our growth?' That's what he says, and what many Americans hear is 'We'd like to be able to make more money and we would like less regulation,'" Kanas says.

How about more money and more regulation? Maybe not as crazy as it sounds.

Harvard's Moss says that when Glass-Steagall was passed back in 1933, many critics predicted that the forced separation of commercial from investment banking would severely weaken the American financial system and undermine its competitiveness.

"It turned out that the critics were dead wrong," Moss says. "In fact, our investment banks turned out to be the most competitive financial institutions in the world. They were arguably more competitive, more dynamic than they were before Glass-Steagall, before the separation, and our financial system blossomed."

That "golden era" of U.S. financial regulation lasted some 50 years, Moss argues.

"There were no major financial crises and America's financial system was the most competitive in the world. That formula - of aggressive regulation of the biggest systemic threats and a lighter regulatory touch elsewhere -- worked for us in the past, and it's a formula we should get back to."

-- Written by Dan Freed in New York.
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